The New Economy Needs a Third Way
Council on Economic Education - February 1997
By Jim Gibson
Political Dilemma
Large majorities of the electorate are disenchanted with both Republicans and Democrats.
Too many Democrats want to take the world back to the New DealToo many Republicans want to take us back to the turn of the centuryPeople have soundly rejected the calls for conservative "trickle down" economics and intolerant social views, as well as traditional liberalism's tax-and-spend policies and something-for-nothing, special-interest politics.
The political system is facing a crisis - the end of the New Deal - the end of traditional liberalism & conservatism. The Reagan and very short-lived Gingrich eras proved to be an unworthy substitute for the New Deal, because unlike President Franklin Roosevelt, modern conservatives did not develop a useful alternative paradigm for government. As they have in the past, Republicans merely paralyzed progressive politics. Both the traditional left & hard right are avoiding the future.
World & Nation is at SeaBuchanan & Radical Right vs. Ted Kennedy & Traditional LeftSensing that the old arguments are simply irrelevant, voters dislike the unnecessary polarization on economic policy and other issues. To break out of this dilemma, conservatives and liberals must recognize that the FDR’s New Deal is over. Liberals should quit defending the New Deal and conservatives should trying to take us back to the turn of the century.
Since the birth of the nation, it seems conservatives, when they get the opportunity, bring back the same old idea with a new name - most recently known as supply-side economics. For those of you who don't understand Republican economic policy, it is really based on the noble principle of equality - the rich and poor will get the same amount of ice. The only caveat is that the poor get theirs in the winter.
In all seriousness, supply-side economics has been a miserable failure. For nearly the last two decades, American economic policy has chased the illusion that higher growth would return if we subsidized higher personal saving and business capital. By 1990, roughly 80 percent of all personal saving received some form of tax preference. From the late 1970s to the late 1980s, revenues from corporate taxes fell as a percentage of gross national product, while taxes on the richest one percent of Americans declined by 8.2 percent. The total effective tax burden on capital income was about one-third less than taxes on wage income.
The bad news is none of it worked. The personal saving rate fell as tax benefits for saving expanded. In reality, people save more when they make more income, not when they pay less taxes on saving. So the real issue is boosting incomes for the middle-class and those trying to become part of it.
Yes, the new economy, like the old one, cares about saving and cares about business investment. But higher growth depends more on what economic policy has recently neglected - the education and skills of the entire workforce, and the capacity of firms and workers to innovate.
Economic Realities
We need a new kind of economic debate for the Information Age - one that focuses on new realities rather than old dogmatic rhetoric. Our differing visions should be on the economic future of our country, rather merely a rehash of old arguments from a prior era.
Even going back to the beginning of the Republic, it has never been a question of whether government has a role or no role in the economy. Despite the current myths, history tells us that government was a significant player when the American republic was conceived. Everyone recognizes that Alexander Hamilton believed in a specific place at the table for the public sector, but even Jefferson, known as the intellectual giant behind laissez-faire, developed federal land policies and emphasized public infrastructure.
The Founding Fathers had no dogmatic commitment to the unregulated marketplace. Their legacy is rather a blend of private and public initiatives known in our day as the mixed economy.
More recently, reasonable people agree that the GI Bill played a large role in creating and strengthening the middle-class after World War II. Government made home ownership and higher education, realities for veterans and their families.
As a result, the real question before us this morning is not whether there is a role for government in the economy, but rather, what should it be? We must avoid the false arguments of role or no role.
We must realize the ingredients of good economic policy have changed significantly. In the old economy, a good harbor, a surplus of labor, plenty of capital and good weather were very important. Today's economy needs well-educated employees, investments in technological research and a world-class infrastructure - roads, bridges, communication systems and the like.
With technology permanently wiping out millions of jobs each year, continual job retraining and lifelong learning are also very necessary.
Freed from the false ideological and historical baggage, we can begin to freshly approach and aggressively tackle the economic challenges of our time. We can begin to develop new and innovative initiatives that address the real issues of the economy and the concerns of our people:
Blinding Speed of Technological ChangeTough Transition from an Industrial to Information EconomyGlobal EconomyGrowing Gap between the Haves and the Have-NotsThe real issue - stagnating incomes Let me put a specific Information Age economic strategy on the table. At the federal level, we should ruthlessly cut the $225 billion of tax and spending subsidies in the budget that serve powerful corporate interests. Just from that cutting alone, we will be adding by subtracting.
Economists agree that the competitive and innovative industries that are generating the well-paying jobs. Obviously, eliminating government handouts to these companies will only make them more competitive and innovative.
The second step is to take those savings and apply them to productive public investments and deficit reduction to spur private investment. The need for deficit reduction is obvious - let me make the case for specific public initiatives - first to develop the workforce and second to upgrade our infrastructure.
We should invest in initiatives like Head Start for disadvantaged children so they can begin elementary school ready to learn. We must nurture the competition and deregulation of public education through charter schools and rigorous voluntary standards. We should expand national service which provides college tuition support for young people willing to give something back to the community. We also need to closely link non-college bound high school students to employers, especially in high-tech manufacturing.
To upgrade the skills of the current workforce, we should create opportunities now for lifelong learning and training. Today, American business spends the equivalent of nearly 1.5 percent of payroll costs on training but the top 10 percent of employees get more than two-thirds of it.
We should raise every worker's productivity; all firms but small ones should be required to invest the equivalent of the same 1.5 percent of their payroll in ongoing training - but every worker will have the right to his or her per-share of it.
While we must continue to promote free trade, we should also recognize that the global economy is creating opportunities for well-educated "knowledge workers" but is also undermining the security of less-educated employees who face low-wage competition from developing nations. This nation must achieve two very important interconnected goals - enhancing worker opportunity and maintaining domestic support for free trade.
For example, we should scrap the failed hodgepodge of costly employment and training programs designed for the Industrial Age and replace them with a new learning enterprise controlled by its customers rather bureaucrats. Workers should be given a choice of providers and armed with information on occupational standards, provider performance and job opportunities. To empower them further, we should create Individual Development accounts, tax-favored savings that workers could draw upon to upgrade their skills.
Finally, we must further develop and maintain the transportation and communication systems which bind our markets and people together. 37 percent of the nation's interstates are only in fair condition or worse. The percentage in Colorado is even higher.
Entitlements
To invest for a brighter future, we must get a handle on federal entitlements - namely, Social Security, Medicaid and Medicare. Because our time is short, let's focus on Medicare and Medicaid.
Both parties have transformed Medicare/Medicaid into a game of political football. The people who depend on both systems, as the well as the people who pay for it, are anxious, angry and confused.
Recent Republican plans squeeze beneficiaries too hard and are too short on genuine reform. Democrats have been much too defensive about the status quo and too reluctant to admit that the program must be fundamentally changed in order to survive.
Republicans see Medicare /Medicaid as cash cows to be milked to keep their promises of deficit and tax reduction. Democrats see the current costly system as a horse to ride to political victories.
We need to break out of this dead-end, unproductive argument. While we should not scrap these very important public responsibilities, there is no need to do them the same old, bureaucratic way.
Instead, we should preserve and reform Medicare/Medicaid but in a new way that works. We have had very good experience when government works with the marketplace to achieve worthy social objectives.
If you had set out to buy a home in 1930, you would have been required to save up to 50 percent of the purchase price for a down payment and apply at your local bank for a five-year mortgage. That was how people bought homes then, because that was how banks did business.
During the New Deal, FDR's pioneered a new form of mortgage, which required only 20 percent down and let the borrower repay over 30 years. Other government corporations created secondary markets so banks could resell these new loans.
Today we take our 30-year, 20 percent down payment mortgage for granted, because the federal government changed the marketplace. Would we be better off if FDR had created a half-dozen low- and moderate-income housing programs? Would the middle-class be able to own decent homes if we had followed the Republican strategy of completely staying out of the marketplace?
Using that same model which will ensure continued quality of care while controlling costs, we should dismantle the unwieldy Medicare/Medicaid bureaucracies and give the eligible people a direct subsidy that allows them to choose a private health insurance plan from a menu offered by the private sector.
Those who choose cheaper plans, such as HMOs, will get to keep what's left over from the subsidy for themselves. Those who prefer traditional fee-for-service will pay more. In addition to injecting much more quality and cost-consciousness into the system, nothing could be fairer than that.
In 1995, Republicans fashioned a radical cut in Medicare with a timid reform of its structure. That is like treating a patient's clogged arteries by reducing the supply of blood.
Too many Democrats still are fighting just to keep the blood flowing. It is time for both parties to surgically remove the blockages.
Conclusion
A progressive economic plan, combined with genuine entitlement reform, will increase job opportunities, boost stagnating incomes and preserve the social safety net. These kind of policies can change the country and truly prepare America for the transition from the twilight of the Industrial Age to the dawning of the Information Age.
There should be no higher national priority.