In the early post-World War II period, we outinvested the rest of the world in the four types of assets that drive productivity growth: technology, capital formation, worker education and infrastructure. Today, we are lacking in all four areas.
THE Democrats desperately need an economic-growth strategy and its effective communication to voters. The party has not had a visible and substantive economic-growth message since Bill Clinton’s successful presidential campaign in 1992. The campaign’s slogan, “It’s the economy, stupid,” serves as a critical message for party leaders planning for 2018.
Recently, however, the Democrats’ “economic-growth policy” consists largely of income redistribution proposals such as raising the minimum wage, championed by the Bernie Sanders wing of the party. While having some social justification, this is not a growth policy. And income redistribution never goes over well in times of stagnant economic growth.
The Republicans have an alleged “growth policy” of cutting taxes and government spending and regulation. But, it doesn’t qualify as such. Cutting taxes for rich individuals is rationalized in terms of the “trickle-down mechanism.” This is not a legitimate growth theory and, in fact, actually creates income redistribution in reverse.
Reducing corporate taxes and regulation is allegedly justified by the claim that larger profit margins will encourage expansion and hence promote employment. However, just the opposite is the case. The industries most desperate for tax and regulatory relief are the older and less competitive ones. They haven’t responded to globalization up to now, and giving companies such breaks will reduce pressure to restructure their failing business strategies. While competitive tax rates are essential, the lack of adaptation to global competition means the short-term spike in profits will quickly fade and companies will require another “fix.”
Given this pattern, it is not surprising that, as shown in an analysis by the Center for Responsive Politics, declining and regulated industries predominantly support Republican candidates who persistently offer tax and regulatory relief. In contrast, high-tech industries contribute more to the Democrats, who in the past have promoted government-investment support of new-technology development. However, without a return to a true growth strategy, based on investment in technology and, more broadly, productivity growth, technology-based industries will continue their relentless diversification to other parts of the global economy.
The process of offshoring has recently been attenuated to a degree by increased automation, which has lowered labor content and thereby reduced incentives to offshore to economies with cheaper labor that have comparable skills. However, surveys consistently show that the U.S. educational system is not providing enough workers with the advanced skills needed for the jobs being created by automation.
Thus, neither political party is addressing the current economic malaise. This is a serious problem for the country, which desperately needs a viable economic-growth strategy. Major portions of the American workforce are suffering through not just no growth in real incomes, but actual declines.
These negative economic trends began well before the Great Recession of 2008. As history shows, prolonged economic decline spawns populist movements. The one in this country elected President Donald Trump. European countries are being threatened by similar movements, as inadequate responses to globalization suppress real income growth rates, as well.
The bottom line is that, as a nation, we are not addressing the urgent need for increased investment in productivity, which is the only path to sustained increases in the standard of living. Productivity is another word for efficiency, which translates into higher profits. Companies will therefore pay more for assets that contribute to productivity growth. These assets include labor. Government statistics show a strong correlation between productivity and worker compensation.
Instead of promoting needed investments in productivity, efforts to achieve recovery from the Great Recession have relied almost entirely on monetary policy, which is actually a business cycle stabilization tool — not a growth-policy instrument. Such dependence required the Fed to grow its balance sheet from $875 billion in 2008 to a whopping $4.4 trillion by 2015 just to achieve a meager average annual growth in real GDP of 2.1 percent since the recession ended in 2009.
In comparison, in the first 30 years after World War II (1948-1978), when the U.S. was the dominant technology-driven economy, the average annual growth rate of real GDP was 3.9 percent. Currently, the Fed forecasts the growth rate to remain below 2 percent for the foreseeable future.
How can this be happening? Simply put, it is due to our failure to realize how the U.S. rose to the No. 1 ranking among the world’s economies. In the early post-World War II period, we outinvested the rest of the world in the four types of assets that drive productivity growth: technology, capital formation, worker education and infrastructure. Today, we are significantly lacking in all four areas.
The message for policymakers is that only investment creates productive assets that, in turn, enable sustained growth. So, when someone says it’s the economy, stupid, investment in productivity must be point No. 1.