The American economy is broken. And it’s not likely that the Democrats, even if they do as well as expected in the 2008 elections, are going to fix it. Of course, there’s no chance that the Republicans will either, wedded as they are to endless tax cuts.
The experience of the past decade makes clear the need for a sharply new way of thinking about the economy. The subprime mortgage crisis, although dangerous, is not the issue. It’s not even the rising prospect of recession and lost jobs. The real problem is that even when the financial times have seemed to be healthy, the economy was not. Since the 2001 recession gross domestic product is up, profits are at record levels and unemployment is low–but wages, capital investment and, now, productivity are weak. Without these, there is little on which to build an economic future.
Wages for the typical male are actually down since 2001. The fabulous accrual of private fortunes comes at a time when a typical household’s income is lower than it was in 1999, despite the many working spouses. And while subdued wages have enabled companies to generate soaring profits, capital investment in equipment and computer software has in recent years been significantly lower as a proportion of GDP than it was in the late 1990s.
Productivity should be the biggest worry, but it gets the least attention. After growing robustly for a few years, productivity growth since 2003 is as low as it was before the Internet boom. Productivity, defined as the output the nation can produce per hour of work, is the nation’s source of wealth. If it doesn’t rise rapidly, there is no chance workers on average will see their standard of living rise.
Finally, the value of the dollar is significantly lower, and the trade deficit, though improving, will remain a problem. A lower dollar makes exports more competitive, but even with this dollar, rebalancing the economy will not be easy. After years of living with a high dollar, manufacturers don’t have the capacity or trained workforce to make many of the products the rest of the world wants.
Tinkering with the safety net, placing a few restrictions in trade agreements or pressuring the Chinese to raise the value of their currency will not fix matters. What America needs is a set of policies that will make it a high-wage nation again, no longer dependent on ever increasing consumer debt and work hours to make ends meet. It must once again invest adequately in the public goods and services required to compete in the new century, including early education, transportation infrastructure, energy conservation and healthcare reform. The mainstream economic model on which most Democrats have relied since Bill Clinton’s presidency will not deliver this. Here are a few of the key precepts of the outmoded mainstream model–hardly an agenda for our times.
Wage growth must be moderate. Every time wages have gone up more than moderately since the 1980s, Wall Street and Washington worry, and this has long included the Democrats. Fearing inflation, the Federal Reserve clamps down rapidly if wages begin to increase the way they once did–with overwhelming support from both parties. The one exception was the late 1990s, when the Fed allowed a wage rise in anticipation of rapidly rising productivity to offset it.