Yesterday, Reihan Salam wrote a column on how to fix the economy, and for someone who complains a lot about straw men, Salam has no trouble invoking them. He writes that the Obama administration has "tried to cash-for-clunker its way over the economic abyss instead of staring into it," which mistakes a relatively small investment in fiscal stimulus and carbon reduction for the administration's much broader and more innovative economic growth agenda.
What Salam doesn't understand is that there is a difference between preservation and transition: Obama isn't trying to preserve the current economic system in amber; he's trying to ease the transition from a recession into a new, growing economy. The stimulus, for instance, certainly included temporary expenditures designed to boost the economy and ease the recession, like cash-for-clunkers and unemployment benefits, but it also included substantial investments in infrastructure and information technology. Salam's conclusion is that we need a Volcker-Reagan style recession, presumably on top of our current recession, to clear away the economic deadwood and allow for future growth. Even if abandoning the government's support for the economy now were a good idea, Salam is creating an unnecessary binary choice:
Will [economic] transformation come from Washington, where various plans for a clean-tech future are being devised by bright Hill staffers and lobbyists and think tankers, or will it come from millions of anonymous entrepreneurs, workers, and consumers in cities and towns across the country, most of whom you've never heard of?
Why are these two strategies irreconcilable? A truly smart economic development strategy would emphasize the government's role of creating conditions for the anonymous folks to succeed. That's the Obama administration's strategy, which combines an understanding of the need for rules in the market with a desire to avoid heavy-handed regulation that limits growth. That's why you have, for instance, the 48c tax credits, which, leveraged with private investment, lower fixed investment costs for energy entrepreneurs to expand their firms. Salam, instead, offers this:
The sectors that saw productivity boom were the sectors that saw the wholesale destruction of jobs, which in turn gave rise to job creation. This painful process was spurred by deregulation, lower barriers to trade, lower marginal tax rates and the rise of pay-for-performance. The rise of pay-for-performance didn't reflect some perverse disregard for working stiffs. Rather, it reflected a desire to retain footloose talent. All the same, it has contributed mightily to the rise in income inequality, a phenomenon that the president and his allies consider pernicious.
Every factor Salam suggests contributed to the 2008 financial crash; why should we now apply those same policies to the health, energy, and education sectors? That's preserving a broken economy. And indeed, if Reihan wants a productivity boom, we're already seeing an enormous one -- productivity has increased across the board in the last year.
Worse, Salam's casual disregard for the millions of American workers who would be affected by his prescription is perhaps the ultimate inside-the-Beltway mistake: The purpose of economic growth is not economic growth. It's increasing the standard of living across the country. If the price of economic growth is the wholesale destruction of jobs while the wealthy get wealthier, most Americans probably don't want to pay it. I don't blame them.
A little bit later: Reihan graciously responds in the comments...
-- Tim Fernholz
