The Growth Imperative

July 29, 2010


We could be in for a long, slow decade. There’s a confluence of forces that are probably going to retard economic vitality.

Consumers are still overindebted, and it will take years of curtailed spending before households are back on a sustainable path. Federal and state governments also will have to pull back. Labor markets were ill before the recession and are worse now.

Our trading partners in Europe and Japan are stagnant or in peril. Banks in this country are not lending to small businesses and banks elsewhere have huge write-downs to endure. The psychological war between business and the Obama administration also is taking a toll. Business types think the administration is stuffed with clueless professors. Some administration officials think corporate honchos are free-market hypocrites prowling for corporate welfare.

What we have is not just a cycle but a condition. We could look back on the period between 1980 and 2006 as the long boom and the period between 2007 and 2014 or so as the nasty crawl.

Politically, this period could be akin to the late-1970s. Economic anxiety could produce good and bad ideological effusions. As the economy stutters, people will ask fundamental questions about the nature of our political-economic structures and come up with grand proposals to revive growth. The electorate could shift in ways hard to imagine.

In my previous column, I tried to imagine what a moderate Democratic growth agenda would look like. You could call it the Moon Shot Approach. In this approach, government tries to spur economic development first by creating the context for growth with a big infrastructure program and then by focusing subsidies and tax credits on key sectors, like energy research.

The Republicans have their own growth agenda. You could call it the Unleash America Approach. The underlying worldview was deftly sketched out in Arthur C. Brooks’s book, “The Battle: How the Fight Between Free Enterprise and Big Government Will Shape America’s Future.”

Brooks (no relation) argues that Americans are a uniquely entrepreneurial people. A nation of immigrants, “America’s vast success might be explained in part by our genetic predisposition to embrace risks with potentially explosive rewards.”

Citing an array of polling data, Brooks argues that 70 percent of Americans embraces this free-market and entrepreneurial vision of their country. But 30 percent prefers a more government-centric, European-style vision. The battle, Brooks concludes, is between the 70 percent, trying to reclaim the country, and the 30 percent, which is now expanding the federal role on an array of fronts.

Paul Ryan, the most intellectually ambitious Republican in Congress, lavishly cites Brooks’s book. Over the past few years, Ryan has been promoting a roadmap to comprehensively reform the nation’s tax and welfare system. On the tax side, he would sweep away most of the special-interest-favoring tax credits and subsidies and give people a chance to join a simple tax system with only two rates.

On the welfare-state side, he’d sweep away most subsidies to the middle and upper classes, like the tax exemption on employee health plans. He’d essentially voucherize federal benefits, like health care and Social Security, and increase federal subsidies for people down the income scale.

The idea would be to end the complex and sclerotic arrangements and solve the fiscal crisis. The effect would be to radically reduce the power of federal policy makers and shift discretion (and risks) onto individuals.

Both the Democratic and Republican approaches have problems. The Moon Shot Approach relies on omniscient experts to pick out the engines of future growth and on public-spirited legislators to pass bills that maximize productivity instead of special-interest favors. The weakness of the Brooks and Ryan approach is that their sociology is off a bit. America is not a nation of risk — embracing pioneers. It is a nation of heroic bourgeois families who want to thrive within a secure social order. The economic debate is not as Manichaean as the culture war since most people are split down the middle and because it’s easier to compromise on money than on life.

Still, these two visions are better than the nativist and antiglobalist visions that will be arising. And despite the tough battle talk, they are combinable. At his best, Ryan wants to cleanse and rejuvenate the nation — to sweep away the special-interest sclerosis that strangles flexibility and growth. At his best, Obama wants to create a context for innovation — to employ blue-collar workers and to spur growth clusters like Silicon Valley, which, let us remember, was a magical cocktail of federal research subsidies, hippie culture, entrepreneurial daring and university settings.

The two projects are in tension, but in a sane political culture they are not mutually exclusive. It should be possible to simplify the tax code, target welfare spending and also build strong infrastructure at the same time.