Yes, there is a Democratic economics. What remains to be seen is whether there is a Democratic politics. The real economic issue is not the current recession, but fifteen years of invisible depression. That should be the focus of the reframed debate. A steady erosion of living standards for wage and salary earners suggests a very different construction of the problem, different remedies, and a far superior politics.
At this writing, George Bush is at last reaping the consequences of eleven years of wrong-headed economic policy. He, and we, face an improbable economic bind, in which annual deficits of $300 billion are necessary for the economy merely to tread water. For Bush to propose capital gains cuts as a remedy is not only bad economics; as politics it plays into the Democrats' hands. Add to this the shaky condition of banks and real estate markets, the visible decay of public services and infrastructure, the richly deserved voter skepticism about various experiments in deregulation, the consumer worries about further declines in living standards, and you have a situation ready made for an opposition program.
That is the good news. The problem, of course, is that the very same economic deadlock tends to paralyze the opposition imagination. Presumably, fiscal policy is inoperative because of the deficits; monetary policycheap moneyhas arguably reached its limits because the same high deficits preclude very low interest rates without triggering inflation. Until lately, the 1990 budget deal, with its wall between military and domestic expenditures, has seemingly denied us the one available "free lunch"the peace dividendthough the Democrats lately have awakened to this possibility. Even so, the shifting of modest sums from defense to civilian outlays would stop well short of real economic transformation.
In addition, the accumulated structural damage of the Reagan-Bush era also seems to thwart an opposition program, for some problems have no quick fixes. The banking sector, on which ordinary commerce depends, is seriously weakened; the overbuilt commercial real estate that gluts downtown Los Angeles, Houston, Denver, Boston, functions as a slow-fused time bomb that will continue to bleed bank balance sheets and leave banks hesitant to lend. The destruction of public agencies under Reagan has eroded voter confidence in public remedy. As universal health insurance edged back onto the public agenda, former Deputy Secretary of Health and Human Services Constance Horner warned that a government-run health program would have all the efficiency of the Postal Service and all the compassion of the IRS.
Also, the Democrats have only partly recovered from the ideological stupor of the 1980s. Throughout the Reagan era, Democrats were something of a me-too party. They were pro-business, "too." They supported incentives to capital, "too." Sensing the conservative public mood and the intellectual ascendance of laissez-faire economics, they joined in the assault on regulation, supported selective forms of privatization, abandoned progressive taxation, sacrificed to the fiscal gods even domestic programs that worked. Their ideology was essentially Republican, only a little less so. Some even toyed with such disastrous notions as the means-testing of universal social programs. Even today, many Democrats are not entirely weaned from their recent romance with the conservative regulatory, budgetary, and macroeconomic assumptions of the Reagan-Gramm-Rudman era. And some, like presidential aspirants Paul Tsongas and Jerry Brown, swing oddly between a populist anti-business rhetoric and a cultivation of entrepreneurs.
Although most Democrats have begun to reclaim their historic identity, the confused ideological legacy of the 1980s lives on in institutions like the Democratic Leadership Council and its affiliated Progressive Policy Institute, which recently held a joint conference with the far-right Heritage Foundation, celebrating the "New Paradigm" of entrepreneurship and flexibility. It lingers on in the freelance politics of several key Democratic House and Senate committee chairmen and their close alliance with business interest groups; and it persists in the imperatives of campaign financeall of which creates a conservative undertow. But if ever in Democratic politics there were a moment to clarify economic differences rather than submerging them in premature and substantially conservative consensus, it is now.
In fashioning an opposition economics, we need to recognize that the economy suffers from three distinct problems that require three distinct cures. The first of these is short-term, but its cure is neither easy not conventional. The other two are structural and will require long term, structural remedy. There are points of connection among these three areas, politically and economically. But debate has tended to conflate them into a single problem under the rubric of "growth" or "competitiveness." They need to be disentangled and clearly understood, before an opposition economics can truly emerge. The three tasks are these:
- Economic recovery from a fifteen-year hidden depression.
- The structural reform of economic institutions to enhance productivity and competitiveness over the long term.
- The defense of the working middle class
Reframing the Economic Problem
The context for an opposition economics is the steady decline of middle class living standards throughout the Republican presidency. Indeed, the period since the late 1970s represents a longerif shallower trajectory of declining income than even the Great Depression. Not only have wage and salary levels deteriorated for a majority of families. Such basics as health insurance, college tuition, and even home ownership, are increasingly beyond the reach of ordinary middle class Americans. This is very different story from the usual formulation that all the Democrats need is a good recession, and a different, more compelling framing of what is wrong. Democrats should focus on the secular decline in living standards rather than merely the current cyclical downturn. That entails a markedly different rhetoric, program, and politics. Nor is the issue "distribution" in the static sense, but rather it is how to restore a high-performance economy in a way that benefits ordinary people.
This reality of declining economic prospects, intuitively perceived and resented by voters throughout the 1980s, has finally entered political discourse. The amorphous worry about "the future," first discerned in opinion polls more than a decade ago, turns out to be a justifiable anxiety about living standards. After a decade of inchoate economic distress, the issue now constructs an axis of division between the two parties that could play to Democrats' historic strength as the party of ordinary people.
Two recent defining moments in the repoliticization of economics were the overturning by the Democratic congressional rank and file of the original 1990 budget deal on distributional grounds, and the reluctant conversation of House Ways and Means Committee Chairman Dan Rostenkowski in November 1991 to the no longer controversial idea of raising taxes on the rich to give the middle class a break. "If you're a middle-class American, you get a tax cut. If you're in the top one percent, you get a tax increase," said Rosty. FDR could have not put it better.
Moreover, there is now, belatedly, an emerging cleavage of views on economic growthone that also plays to Democratic strength. After an appalling interlude during which many Democrats seemed to accept that equity had to be sacrificed to growth, it is now widely accepted that supply-side economics was a fraud. Reagan presided over a moderate rate of economic growth (2.7 percent per year, well below the postwar average) thanks to enormous deficits, not thanks to supply-side incentives for savings and investment. In reality, savings rates fell to a new low. Investment also declinedfrom 17.5 percent of gross national product (GNP) in 1979 to 14.0 percent last yearand would have declined further but for foreign direct investment and loans. The deficits produced temporary macroeconomic stimulus; but they were distributively arbitrary. That is, they might just as well have gone to rebuild public services, finance health care, subsidize parental leave, develop new technologies. Had the Reagan deficits done that, they would have produced the same macroeconomic stimulusplus some useful things besides. Instead, they went to a military build-up and the tax relief of the well-to-do. And because the borrowing went substantially to support consumption, not increased investment and growth, the accumulated national debt kept rising as a fraction of GNP and the program was unsustainable. Thus, we can jettison the mistaken notion that even Democrats, however reluctantly "must stop fighting over shares of the pie and work to enlarge it." Rather, the issue can be framed as how to rekindle economic growth in a manner that benefits most working people.
The core economic principles of the modern Democratic Party boil down to these two: Ordinary people who live paycheck to paycheck do not get a fan-shake from a self-regulating market, for the market in practice is neither self-regulating nor fair. And in a democratic society the only instrument that can provide the security and opportunity that the market omits is the government. A pure, laissez-faire economy leaves ordinary people vulnerable, creates arbitrary injustices, denies the economy its full employment potential, and produces degradation of public goods such as the environment. That is the common rationale for such diverse policy instruments as macroeconomic management, regulation, public investment, and the social safety net. Ideologically, Republicans claim the economy performs better when the government just gets out of the way. But the experience of the past decade has refuted the claim. In those areas where government has gotten out of the wayhousing, mental health, economic regulation, taxation of businessthere has been no spontaneous resurgence led by markets. And in areas where government cannot avoid stewardshipthe budget, management of public agencies, supervision of banks, airports, roads, bridges the Bush and Reagan administrations have made a hash of things.
In the liberal Democratic view, the task of government is not to overwhelm the market but temper it, tame it, domesticate it, and make sure it serves benign purposes. These core principles were submerged during the 1980s, and they are now coming back into fashion. But how to operationalize them in times like these? And how to turn them again into good politics?
To offer a different remedy and a convincing politics, one must begin by altering the conception of the problem and hence the terms of debate. Through most of the 1980s, the defined problem was the federal deficit. The defined remedy was "belt-tightening." The politics were dreadful; potential Democratic voters already reeling from reduced living standards were offered further sacrifices. Today if the defined problem is recession, the orthodox remedy is "growth measures." The politics, at least, are rather better. The economy weakened on the Republicans' watch, and liberal growth measures (tax relief for the middle class) are more attractive than conservative ones (more supply-side relief for the rich). But the politics are not quite dispositive, nor are these remedies likely to do the job.
As I have written elsewhere, the "declining middle" is the result of multiple factors. These include the globalization of commerce, the weakening of organized labor, the petering out of the postwar boom, and the shift to a service economy whose earning structure is more bifurcated than that of an industrial economy. These forces were compounded by the regressive tax and transfer policies of the Reagan administration, which withdrew transfer income from the poor, and shifted the tax burden from the rich to the middle class. The trend was exacerbated by the go-go economy of the 1980s, which led to a more entrepreneurial distribution of income and wealth, with super-star earnings for a few and vulnerability for most wage and salary earners. The income of the middle class was further compromised by the slower growth of the Reagan years, which halted altogether under Bush. A politically convincing program needs to quickly propel the economy out of its current slump, and also begin the task of repairing the structural damage. We need to shift back to a high growth path, but in a manner that restores the prospect of a broadly middle-class society.
I. Macro Paralysis
Blasting out of the present slow growth trap will first require a much bolder sense of the possible. Looking back on the 1980s, the fiscal legacy of Reaganism produced a bizarre political role reversal. On the right, Republicansusually the party of fiscal prudencefound in supply-side theory a safely conservative rationale for large deficits. In a weird alchemy, they took credit for the temporary spurt of growth, blamed the deficits on Democratic congressional spending, yet pooh-poohed those who found the deficits troubling. Meanwhile, in the orthodox center, economists who called themselves "neo-Keynesian" became alarmed at the deficits and unlikely crusaders for austerity. Brookings-style Democrats, thinking fiscal probity necessary economics and sound politics, turned the party of Roosevelt into the party of the green eyeshade.
It is worth pausing a moment to consider the macroeconomic assumptions behind the calls for austerity. In standard economic theory, savings equals investment. All investment has to be financed by something, and all savings has to go somewhere; therefore, looked at after the fact the supply of investment precisely equals the supply of savings. From this accounting identity, centrist economics constructs the following chain of logic: The United States needs more investment to grow more rapidly; the U.S. historic savings rate was lower than that of its faster-growing competitors; big federal deficits only lowered it further since they have soaked up about two-thirds the supply of household savings. Hence, the number one priority for the economy is smaller deficits and higher savings. In the short run, this will be contractionary, but it is necessary medicine for the morning after a decade of excess. This is a consensus that goes roughly from Lawrence Summers, Benjamin Friedman, and Robert Lawrence in the moderate center to Martin Feldstein and Peter G. Peterson on the conventional right.
Put aside for a moment the political stupidity of telling people who have spent a decade coping with declining living standards that what they need is more belt-tightening. The macroeconomics is also wrong, for it falsely assumes that savings is what drives investment. It was Keynes, seconded by Michal Kalecki, who pointed out that when an economy is stuck performing well below its potential, higher savings does not necessarily stimulate higher investment. Entrepreneurs invest when they think customers will buy products, not when the economy is flat. The vulgar understanding of "Keynesianism" is that it simply equals stimulation of aggregate demand via deficit spending. But what passes for Keynesianism has filtered through the exegeses of Keynes's more conservative American disciples. Keynes himself realized that what drove economic growth was indeed investment, but not necessarily via private savings. This was the famous "paradox of thrift." Keynes wanted the most possible investment at the lowest possible interest rate. He also wanted to keep the economy running at full employment and high growth. But under some circumstances the pump-priming needed to occur on the investment side first.
What Keynes grasped, and what his neo-Keynesian heirs have forgotten, is that in a stagnant economy more private savings does not always generate more private investment. This is particularly true in a situation like the present one, in which the institutions that extend credit are suffering from serious recent structural traumas. Bank capital has been depleted by the losses of the 1980s. Banks are justifiably reluctant to incur risks. As the economist Irving Fisher wrote in his classic 1933 article, "The Debt-Deflation Theory of Great Depressions," a depression is different from a mild, self-correcting recession, in that a depression involves a collapse of asset values, typically after a bout of speculation. When debt exceeds the value or earning capacity of its collateral, debtors suffer serious inroads on their net worth and income, creditors suffer erosion of their wealth and their capacity or willingness to lend, and there is no great demand to borrow.
The Investment Cure
In this setting, the quickest way to stimulate investment is simply to increase it directly via the public sector. A dollar saved by a private entrepreneur may or may not turn up as a dollar of investmentindeed, in a depressed economy, that conversion is unlikely. But a dollar spent by the government on a road, water treatment plant, high speed rail facility, or optical fiber network, is actually one hundred cents worth of real investment. This brings up a related accounting fallacythe arbitrary assumption in the National Income and Product Accounts that government spending is "consumption." Identical investments are scored differently in the national income accounts, depending on which sector undertakes them. A public power plant is as much an investment as a private one. A public subway line is as much an investment as a private light rail project. Investment is investment is investment. In fact, the fraction of government spending that represents investmentparticularly non-military investmenthas deteriorated markedly during the Reagan-Bush era, and this is part of the story of declining investment generally.
As Robert Heilbroner observed in The Nature and Logic of Capitalism, in free-market ideology all private-sector activity gets an implicit pardon; it is presumed innocent it must be efficient; else the market would not have undertaken it. Conversely, public outlay is assumed to be a drag on productive investment; it may have necessary social purposes, but it is the object of economic disdain. It is presumed inefficient because the government by definition cannot outguess the market. But after the real estate debacle of the 1980s, in which the genius of the private market sank hundreds of billions of dollars into economically worthless commercial buildings, only a fool would continue to insist that the market by definition guesses right.
The immediate recovery program, therefore, needs to be a World War H-style cure: an investment-led recovery involving outlay that is initially public but that stimulates private activity as well. A public investment-led recovery has four distinct benefits. Virtually all the outlay actually is invested, unlike the fruits of a supply-side tax cut. Virtually all of the outlay stimulates domestic activity, while a consumption-led boom partly leaks out into purchase of imports. Public investment of the traditional sortroads, brudges, sewers, water-treatment plants, subways would make up for the accumulated shortchanging of infrastructure maintenance during the 1980s and increase productivity, while high-tech public investment in projects like fiber-optic phone lines and high-speed rail would increase the technology-intensity of the economy and accelerate technical learning, productivity, and competitiveness. Obviously, the investment would be initiated by government, but most of it would end up contributing to private-sector jobs and much of it would wind up as private capital goods.
The belated recovery from the Great Depression stimulated by the burst of public investment during World War II was astonishing. Unemployment melted from 11.8 per cent to under 2 percent in less than a year. Real income rose by more than 40 percent during the war. The wartime investment also produced a generation of physical and human capital, which in turn powered the postwar boom.
An investment-led recovery program would have to be financed partly through special taxes and partly via borrowing. World War II relied on both war bonds (borrowing) and surtaxes. A public investment program, on the order of $150 billion annually, could raise $50 billion from either surtaxes on very high incomes or from selected consumption taxes on, say, energy where there are good independent policy reasons to raise the cost of usage. A second $50 billion could come from an accelerated peace dividend. This makes good sense because throughout the Cold War military spending has been the unacknowledged instrument of our technology policy, as well as a subsidy to the investment of capital goods in such industries as aircraft. As military spending is reduced, so is the unadmitted stimulus to investmentwhich needs to be offset.
The final $50 billion could be borrowed. The borrowing of the 1980s was unsustainable because it primarily financed consumption. There is nothing wrong with borrowing to finance investment. It is time for a government capital budget, so we can at last differentiate which portion of public outlay is consumptionwhich should be financed by taxes and be deficit-neutral over the course of the business cycleand which portion is investment. The investment portion can legitimately be financed by borrowing, in the same way that the private sector finances investment by borrowing.
At the end of World War II, the public debt peaked at 119 percent of gross national product. But that debt did not choke a recovery; on the contrary, the productive fruits of that debt nurtured the postwar consumer boom. Per-capita public debt increased nearly five fold during the war, but this increment was well worth it, for it finally ended the Great Depression. With the economy back on a high growth path, the ratio of debt to GNP diminished for 35 years, until Ronald Reagan started it on a sterile, upward course. Today, the national debt is about 55 percent of GNP. Seemingly, there is plenty of room for additional debt. However, the current debt is more serious than it seems because real interest rates are so high. In 1946, net interest paid by the federal government was 1.9 percent of GNP. Today, that percentage is 3.4 percent of GNP, and personal and corporate debt are also at a postwar high.
Can We Afford More Debt?
The Levy Forecasting Institute has projected that by the year 2000, if present trends continue, real GNP (in current dollars) will be about $6.1 billion, while debt will rise to about $6 billion. Therefore, debt will equal 98 per cent of GNP and the cost of servicing it will increase to an alarming 8.1 percent of GNP. The easiest way of lessening the drag of this debt burden is to lower real interest rates. During the war, notwithstanding the very high deficits, interest rates were low because the executive branch and the Federal Reserve had a stringent policy of keeping them low. Treasury securities were not auctioned; they were spoon-fed. Many ordinary Americans also bought war bonds. And inflation was restrained not by tight money but by wage and price controls. Moreover, when there is high idle capacity as at present, the risk of very cheap money setting off inflation is far lower.
Obviously, we cannot expect the kind of wartime discipline that operated in World War II. But it is possible to keep lowering real interest rates and offset the inflationary impact by a serious incomes policy that represents a social compact between industry and labor. It is also possible to sell more bonds directly to the public. And it is possible to require very high income Americans to spend a small portion of their income on compulsory purchases of Treasury debt with a moderate real interest ratesay, inflation plus 2 percentas an alternative to higher taxation. If real interest rates can be lowered, a $50 billion annual increment to total debt to finance investment is easily bearable. And the relief to the larger burden of high real interest rates generally for both public and private sector would be immense. Each 1 percent drop in the interest rate saves the government $35 billion per year.
Keynes observed that the real interest rate should be as low as possible, to make it cheaper to invest. Business has spent the supply-side era moaning about the high cost of capital, and pleading for special incentives to offset the high prevailing interest rates. But special tax breaks are the wrong solution. It is far better to lower interest rates across the board.
On the savings side of the equation, there are alternative strategies for increasing the savings rate over the long term once growth is restored to a higher path. One way is to reform the private pension fund systema key source of increments to savingsso that corporations are not permitted to vary their actuarial assumptions and loot pension reserves whenever the stock market or the prevailing interest rate happen to be elevated. A second way is to use the Social Security surplus as an annual source of contributions to total savings, instead of consuming it to offset the current deficit. But the most important way is to restore economic growth and the incomes of the middle class. The experiment of the 1980s confirmed Keynes's insight that savings are relatively insensitive to interest rates. Throughout the decade, real interest rates were at historic highs but the household savings rate plummeted because people had little spare income to put aside.
For Democrats to embrace this view, they would have to break with the macro-economic orthodoxy of recent years. They would have to remember that when times are hard, the voters do not oppose government coming to the rescue; they fairly demand it. They would have to remember that most voters do not care about the size of the federal deficit; it is an abstraction, an issue that does not really concern ordinary peopleexcept when the indirect effect is to pick their pockets.
II. Competitiveness and Productivity
Beyond the short term problem of a "debt-deflation depression"the fallout from bad recent policies choking off recovery and high growththe economy suffers from several interrelated structural deficiencies which render it less productive and less competitive in world markets than it might be. Many of these boil down to the famous short-term preoccupation of American investors and managers, but this economic myopia is reinforced by our institutions and can be changed by structural reforms. This is a problem independent of the slow growth, the bank-real estate trauma, and widening income disparity of recent years. Even if we can escape the macro trap, we have an institutional productivity problem. The damage done to banks will affect our global competitiveness; and if we want to reverse the long-term degradation of income distribution we will need a more competitive economy.
One arena for reform is our capital markets, which are structured to fairly beg managers to ignore the long-term health of the enterprise, and discipline bad management by selling out or breaking up the entire companya remedy not unlike burning down the barn to roast the pig. At a minimum, the tax treatment of capital gains ought to be amended to induce longer-term holdings. Pension funds, which are tax exempt, ought to be punished for short-term churning of their investment portfolios, and induced to invest long. We need a residual, public source of long-term capital as well, perhaps through a portion of the Social Security surplus which might be invested in a diversified portfolio of stocks, or through a new Reconstruction Finance Corporation. As Felix Rohatyn has suggested, it would also make sense to recapitalize banks on the front end, rather than continuing to suffer cycles of slow bleed followed by costly bail-out.
Congress, at this writing, has just voted to replenish the Federal Deposit Insurance Corporation (FDIC) but is stalemated on banking reform. My own view is that we definitely need stronger banks, but that German-style "universal banks" which both underwrite stock and perform traditional commercial banking functions, and perhaps own commercial enterprises, should be limited to a handful of the strongest, best managed banks, at least for now. In the meantime, we should reinvent locally-oriented banks as economic development institutions. Savings and loan associations once served something of this function, as nonprofit institutions. Rather than moving toward one, undifferentiated money market, we should recognized the structural fact that an economy needs distinct, specialized financial institutions.
The government has to reinvent the entire banking system, wiping off a generation of bad debt, dosing shaky banks, reorganizing and recapitalizing the remaining ones. This, in effect, is what the FDIC has been doingbut it is pretending that it is merely paying off depositor claims. As a result, its own focus is entirely on the balance sheet, with the effect that banks are very stingy with credit. The government should admit what it is doing, acknowledge the larger dilemma, and pursue a program that makes business credit plentiful.
The financial economy needs to be restructured to serve the real economy, as it does in the world's more successful societies. In the 1980s the real economy was seen as a plaything of the financial economy. Further, we need an alternative to the hostile takeover as a form of holding corporate managers accountable. There are only two possible candidatesmore hands-on management by creditors and institutional investors, and more of a stakeholder role for employees. Germany, one of our most dynamic competitors, uses both approaches.
As Bennett Harrison and Maryellen Kelley wrote in the Winter 1991 American Prospect, it takes stakeholder relationships between worker and manager to allow workers to deliver their best productivity, and to permit managers to give their workers the necessary autonomy. "Best practice" companies already attempt this form of labor management relations, but far too many firms still attempt to compete by taking the low road of cheap wages and idiot-proof production routines. Public policy could offer a variety of inducements to encourage best practice.
A related candidate for long-term structural reform is labor market and educational policy. There has been no shortage of expert study on this problem. By far the best report was America's Choice: High Skills or Low Wages, by the Commission on the Skills of the American Workforce, chaired by Ira Magaziner, an author, business consultant, and expert on comparative industrial policy. As honorary co-chairs, the commission had former Carter Labor Secretary Ray Marshall and former Reagan Labor Secretary William Brockno small ideological stretch there.
The Skills Commission pointed to the wide disparity in the school-to-work transition programs of the U.S. and its leading competitors, as well as the absence of labor market institutions that facilitate a high-productivity, high-skill, high-wage path to competitiveness. The commission recommended that all high school students attain a standardized Certificate of Basic Mastery, and that dropouts receive encouragement and aid to go back and get this basic certification. Non-college bound students would be able to work toward a variety of professional and technical credentials, which would be standardized and accepted nationwide; this would all be coordinated and administered through a new system of local labor market boards. The plan borrows heavily from German, French, and Swedish experience. As Barry Bluestone has suggested in these pages, both college and non-college postsecondary education could be financed by a loan entitlement. This would have the further virtue of financing the upgrading of the work force through loans that would be self-liquidating.
Civilian Technology Policy
Throughout the Cold War era, the U.S. used the Pentagon as its implicit industrial policy. Although some critics of the impact of defense spending on the economy such as Seymour Melman have viewed it as a pure drain, the military-aerospace complex allowed the government to invest trillions of dollars in research and development, production capital, and technical learning that would have otherwise been ideologically objectionable to conservative administrations. In fact, at the peak of America's postwar boom, the military was spending twice its current fraction of GNP. As the military fraction of GNP winds down and as military technology becomes more arcane, with fewer easy commercial spillovers, it is essential to recognize the implicit role as surrogate technology policy that the Pentagon has played, and to devise an explicit substitute.
If we do not wish to lose these benefits entirely, we should follow the suggestions of Senator Jeff Bingaman and others that we create explicitly civilian agencies of government whose task is to promote the development of advanced technology with commercial uses. Bingaman, seconded by Senators Sam Nunn and Fritz Hollings, has proposed legislation creating in the Commerce Department what amounts to a civilian Defense Advance Research Projects Agency (DARPA). Bingaman's twin bills would create critical technology application centers, intended to help U.S. firms to transform new technologies into new products more quickly and more cheaply. A companion bill would upgrade the National Institute of Standards and Technology, which already exists in embryonic form but has never been fully funded because of ideological opposition from the Bush administration.
DARPA-financed research helped create, among other innovations, lasers, data packet switching, super-computers, and advanced composite materials. Conservative ideology absurdly holds that this role of public investment in technology is fine as long as it creates commercial benefits only inadvertently. Somehow, when the purpose is to create commercial benefits, the enterprise becomes suspect. By the same token, the National Institutes of Health, whose research and development spending has helped make the U.S. biotechnology industry a world leader, are tolerated ideologically on the ground that their purpose is to advance science and health; the incidental effect of creating a strong, competitive U.S. commercial industry is held to be a mere byproduct. Surely, it is time to challenge this prejudice against publicly sponsored R&D, head on. The Energy Department's National Laboratories, long a part of the nuclear weapons program, should likewise be converted to explicitly civilian uses.
A word of caution about this set of structural policies: None of them is especially sexy. Nobody is going to get elected president by crusading for a civilian DARPA or for a revised system of pension fund regulation, or even for a restructuring of labor market policy. These are reforms to be undertaken, in office, by a Democratic administration that is clear about its first principles and that has the self-confidence to lead by example and look to the long-term well-being of the economy. And unlike the orthodox cold bath fiscal remedies, these policies at least have the virtue of inflicting no harm while they are doing their work.
I have not yet mentioned trade, which I have written about widely in The American Prospect and elsewhere. I believe passionately that the Bush Administration has mistakenly placed the goal of worldwide laissez-faire trade ahead of the more important goalssuch as assuring fair access for American-made products overseas and insisting on roughly equal sacrifices on the part of the major trading nations to maintain a symmetrical and equitable trading system, not to mention sensible domestic policies. I suspect it is good and legitimate politics for Democrats to fault the Administration's trade policy priorities, as well as its negotiating strategy. At the same time, as Congressman Richard Gephardt found in 1988, it is difficult to prevent trade-nationalism from deteriorating into simple jingoism, especially when one is searching for thirty-second commercials and bumper stickers. The larger point is that an assertive trade policy makes the most sense when it is embedded in a larger program that reclaims the case for a mixed economy at home.
Trade policy, by itself, is a poor substitute for an industrial policy, for trade cases arise according to the vagaries of anti-dumping complaints. The government then backs into de facto industrial policies that it cannot otherwise defend and that seem to make little sense in their own terms. For example, thanks to an anti-dumping case by the Harley Davidson company, the government found itself with an industrial policy for motorcycles while it had none for semiconductors. Like it or not, government policies affect the health of key industries, deliberately or by inadvertence, and government therefore has no alternative to thinking coherently about which technologies matter. Conservatives contend that this process will be vulnerable to interest group pressuresbut the absence of explicit goals virtually guarantees that our technology policy will be nothing but the lowest common denominator of interest group politics.
III. Defending the Middle Class
This is, of course, the big, resonant campaign theme, and it connects to several concrete policies. As Harris Wofford said, deliciously, in the Pennsylvania Senate race, "If criminals have the right to a lawyer, working Americans have the right to a doctor." For better than a decade, the middle class that plays by the rules has been working harder and falling further behind. Astonishingly, the median household income is today what it was twenty-three years ago, when it was not conventional for mothers of school age children to be in the paid labor force. The median wage of a male nonsupervisory worker has dwindled to what it was in 1957. The very real economic resentments and fears, if validated and articulated, serve to restore the alliance between Democrats and wage earners. If not, the politics of economic resentment quickly mutates into the likes of David Duke.
As a core theme, rescuing the middle class offers multiple benefits. The vast majority of Americans are not owners of large stores of capital. Anybody who must work paycheck to paycheck, who is economically vulnerable to losing his job, is middle class almost by definition. By the same token, the virtuous poorthose who work or who genuinely want to workalso have essentially middle-class values and aspire to a middle-class standard of living. Symbolically, they are part of the middle class, too. Championing the middle class bridges over the largely phony issue of whether Democrats ought to be for the poor or for the great middle. At their best, Democrats fight poverty by defining a society in which everyone is equipped to work and everyone who works gets to be more or less middle class. It is a politics not of redistribution but of inclusion.
Some obvious sectoral policies are suggested by the points of contact between voter frustrations and Republican failures. Health care, for one, has just about everything. It is, as they say in the academy, a heuristic. It teaches important ideological lessons and validates the perception of ordinary people that the free market is hazardous to their health. Government allegedly wrecks whatever it manages, but in truth most old people feel they get a better shake from the public and universal Medicare system than from the caprices of private health insurance.
Tax justice is a second such defining issue. Republican claims that tax reductions on the very well off were the key to stimulating growth and balancing the budget have been revealed as self-serving nonsense. When the first budget summit failed last September, Democrats found to their surprise and delight that raising taxes on the rich in order to save programs that serve the middle class was, of all things, good politics. A Wall Street Journal poll last October revealed that fully 76 percent of voters favored adding a new top bracket for "upper-income individuals."
However, the tax issue despite its potential is a reminder of just how fragile is the Democrats' new economic populism. No less than Senate Finance Committee Chairman Lloyd Bentsen and House Speaker Tom Foley have made noises about compromising with President Bush's desire for capital gains cuts to get some relief to the middle class. If the vote were held now, the Bentsen-Foley position would probably prevail. Dan Rostenkowski has let it be known that he hopes his proposal does not come to a vote before next November. It is splendid as a defining issue; in the heat of legislative compromise, it could well turn to ideological mush.
The excesses of deregulation form a third cluster. While individual malefactors of both parties can be fairly blamed for the S&L mess, the rising tide of commercial bank failures can reasonably be laid at the door of Republican regulators who simply did not believe in careful supervision of banks. Some individual Democrats may have been on the take, but the ideology was purely Republican. There is now a second generation S&L crisis, the fault of Republican appointees who failed to competently manage the properties acquired by the FDIC and the Resolution Trust Corporation, which are now the largest commercial property managers in the country. By the same token, the travelling public is disgusted with the gouging and the plain unpredictability of air fares, which are the fruit of airline deregulation coupled with the collapse of antitrust enforcement. The anomalous activism of David Kessler, the new Food and Drug Commissioner, so out of character with the rest of the administration, suggests that consumer regulation is basically popular, even when Republicans do it. Environmental regulation, proof positive of the failure of markets to police themselves, remains broadly popular and Dan Quayle's attempt to gut it is a Republican liability.
A fourth set of issues involves what Stanley Greenberg has called the life cycle of the working family: namely, all of the policy defaults of the laissez-faire era that make it so difficult for wage earners to reconcile family life and work, and to create a harmonious, safe home. These include child care and parental leave policies, as well as symbolically potent programs of affiliation with the struggling younger family, such as first-time home ownership, and secure nursing care for the infirm elderly. Much of this will cost some money. But Democrats should appreciate that taxing the rich is now good politics again (if it ever wasn't), and that bashing Democrats as the party that wants to use government to help ordinary people is no longer a curse when ordinary people are terrified that the economy is going down the drain.
In advocating for the working middle class, we should be very clear about what we can and cannot expect to accomplish, in a campaign and in office. Politically, the point of Greenberg's "middle class project" is to make dear that the Democrats are on the side of the working middle class and the Republicans are not. Under this heading logically fall taxing the rich to provide tax relief for everyone else, and universal health insurance. However, we should not delude ourselves that tax relief for the middle class, alone, is much of a recovery program. Nor should we think that over the medium term a Democratic administration could do much to reclaim the postwar rate of growth in the incomes of ordinary people without making progress on the broader issues of competitiveness and productivity. That will take years (eight preferably, beginning next November).
The stakes are immensely high, and they go far beyond the prospects of the Democratic Party. As history keeps reminding us, ordinary working people are dreadfully vulnerable economically. When living standards fall and institutions of economic and social uplift, such as trade unions and responsive parties that articulate wage-earner interests, are unavailable or moribund, it is a short, slippery slope to the politics of resentment, racism, and demagoguery. The dynamics are the same in Shreveport and Silesia.
In the Louisiana gubernatorial race, some were relieved that Edwin Edwards coasted to victory over David Duke with 61 percent the vote. I was chilled that 39 percent of Louisianans voted for a Nazi. The parallels with the 1920s are all too real. Deny ordinary people their livelihood and their dreams for long enough, and you realize just how thin the veneer of civility is. It is inconceivable that the racial high-mindedness of the early 1960s would have been possible had not America been growing at something in excess of 4 percent per year and the economic prospects of white Americans improving. If we do not rekindle the economy, we will not see that kind of generosity again, and we may see far worse.
Six months agowhich is to say, a political era agothe experts were preparing for a coronation. George Bush, hero of the Persian Gulf War, had frightened off all of the Democratic front runners and would be re-elected with only token opposition. How wrong they were. For the first time in a very long while, the Democrats have gotten lucky. The supply-side turkey has come home to roost in an election year, and some Democratic role models have emerged in the nick of time. At the same time, the electoral mood is very volatile. Democrats remain vulnerable to tax revolts, race-bating, government bashing, and the dubious record of the Democratic Congress. As incumbents in a divided government seeking legislative accomplishment, they remain tempted to split differences with their President, thereby submerging their potential as an opposition. In a presidential primary season, with all its pressures for product differentiation and fund raising, they remain vulnerable to infighting and to some of their own candidates who occasionally sound suspiciously Republican. The 1992 election is definitely winnable, but the Democrats must break with economic orthodoxy and reclaim in the strongest possible terms their historic role as champions of economic stewardship, of broadly diffused growth, and of ordinary people.*
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