Comment: Diminished Expectations

One of my New Year's resolutions was to clean out my study. I am something of a pack rat. I have research files on every book and major article I've written going back to the 1970s, mostly sorted by topic. Throwing away outdated material under such headings as "budget," "unemployment," "savings rate," and "inflation," I realized just how miscast were so many of the assumptions and policy debates of the century's closing decades.



For instance, I have a shelfful of stuff slugged "competitiveness"--ponderous reports from think tanks, transcripts from congressional hearings, clippings, books. America was said to have a "competitiveness" problem, remember?



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The right had a story. America was not "competitive" because of excess regulation, high taxes on capital, low rates of private saving, and overindulged workers and retirees. If America offered greater rewards to entrepreneurs and investors, it would regain competitiveness.



The center blamed the federal budget deficit and social insurance, which were said to be bleeding the private economy. There were also structural explanations. We were not competitive because our investors and managers had "short time horizons." Japan had a better system of industrial innova-tion and partnership between government and industry. We lacked a strong venture capital system.



The left also had a story. Competitiveness required industrial policies, both to revive lagging industries and to target emerging technologies. It required aggressive trade policies and a better income distribution so that more workers could generate demand for more products. We needed better schools to produce scientists and engineers that would build a competitive economy.



Well, somehow, despite the absence of any of these cures, American competitiveness has roared back. We are king of the Internet economy, and manufacturing has revived too, albeit with more machines and fewer workers. Yes, we eliminated the budget deficit, but that happened after the comeback of productivity growth. It was the effect of higher Gross Domestic Product growth, not the cause. American savings rates are still dismal by global standards, yet we have the world's most dynamic capital markets. We even raised taxes on the wealthy as part of the Clinton budget plan in 1993, but that only whetted entrepreneurs' appetites.



With a handful of exceptions (most of whom have been published in this magazine), economists were convinced that the economy could grow no faster than 2 or 2.5 percent a year without incurring inflation. People who challenged this premise were dismissed as "magicians," in the sneering language of MIT economist Paul Krugman. In 1990, Krugman summarized conventional wisdom in his pessimistic book The Age of Diminished Expectations. Gloomy about politics as well as economics, Krugman predicted endless slow growth and budget deficits: "It is not only possible but probable that budget deficits at more or less the current level will continue for the rest of the century."



Well, growth is now something like 5 percent a year, the budget deficit is gone, and Krugman has just been named the economics columnist of The New York Times. As John Kenneth Galbraith famously observed, it is far safer to be conventionally wrong than unconventionally right.



Left and right will long debate why growth returned. Some of the plausible candidates for the new prosperity include these:



  • A long wave of new information technology, at last commercialized: much of this was nurtured, or at least assisted, by public investment (score one for the left).



  • The substantial deregulation of labor markets, which has undercut the wage pressures that normally accompany a boom and lead the Federal Reserve to snuff it out prematurely (score one for the right).



  • The slaying of the budget deficit, which has freed up money to pour into all those IPOs (score one for the center).





  • The sheer dynamism and resilience of the United States (score one for Jefferson, liberal immigration policy, and dumb luck).



    One of the few economists who was more or less right is our friend and frequent contributor Barry Bluestone. In Growing Prosperity, a new book with his longtime collaborator, the late Bennett Harrison, Bluestone explains why the main engine of the current boom is technology. Tax and budget policy are really bit players--the Rosencrantz and Guildenstern of economic policy that somehow usurped center stage. Bluestone and Harrison also point out, as corollary, that if we stint today on the public investments in technology and education that stimulated the present boom, we will likely miss out on the next boom.





    And yet, although economic growth has returned, this really is an age of diminished expectations--though in a sense different from Krugman's. The last time Americans enjoyed a long boom, the 1950s and 1960s, we gave free rein to our collective imagination as a society as well as our private economic fantasies as consumers. We undertook serious public investments, such as community colleges, new subway systems, and interstate highways. We tackled long-deferred social reforms such as basic civil rights. We got serious about investing in pollution control. We brought federal resources to early childhood education.



    In today's boom, our public imagination seems stunted. President Clinton will soon give his State of the Union address. If he runs true to form, he will offer a series of charming miniatures. Unlike the bold initiatives from past eras of expansive public purpose, they will make scant difference in people's lives.



    A rising tide does not automatically lift all boats, but prosperity should at least liberate our collective imagination. As a full-employment society, we can afford to restore outlays that must be public if they are to be made at all. The federal share of education spend-ing is now lower than it was before the Great Society. For all the candidates' talk about schools, no one is serious about spending real money. Even Bradley's health plan, though more expansive than Gore's, would leave millions of Americans without secure health coverage.



    The policy minimalism of this era is the result of several convergent forces. It is still accepted wisdom that budget balance is necessary fiscal policy. It logically follows that there is no new money to spend on public needs. To the extent that the surplus has produced a spendable dividend, the Clinton administration wants to allocate most of it to Social Security and Medicare. This has the tactical virtue of keeping the Republicans from promoting a major tax cut. But it reinforces the sense that no public outlay is available for much else.



    It would be convenient to argue that prosperity requires a more egalitarian society, as some Keynesians do. But economic history suggests that the relationship between growth and equality is indeterminate, and that the cause and effect are obscure. In the early 1800s, we prospered as a nation of yeoman farmers (and slaves). Late in the same century, we industrialized in a grossly disparate Gilded Age. In the 1950s and 1960s, the economy grew smartly and became more equal. In the 1970s and 1980s, growth lagged, and we became more unequal. In the 1990s, growth picked up, and we still became more unequal.



    In the past two years, there has been a very slight move back toward greater equality, but only if the calculations are limited to wage and salary income. If you include stock compensation, the main form of income for the very wealthy, we are more unequal than ever. To the extent that wages are a bit more equal, the prosperity generated the income gains at the bottom, not vice versa.



    Anyone who has visited, say, Brazil (or for that matter, Los Angeles) notices that a society is perfectly capable of sustaining grotesque extremes of wealth and poverty and still having a strong rate of economic growth. Therefore, the case for social justice must be made on its own terms.



    It is fine to insist that without better schools, America will not be "competitive," but the fact is that America is plenty competitive thanks to the skills of the top tenth of the work force (which is very grateful to have college graduates serving its food and mowing its lawns, thank you). If we think every child deserves a decent education, we must make that case on the basis of citizenship; we must argue that every American deserves to realize his or her full potential, as an end in itself.



    Evidently, even a society as unequal as ours can attain a 5-percent growth rate. It can achieve high growth with 43 million people lacking basic health insurance, with young entrants to the labor market paying astronomical rents, and with homeless people lacking shelter. The remedies to these ills must be pursued as ends, not as necessary means to higher growth.



    But a high-growth, full-employment economy does empower us to build a more just society. What we need now is a resurgence of political passion, both among our political leaders and among people not sharing in the boom, who have largely given up on politics. The absence of passion is contagious.



    President Clinton, flaws and all, fought a valiant holding action. During his presidency, the pure extremism of the Gingrich revolution became self-extinguishing. The most radical demands of the Republican right were kept at bay. Social insurance was defended and preserved for future generations. The supply-side deficits were at last put behind us. But all of this came at the price of diminished expectations. It will fall to Clinton's successor and the voters to restore a mood of expanded public possibility. ยค





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