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A Program for Economic Policy Watchers
J. Bradford DeLong
"Program" in the sense of what you buy when you enter the stadium. You can't follow the action on the field unless you have a program. And we have been assured and reassured by voices from Little Rock and Washington that the economy will be the new Democratic administration's first priority. How then to keep score, or even understand what is going on in the game? You need a program--and this is a sketch of one: to say what the object of the game is, and how to keep score.
Begin with the conventional wisdom: Bill Clinton won the election because voters' worries about the poor shape of the economy outweighed their worries that Clinton was a slick tax-raiser. This, we have been told since November 3, is the meaning of 1992: "the economy, stupid."
But there are flaws in this picture. First, George Bush--not a dumb man--seemed never to get it, never to understand why or even that voters judged the economy to be in bad shape. His supporters pointed to the lowest inflation since Kennedy. They pointed to unemployment lower than in 1984, when it was morning in America for Republicans. They pointed to a year and a half of growth--albeit slow growth--in American production, and to a brand-new study showing that the U.S. was still the richest nation in the world. But these convinced voters not that the economy really was in reasonable shape but that Bush was out of touch. By October Republican commentaries had taken on a bewildered tone: someone had changed the rules and managed to turn a solid score--low inflation and positive growth--into a failing one.
Second, economists studying elections did not think last summer that the economy put Bush in jeopardy. Forecasters who quantified votes gained and lost with each percent of inflation or unemployment were forecasting a Bush victory last summer. So why was the economy a key issue? Under Bush short-run indicators like inflation and unemployment were on balance favorable, and certainly not the worst in fifty years. Why did voters reason differently?
The answer is that voters did not look to the-barely adequate-short-run macroeconomic record of Bush, but instead to the-awful-long-run trend of productivity and real wages. A sea-change came over the American economy around 1973. In the generations before 1973 real wages and living standards more or less doubled every thirty-five years. Post-1973 trends are very different-the sharp break makes it tempting to blame Richard Nixon for this, too. Growth is much slower: it will take at least three generations for material wealth to increase as much as in one pre-1973 generation. This 1992 election was the first in which voters' perceptions of the economy were dominated by the ebbing long-run tide, and enough voters recognized that economic management was failing its central purpose: that of generating a rising standard of living in America.
In previous elections voters long-run stagnation had not been salient. In 1980 high inflation and rising unemployment provided sufficient reason to be unhappy with Carter. In 1984 slow long-run growth was masked by the boost given to spendable income by Reagan's large budget deficits: those who did not stop to think that a deficit now means additional taxes or additional inflation in the future thought because of Reagan's tax cuts that their incomes were growing rapidly again. In 1988 the short-run dynamic of inflation and unemployment was favorable, and strong enough to mask the discouraging long-run trend.
But 1992 saw no short-run boom hiding the long-run trend. Long-run stagnation in productivity was made even harder to bear by the spectacle of relatively rapid growth in other major industrial economies like Germany and Japan. On top came an additional shock: increasing income inequality as the wages of America's blue collar workers fell in response to competition from poor but productive and hungry workers elsewhere.
Forecasters have for nearly two years been predicting a recovery, and they will not be wrong forever. They may be stopped clocks, but even stopped clocks are right twice a day. So in the first year or two of a Clinton administration the economic news will appear good. The cyclical bounce will be assisted by accelerated spending, for both public and private spending will be pulled forward in time by decree and by tax credit. For the next two years or so the object of the game is to reduce unemployment and increase capacity utilization. If as recovery comes inflation rises also, or if interest rates rise, then Clinton will have won the first round at the price of losing the game: he will then be unable to induce the boom in investment needed to turn the curve of long-run growth up.
The main event will be the Clinton administration's attempts to accelerate productivity growth. His success or failure at this task will determine the success or failure of his presidency. Liberal initiatives--in welfare reform, in health care, in education--cost money. Money is easy to find if long-run growth is rapid. Money will be impossible to find if the long-run productivity growth trend remains slow. And unless long-run growth accelerates Bill Clinton or his successor will face the awful political task either of telling America's elderly that the country has promised them more in medicare, social security, and pensions than it can deliver, or of telling America's taxpayers that they must finance benefits for those who are old in 2000 at levels that those who will be old in 2030 will never receive. Many things are possible if the productivity slowdown is reversed. Few things are possible if American productivity remains stagnant.
Clinton, during the campaign, spoke sympathetically of many--maybe I should say "all"--of the different approaches to restarting the engine of productivity growth. This was appropriate in the campaign. This is why he won: the creation of the biggest-possible tent. But the substantive policy directions that will be taken now hinge on discussions that have barely begun, and that have been carried on at a highbrow intellectual rather than a nuts-and-bolts policy implementation level. Moreover, be careful-as of today, potential factions are not yet made up of distinct people heading bureaucracies with different views. Instead they are better thought of as different lines of thought in the heads of the same people. But just as supply-siders, the fiscal conservatives, and the corporate looters struggled for control of Reagan administration economic policy in 198182 (and America lost), so factions--teams--will emerge and struggle to shape Clinton administration response to long-run stagnation in 199394. Look for the teams that emerge to be something like this:
In one corner will be the deficit-reducers: those who believe that American productivity growth is slow because savings and private investment are low, and think that the best way to increase private investment is to remove the enormous drain on America's saving that is the budget deficit. If all the saving that goes to finance the deficit were instead channeled into productive private investment, they say, productivity might well grow by an extra $1600 to $2400 dollars per worker over the next four years--an extra $200 to $300 billion per year in added national wealth. These arguments are strong. Those who will think they are strongest are likely to be Wall Street types, whose firms and partnerships would profit enormously from the redirection of savings from Treasury to corporate bonds.
In a second corner will be the investors: those who think that America's problem is not so much low savings (for in today's world capital can be borrowed from abroad) as inadequate public investment, inadequate incentives for mobile multinationals to invest in America, and inadequate government support of technology. After 1973 public investment in infrastructure collapsed just as private sector productivity growth fell. It is this possibly significant correspondence that leads some to believe that to reverse the productivity slowdown, reverse the decline in infrastructure spending. Others (including me) worry about America's low savings rate but despair of raising it by reducing the deficit, and hope to see investment tax credits (especially on the machinery and equipment that embodies so much of technological change) and other incentives to spur not so much savings as investment in America. These arguments will be felt most strongly by officials imported from the private sector, and by congress members with districts to satisfy.
In yet a third corner will be the educators. They trace slow productivity growth to the relative decline of America's educational system. And they believe that America's workers will be able to compete with workers in other countries for high-wage high-productivity jobs only if they are well-educated and well-trained. Capital flows to the place where the workers are most skilled, that boosting savings does little good and boosting investment is impossible unless America's workers offer potential multinational employers the best package of skills. Look at Robert Reich's Work of Nations for the guts of this argument. And also look for the educators to win at least the first round of the policy debate. They promise to attract capital, raise productivity, and also make the distribution of income and wealth more equal. Other factions can promise only faster growth, and the possibility of second-term social policy initiatives to moderate the growth of income and wealth inequality. Two-birds-with-one-stone is a powerful argument. And the large share of Democratic activistswho are teachers of one form or another will not hurt either.
Other teams will never make it onto the playing field. Alan Greenspan stands guard to keep inflationists from making an appearance, and on balance this is probably a good thing: in the post-World War II, era, at least, countries that have tried to inflate their way out of economic difficulties have had unhappy experiences. Another team unlikely to make the cut are the out-and-out protectionists, who hope to see the government shelter America's firms and workers from foreign competition. Once again the post-World War II experience of economies that have followed this road have been uniformly awful: protectionism has not encouraged industrialization, but merely enriched industrialists--and only the politically well-connected industrialists at that.
Of the teams that make it onto the field, there will be definite winners or losers. For remember: not everything can be done. You can't give first priority to reducing the deficit and investing in infrastructure and subsidizing education and training and providing incentives for corporate investment. To try to do everything is to do nothing, and wind up replicating Bush.
Will America be a winner? We'll see. All the currents of opinion that will be floating around Washington in the next two years cannot be correct. If education and training really are the keys, then deficit reduction will not deliver the goods its supporters promise. If infrastructure investments have extraordinarily high social returns, then education and training do not. In part the selection of policies is a crapshoot: there are many plausible arguments, but no definitive answers.
Could things go badly wrong? Yes. Clinton has very limited resources. Were he taking office twelve years ago there could be an education initiative, an infrastructure initiative, and a private investment initiative. Those policies that looked like they were working could be reinforced, and the other initiatives that did not appear so successful could be left to wither on the vine. The model would be that of FDR: try as many things as possible, and then push on the ones that appear to be working. All in all the New Deal--though deeply flawed--was a remarkable success.
But Clinton faces an electorate certain that it deserves a growing list of middle-class entitlements, and grumpy at the taxes to pay for them. He will be lucky if the cuts in defense he can make even match increased spending on medicare and medicaid alone. The $60 billion a year or so that he may find for his economic growth program amounts to only $500 dollars per worker. It will have to be used very skillfully and productively if it is to have any noticeable impact on the average American worker's productivity. The U.S. remains the richest and most productive economy in the world, but by a margin that is steadily diminishing. Another two decades of economic policy mistakes like the last two decades, and any U.S. edge over other leading industrial nations in technology and living standards will be gone.
Twelve years ago, before Ronald Reagan's inauguration, I was confident that the first half of the twenty-first century would still be an American century. It is still very possible that the U.S. will be the world's industrial leader in the twenty-first century, and that people in other countries will still look to New York and Los Angeles to see what their future will be like. But it is far from a sure bet. Bill Clinton's economic team will have to be smart, and right, and lucky if they are to make America a progressive nation again. I know that they are smart.
I think that they are smart enough to arrive at the right policies. I hope that they will be lucky.
Go to Brad DeLong's Home Page
Professor of Economics J. Bradford
DeLong, 601 Evans
University of California at Berkeley; Berkeley, CA 94720-3880
(510) 643-4027; phone (510) 642-6615 fax