The 2008 financial crisis and resulting Great Recession were symptoms of a pre-existing sickness. Over the last 30 years, the U.S. economy has grown substantially but the rising tide has only lifted 10% of boats while the rest are taking on water. Between 1979 and 2006, 90% of Americans saw their incomes rise slower than the national average. The middle 20% of households have been rewarded with a 0.7% annual raise for working more hours. If that isn’t alarming enough, the boom-and-bust cycles of the last 15 years are proof that our economic progress has rested on shaky, speculative grounds. American companies have gotten richer but our overall economy has declined in the areas of competitiveness, stability, and investment. Fixing these three areas can lead to stable growth and prosperity for all Americans – if only our dysfunctional politics can pull off a policy shift from pro-corporate to pro-people.
American competiveness means companies want to place their operations, and thus jobs, on our soil. Free market zealots will have you believe that the economy would sky-rocket if only government would lower the cost of doing business. First, it’s a false belief that our corporate tax burden is outrageously high. A World Bank study ranks the U.S. as the 59th highest corporate tax burden. Notable countries with higher taxes are the healthy and growing economies of Brazil, India, China, and Sweden. Second — and most important —is that the overwhelming decision factor to locate operations elsewhere is to capture lower wage rates. So, we can’t compete on cost unless everyone is willing to take a pay cut (i.e. give back our 0.7% raises). American competitiveness in a globalized economy requires moving up the value chain and competing on other factors like innovation, speed, and quality. The better solution than laissez-faire would be to focus government on strengthening our human capital. This means investing in public schools and apprenticeship programs, making secondary education more affordable, and reforming immigration policies that force U.S. educated foreigners back to their home country and out of our labor pool.
The second healing required is financial stability. A healthy financial system exists to serve the needs of citizens and organizations. It encourages savings, re-allocates funds to productive investments, facilitates payments, and manages risk. A sick financial system drives up asset bubbles, rewards risk-takers, and reduces transparency. Here also the hands-off pro-business approach is the cause of our current sickness and not the remedy. Pro-people policies can ensure the financial system meets our needs by clamping down on risks and aligning incentives. This means separating financial institutions by category (a 2012 version of Glass–Steagall), consolidating responsibility to regulate derivatives, banning the most complex securities, reforming rating agencies, and changing the way financial firms dole out bonuses.
The third element of recovery is investment. You cannot grow an economy without investing in it. Sustained high-growth economies invest >25% of their GDP with government investing 5% to 7% on public goods like education and infrastructure. These public-sector investments increase the rate of return of private-sector investment and fuel growth. Unfortunately, our private-sector economy has been more “debt and consumption” than “savings and investment”. Government debt only makes this problem worse by competing for investment dollars and driving up the cost of borrowing. As of now, budgetary progress is being stalled by extremism. The reality is we must retain our public investment spending and we can do so with good fiscal policy. A productive example is Harvard Business Review’s proposal to reduce the deficit to 1% of GDP by 2021 through raising taxes and cutting entitlement/defense spending.