Restoration of robust growth is the paramount challenge facing the nation, the most significant issue of the 1992 election, and the first task that will face a new administration. Indeed, all other important public questions are being held hostage to a sick economy that depresses aspiration, increases unemployment, de pletes revenue, and makes public remediation seem unaffordable.
Many serious commentators have lately concluded that nothing can be done to cure the depressed economy, save to depress it further via budget balance and wait for private confidence to return. The discussion bears an uncanny similarity to that of the late 1930s, when the economics journals were filled with gloomy assessments of something called "mature capitalism." After a full decade of depression, many economists concluded that 12 percent unemployment, static living standards, and 1 or 2 percent annual growth were the best a mature market economy could do.
An abrupt event on nobody's economic radar screen World War II settled the debate in short order. A market economy, with a strong dose of public investment, could and did grow at better than 10 percent a year. Full employment was indeed attainable. The war was simultaneously a recovery program for the nation, a recapitalization of industry, a technology policy, a retraining program for labor, and a force for social progress. In a more attenuated sense, the Cold War played something of the same role.
It seems a shame, of course, that government should only have this potent effect on the collective organization of idle resources as the incidental byproduct of a war, especially since war blows up most of what is produced. As economic policy, war stimulus burns barns to roast pigs.
Like the false remedies commended to cure it, today's economy also recalls that of the late 1930s. For the first time since the Clutch Plague we are experiencing a deflation, though it is contained somewhat thanks to stabilizers that conservatives have been unable to repeal. The real estate bust is the most dramatic emblem, but wages and consumer buying power are falling, too. In a deflation, the market price of an asset plunges and its earning potential is not sufficient to pay its debt. Banks, in turn, suffer from depressed payments by debtors, and become skittish about extending new credit. Banks were none too healthy even before the deflation began, thanks to unintended consequences of financial deregulation.
Unlike the 1930s, the stock market has not yet suffered a severe deflation (as of this writing), but that uneasy buoyancy is the mechanical result of steady reductions in interest rates by the Federal Reserve. When interest yields are low, investors shift into stocks, which bids up their price. However, the Fed's cheap money policy has just about reached its logical limits, especially given the escalating international pressure against the dollar.
Although public debate has emphasized whether the economy is technically in or out of mild cyclical recession, the deeper problem is long-term stagnation. Whenever the current recession ends, not even the White House economists are forecasting a return to robust growth any time soon.
Miraculously enough, the Democratic nominee, unlike his two immediate predecessors and at least one of his primary opponents, has not succumbed to the calls for a deflation cure. Clinton has called for a moderate program of public investment, though he has not fully parsed out all of its economic implications. As president, he would need the intellectual clarity and political resolve to persuade public opinion to support outlays of a magnitude that could do the job properly.
The 1992 election thus offers an implicit three way debate between supply-siders who want to restore growth via tax breaks, deflationists of both parties who would make budget balance paramount, and advocates of a World War II-style cure.
That debate needs to be put into sharper focus.
This issue of The American Prospect contains a special cluster of articles on the logic of public investment as the necessary cure for a stagnant economy. We who offer public investment need to articulate a compelling logic, for this approach flies in the face of several conventional wisdoms about the disabling constraint of the deficit and the limited competence of public endeavor.
Public investment can cure slow growth in four distinct respects. The first two are macroeconomic; the final two are structural.
First, in a deflated economy public investment bridges over the failure of private firms and individuals to invest, given their accurate perceptions of depressed consumer purchasing power. It thereby raises the investment rate directly, which is the key to growth, and puts idle people back to work. In many center cities, where commercial vacancy rates are 25 and 30 percent, we will wait decades for private developers to pour much concrete. But an accelerated bridge, tunnel, rail, highway, or water and sewer program could get concrete poured within a few months, most of it via private contracts that would generate private sector earnings and private employment.
Second, in a global economy, ordinary macroeconomic stimulus of private consumption via tax cuts and deficits partially "leaks" into purchases of imports that do little to restore domestic growth. Instead, conventional stimulus buys only chronic trade deficits as well as budget deficits. A virtue of public investment is that almost all of it is spent domestically.
The third effect has to do with how public investment facilitates private productivity. Goods need to get to market, and workers need to commute to their jobs. Besides transportation, a modern economy also depends on reliable energy and telecommunications. Research by economists Alicia Munnell, David Ashauer, and others has demonstrated that public infrastructure investment is a necessary complement to private sector productivity growth. But in the 1980s, basic investment in infrastructure declined to less than half its normal postwar rate.
Finally, public investment often leads technological advance, which is the microeconomic source of growth. During the Cold War era, this public outlay energized technical advance, primarily via military spending. That military technology policy now needs to be civilianized or it will be lost.
Thus the convergence of several factors the end of a long era of military stimulus, the trauma to private lending institutions, the depressive effect of price deflation, the high-debt aftermath of Reaganomics, the inability of private investors to commit enough capital all point to public investment as the only alternative to chronic stagnation.
The program is "Keynesian" not via increased demand, but via increased investment, recognizing that over the long term it is investment that drives growth. It will certainly have short-term anti-recession benefits, too however the real point is not merely to accelerate recovery from the current business cycle recession, but to get the economy back on a high growth path of the sort that powered the long postwar boom.
The public investment strategy is all of a piece, and should be understood in its complete logic. In this issue of The American Prospect, the historian Doris Kearns Goodwin, author of a forthcoming book on the World War II economy, reflects on the lessons of 1942 for 1992. Michael Borrus reviews the beneficial effects of public investment on technology. Ralph Nader and colleagues point to the innovative potential of government procurement. Jay Stowsky and Burgess Laird consider one key conversion dilemma how to turn the national laboratories from military to commercial ends. Peter Stone examines one leading candidate for public investment: high-speed rail. Steven Kelman rebuts the favorite conservative charge that public investment will necessarily degenerate into pork barrel. Bennett Harrison looks as the various structural reasons why private investment cannot lead a recovery. And David Casagrande reviews the literature of the military conversion debate. In future issues, we will examine the human-capital aspect of public investment.
Besides its economic benefits, this strategy offers one compelling political benefit. It restores the link between liberals and economic growth, without needlessly sacrificing equity. For more than a decade, repentant ex-liberals have chanted a demeaning mantra about giving up their obsession with dividing the economic pie, the better to begin expanding it. Meanwhile, conservatives have etched into the public consciousness the claim that a "growth measure" was necessarily one that cut taxes on the well-off.
The morning after Reaganomics should finally lay the conservative claim to rest. A post-mortem on the 1980s reveals that supply-side tax cuts raised the rates of neither savings nor investment, while it doubled the national debt to no constructive economic purpose. And with that verdict in, and the public debt now in excess of half one year's GNP, a second round of supply-side tax cutting would be a much greater folly than it was in 1981. Conversely, investment-led growth should finally relieve liberals of the neurosis that they favor distribution at the cost of expansion.
What of the chronic deficit and the debt? They are millstones all right, but they must not prove disabling. Today, the debt held by the public is less than half of what it was in 1946. At the end of World War II, the national debt stood at 119 percent of one year's GNP. But that debt had not just bought tanks, planes, and bombs. It had renovated America's physical and human infrastructure. As Robert Reich suggests, investment is not just a euphemism for current spending. Whether public or private, debt directed towards expanded investment increases growth. We can indeed, we must incur expanded public debt if we do so wisely. Once a higher rate of long-term growth is restored, the debt will gradually shrink as a share of GNP, as it did for thirty-five years until Ronald Reagan occupied the White House.
The 1980s badly tarnished the public sector as an engine of public purpose. Even many liberals began to doubt whether public endeavor could be salvaged. But we had better begin refurbishing government's capacity for collective purpose, and fast. For in this economy we are going to need it.
From its founding nearly three years ago, The American Prospect has sought to help reconstruct a plausible and persuasive liberalism. This issue's cluster of articles concerned with a public investment strategy for economic growth exemplifies that purpose: substantive, detailed thinking about how to solve the nation's problems, rather than symbolic gestures. Yet, as this political season has reminded us, there is another aspect to the conflict over public ideas in America that is inevitably and properly symbolic. It is a battle over cultural ideals, ways of life, the meaning of the past. And that conflict is inseparable from the hard choices in economics, social policy, and even foreign affairs.
Clashes over cultural ideals and ways of life are hardly new in the United States. The passions aroused by the temperance movement as this century began were not wholly unlike those aroused by today's conservative crusades for "family values" and against abortion and gay rights. Temperance, in fact, was a "pro-family" issue in its day. Yet the present conflict, whatever its deeper historical continuities, dates fundamentally from the 1960s, and it is striking how much that decade continues to preoccupy, bedevil, and divide us.
The sixties seem to return at nearly every juncture. As the war with Iraq began, the nation argued about whether it would be "another Vietnam" (it wasn't), much as a prior generation had debated matters of war and peace worrying whether some incident would become "another Munich" or "another Sarajevo" (we can now appreciate the latter reference). Press stories about Bill Clinton's draft record and whether or not he inhaled prompted another round of reflection: Could the generation of the sixties ever be free of its past? Could the nation ever trust anyone who was under thirty in 1968?
And when Los Angeles erupted in riots and flames, Marlin Fitzwater, the White House spokesman, peered over the city and, astonishingly, saw the words "the sixties" traced by the smoke. Again we were back to the same argument, in a slightly different version: Was the Great Society to be held responsible for urban disintegration and violence today? (According to a Los Angeles Times poll in early May, few thought it should, and roundups of Medicare, Headstart, and other surviving programs from that era turned up no plausible suspects.) Meanwhile, "JFK" was playing at your local theater, forensic cultural historians hovered over Marilyn's deathbed looking for fingerprints, and the music of the 1960s that was once damned as subversive had literally been turned into advertising jingles. The lyrics have been changed, but the melodies and the gunshots linger on.
Yet the memory of the 1960s does not simply linger; it has become a source of power for some, of weakness for others. The rise of conservatives at the national level dates to 1968, the waning of liberal influence to the same period. In the 1992 election, the Democrats are still trying to shake off the taint of the sixties, the Republicans are still trying to run against it. At their convention in New York this year, the Democrats tried to overcome and put behind them the cleavages that opened in their own ranks and the larger society in the sixties. At their convention in Houston, the Republicans proclaimed a "cultural divide" (Dan Quayle), and even a "religious war" (Patrick Buchanan), trying to stoke the embers of old antagonisms into a roaring blaze that would consume the Democrats.
From a social and cultural standpoint, the Democrats have become the party of peace, the Republicans the party of war. If conservatives in the Republican Party cannot summon supporters to fight the archenemy in Moscow, they can at least summon them to fight the Anti-Christ in Hollywood or New York. In short, they can make liberalism the moral equivalent of communism, the "cultural elite" the equivalent of the Politburo, and the battle against them the equivalent of war. Some might have thought that once the Cold War was over, the right's leaders would no longer question their opponents' loyalty. But it seems they have more reason now than ever: Without communism as a unifying force, even moderate Democrats must be made into enemies of the American way of life. This is dangerous to the civility needed for political cooperation, to the tolerance needed in a heterogeneous society, and most of all to the truth.
To be sure, the Democrats have not rejected, nor should they, all the social and cultural changes we associate with the sixties. By and large, the major social programs of the decade still stand, many of them, like Medicare, beyond partisan controversy. But the differences between the parties on the meaning of the sixties are clear enough. Unlike the Republicans, the Democrats not only accept the changed role of women but favor policies, such as family leave, that facilitate and advance that change. And the Democrats have incorporated not just feminism, but even gay rights, which would have been truly inconceivable before the sixties. Even if one had never heard of Ron Brown or Bill Clinton, it would not be difficult to guess which party has a national chairman who is black and a presidential candidate who rock 'n' rolls.
Yet Democratic leaders, and liberals more generally, now recognize that the path they took in the late 1960s or, to be more accurate, some turns on that path led them into the electoral wilderness. In both its public and private expressions, the ethic of expansive entitlements seemed to deny limits, whether in personal conduct or government expenditure. Of course, not all liberals or liberal programs, much less all Democrats, had such an ethic, but enough did to make credible the charge that liberals did not know where to draw the line. So now they must reassert, as an earlier generation of liberals once did, an ethic that emphasizes prudence and responsibility as much as rights. The New Covenant a poor slogan, perhaps, but a good idea is an expression of that renewed emphasis on the norm of reciprocity rather than entitlement.
Similarly, rather than emphasize separate programs for the poor, the Democrats now put priority on growth and full employment, as did liberals from Roosevelt to Kennedy. There is a symbolic as well as substantive change here: The Democrats are making the values as well as the interests of the middle class, not the poor, their point of reference in social and economic policy. Some on the left, whose conception of progressive politics was formed in the 1960s, consider this revival of Rooseveltian liberalism a retreat. But what the poor most want is to join the middle class, not to reject it. Those who care about the poor serve them best by identifying them with the middle-class majority, not by distinguishing them from it. In the 1960s, the movement for racial equality correctly argued that civil rights could not depend on majority vote; blacks were entitled to equality of respect regardless of whether a majority of whites approved. That experience, however, led some liberals to treat other types of minorities, such as the poor, as groups whose interests demanded satisfaction regardless of majority approval. From advocating civil rights, they slid into advocating welfare rights as equally imperative. As a point of democratic theory, this was doubtful; as a matter of democratic politics, it was a disaster. Today's changed views of welfare, child support, and other policies all reflect a chastened respect for the culture and pocketbook interests of the nation's middle-class majority.
This is not an abandonment of liberalism; it is more like a return to what liberalism stood for, at least in the minds of its most persuasive advocates, before the late 1960s. The liberalism of the World War II generation, epitomized by such people as Reinhold Niebuhr, had a much stronger sense of both human limitations and the limits of social reconstruction. In the sixties, we sang, "We shall overcome," but unfortunately, many of us were overcome and now have come back. If the effort currently under way in the Democratic Party succeeds, it will be not simply a matter of a new administration, but the end of an estrangement from a tradition. There is much talk about a sustainable economy and environment; we also need a sustainable politics, grounded in a realistic appraisal of national sentiment as well as the national interest. In a democracy, this is not optional, except for those satisfied to grumble rather than to govern.
In the nation's memory today, the great counterpoint to the 1960s is the 1940s, remembered as a time when America was at once simpler, more serene, more unified, and more powerful. The movies, songs, old magazines, even the social critics of that period have acquired a rosy glow. Harry Truman's prestige is so high that George Bush, who surely voted for Tom Dewey, now says the Missouri New Dealer is his model. Of course, some of the longing for the forties is for a period when America was clearly on the rise, and when the problems of race and poverty did not appear intractable (in part because they were hardly thought about at all). But, as Doris Kearns Goodwin reminds us in this issue, the 1940s were in many ways a more liberal period than today, and they offer us a remarkably bold precedent for liberal remedy. Even as we take caution from the sixties, we could do worse than take courage from the forties.