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On the Record

It’s not the economy, stupid—it’s failed politics!

Editor’s note: The text below is from Alice M. Rivlin’s SIEPR prize lecture, delivered on April 14, 2016.

I am delighted to receive this wonderful prize from Stanford Institute of Economic Policy Research. SIEPR is a collection of people who think economic policy is important and care about getting it right. SIEPR scholars believe that solid economic analysis can help shape policies that will make life better for most people, and they keep on believing that even when the politicians who could make these policies happen are manifestly not listening. These are my kind of folks!

This is a frustrating and discouraging time for those of us who care about economic policy. Despite slow, but impressive recovery from the Great Recession, political candidates of both parties are stressing how badly the current economy is performing. You would think we had 10 percent unemployment instead of 5 percent. They are voicing anger that much of the public shares over lagging wages, extreme inequality, the downsides of globalization and technical changes, and the sins of the public and private establishment. Much of this anger is justifiable, but anger is not a strategy, and the campaign has not produced serious economic policy debate. The questions, “What would you actually do, how would it work, and what would it cost?” are mostly neither asked nor answered. Moreover, Washington has been mired in partisan gridlock for so long that expectations of post-election action seem like fantasies.

So what you are getting tonight is a rant—the rant of a frustrated moderate, who believes that Americans are missing a huge opportunity. Despite what politicians—and even some academics– say about American decline and impending economic disaster, we actually have a great economic system with proven strengths and resilience, which should be performing at a higher level and delivering a better life and greater opportunities for more people. The hard question is how to make this happen—how to translate the anger into realistic policy solutions.

What makes me angry is not the state of the economy, but the fact that we aren’t making an effort to do anything to make it better. I believe we have at our disposal a set of economic policies that could command broad public support and could move us toward a higher level of sustainable prosperity in which all groups share. These policies would enable us to continue being the world’s leading economy power. We are that now, but we could be doing much better and leading the world to shared prosperity.

I am not talking about wild new policy ideas, although we ought to be open to those. I am talking about tried and true policies for growing the economy faster—such as, modernizing infrastructure, funding science and skill development—as well as tax and entitlement reforms to control the growth of long-term debt.

  • We have implemented many of these policies successfully in the past—people at SIEPR have worked on many of them.
  • But we can’t get any policies enacted now because our political policy-making process has stopped working. We aren’t even trying to solve problems by hammering out the compromises necessary to write laws, get them passed by congress, and signed by the president.

It is our political system that has broken down—not the economy. The problem is not so much polarization of policy views. The problem is that we have forgotten that our Constitution, which politicians and Supreme Court justices laud to the heavens, requires that politicians work together across party and ideological lines to get anything done at all. Recapturing the lost art of political compromise is essential to realizing our economic potential.

What I want to do tonight is:

  • Touch briefly on the state of our economy and why so many people are so angry about it.
  • Say a word about what we should aspire to
  • Then I’ll run quickly over my list of feasible economic policies that I think could command broad public support.
  • Finally, I will share some tentative thoughts about we need do to fix the political process. I do not pretend to know the answer, but I want to get this SIEPR audience thinking about it, because until we fix our broken political process, we won’t have constructive action on economic policy and we won’t have customers for SIEPR research.

That is a large order for a short talk, but how often does one get an audience like this one that actually cares about economic policy?

State of the economy

Paradoxically, at the macro level the U.S. economy looks quite strong, but public perception of the economic situation is negative. We recovered slowly from the deep recession that followed the unnecessary financial crash of 2008, but we have recovered more fully than other countries. We have created 14 million jobs since the low point in employment in Feb. 2010, the unemployment rate is hovering around 5 percent, and housing prices are rising again. Other developed countries, especially Europe, are not doing so well, and developing countries are struggling with low oil and commodity prices. Over-extended China is experiencing slower growth and having trouble reorienting its economy away from dependence on manufacturing exports.

Since the financial crisis itself was mostly our fault, it doesn’t seem fair that we should emerge from its disastrous aftermath as the strongest economy in the world, but we have, I think for two basic reasons.

  • First, we have a very resilient economy–more flexible, adaptable, and innovative than others. Our economic system has shown time after time that it can absorb shocks—stock market crashes, accounting scandals, 9/11, even the collapse of an asset as critical as housing, which is most households’ principal asset.
  • Second, AFTER the crash occurred (albeit, not before) policy-makers did the right things and did them quickly. The stimulus should have been bigger and lasted longer, but it helped a lot, and so did the Fed’s aggressive easing of monetary policy. Stabilizing the financial sector—otherwise known as bailing out the banks—was absolutely necessary, even if it wasn’t done in the most politically sensitive way. Allowing a cascade of major financial institutions to fail would have made the recession even deeper and would have wrecked the lives of millions more ordinary people in the name of punishing reckless behavior of financial executives. We should all be glad that policy-makers didn’t take that risk.

At the macro-economic level, we certainly don’t look like an economy in decline—and we don’t have to be if we implement the right policies–but at the same time we should not be surprised that many people are angry. The only puzzling question is why the anger has erupted NOW, when many of the apparent flashpoints have been there for a long time.

The recovery exacerbated the decades-old trend toward inequality, with most of the income gains going to the very top—the one percent, or even one tenth of one percent. Average wages have not been rising for a long time, manufacturing jobs continue a long decline, and workers with only a high school education (or less) are falling further and further behind. For many, the dream of getting a higher paying job and seeing ones children do even better has faded into disappointment. Big money dominates politics and the media. Those who profit from the status quo use their resources effectively to keep a good thing going– whether by capturing regulatory agencies or blocking threatening reform legislation. Perhaps more importantly at an elite university like this one, a whole generation of young idealists sees opportunities to make the world a better place and observes those in power bickering rather than acting. The grown-ups who were supposedly in charge messed up badly. They allowed the risky, unconscionable behavior—both public and private–that caused the financial crash, and now they are pointing fingers at each other, but not making a serious effort fix the economy for the next generation.

What should we aspire to? My shorthand for the right goal for the economy is “sustainable, inclusive, and rising prosperity.” Sustainability is crucial. We don’t want to live in temporarily prosperous society that is eating its seed-corn, polluting the environment or running up unpayable debts. We used to think of inflation as a major threat to sustainably rising prosperity—and charged central bankers with combatting it. But inflation has evaporated as a threat to sustainable growth in the U.S. and other big developed economies—the Fed is worried that it is too low—and seems unlikely to return in the foreseeable future.

The most serious threat to future prosperity at this moment is climate change, followed by financial instability. On climate change an intransigent minority is denying that there is even a problem, which is enough to prevent the majority from taking serious action (such as a carbon tax). On financial stability, we have taken serious actions to reduce the likelihood of another 2008, but we don’t know how well they will work or whether politicians, faced with well-financed lobbying by financial institutions, will have the courage to enforce them when it matters.

Prosperity is relative to time and place, but it’s the trajectory that matters most—doing better and having hope for the future. “Inclusive prosperity” means that major groups— racial, ethnic, and income groups–with which people identify, are sharing in the improving standard of living and expect their kids to be better off than they are. Fairness and hope are both necessary parts of a sustainably prosperous economy.

Against my standard, we are doing pretty well on prosperity, but badly on sustainability and inclusiveness. To do better we need two types of policy changes:

  • First, we need policies that enhance sustainable economic growth by increasing productivity of the workforce—especially important in an aging society, which needs its relatively smaller workforce to be as productive as possible. Some scholars argue that productivity growth will be anemic in the future. Robert Gordon has written an impressive book about the golden age of invention and its impact on productivity. He alleges that the golden age is over—all that the neat stuff that Silicon Valley is inventing won’t have a comparable impact on productivity. I don’t think we know that. Economists are lousy at predicting productivity growth. In any case, we would be stupid not to enact policies that we are pretty sure will move productivity in the right direction.
  • Second, we need policies that share the growth more broadly or make the slices of the larger pie more equal.

Many economists, including my late colleague Art Okun, used to think there was a trade-off between these two kinds of policies—faster growth meant more inequality and v.v. But there is accumulating evidence that economic growth and broad distribution of the gains reinforce each other. Policies can be designed to foster both faster growth and less inequality. My list of potential consensus policies could all be crafted to enhance both goals.

So here’s my list:

  • A big investment in modernizing public infrastructure.
    We need to fix crumbling roads and bridges and keep them in good shape, build the infrastructure we need for smart, non-polluting cars, faster more reliable rail and transit systems; safer, more efficient airports and air traffic control; faster, more reliable Internet service—or whatever is the next gen high speed electronic communication. Modernizing infrastructure could raise productivity as well as creating the jobs we need to restore tighter labor markets and give more people chances to move up.
  • Early childhood nurturing and high quality preschool programs.
    There is strong evidence that the early years of life matter a lot to brain development and language skills and young children can be permanently damaged by violence, fear, and neglect. These findings have sparked bipartisan response. Oklahoma, a very red state, now has universal pre-K, and the very-successful nurse visitor program that works with new moms has bipartisan support, but not enough funding.
  • More funding for basic science and increased access to post-secondary education, especially technical education. We should shift the mix to more generous grant aid and less reliance on student loans, especially for low-income students. But free college is not a smart idea. It would be a taxpayer-supported windfall for more affluent families who would have paid for college anyway.
  • Comprehensive immigration reform.
    In addition to reducing illegal immigration and enforcing the laws, we must get law abiding undocumented immigrants out of the shadows and into more productive jobs. We need more young workers in our aging society, and immigrants tend to be young and hard-working. (Syrian refugees may save Europe from the stagnation of an aging work-force.)
  • Reform the tax system to make it both more pro-growth and more progressive.
    The income taxes—both corporate and individual–present a big opportunity. In general, conservatives argue that lower tax rates favor economic growth, while liberals argue for more progressivity and more revenue. We could have all three, if we were willing to cut back on the special provisions that narrow the tax base and mainly benefit higher income people. For example, the home mortgage deduction deferentially favors higher income taxpayers with expensive mortgages. Converting the deduction to a credit would help moderate-income home-owners more and would reduce the demand for mansions. But didn’t we just build too many of those?
    A carbon tax that started low and rose predictably over time would discourage fossil fuel use and raise revenue, some of which could compensate lower-income fuel users for the price increase.
  • Simplifying regulations and getting rid of unnecessarily burdensome ones.
    A constant applause line of conservative and libertarian politicians is the burden of environmental, safety, and other regulations on business, especially small businesses. Personally, I suspect that conservatives exaggerate the economic burden of regulation, but there is some fire under all the smoke and many ways to accomplish the same goals more efficiently. Liberals and progressives would improve their credibility if they would embrace reexamination of federal regulations aimed at accomplishing goals in simpler more effective ways.
  • Restructuring and modernizing federal spending programs
    The federal government has too many small, domestic programs created years ago by well-intentioned legislators of both parties, most of them grants to states, communities, and non-profit organizations. These programs live on for decades because they have a few vocal supporters and it is too much trouble to reexamine whether they are still needed.
  • Even abolishing all these programs would not save much money—the big bucks are in a few big programs like Medicare and Social Security—but weeding out antiquated, less effective programs—or combining them into a block grant for states–would help reduce the widespread impression that the federal government does too much and meddles too much. This kind of review never happens. Progressives don’t do it because they fear it will be an excuse for cutting programs they value, and even right-wing “small government” conservatives don’t do it because it is too much work and does not save much money. Instead, they lower the “caps” on the whole category of annually appropriated domestic programs and let them all limp along on slightly reduced budgets year after year.

  • Finally, we need to take steps now to reduce the growth of future debt and eventually reduce it.
    The debt to GDP ratio more than doubled from a comfortable 35 percent at the end of 2007 to about 76 percent now, mostly because of the Great Recession and measures taken to mitigate its effects. The debt ratio is not a problem right now, because interest rates are low and current deficits are down to manageable levels. The serious worries come in the future as the baby boom population ages into Medicare, Medicaid and Social Security and spending for those programs rises faster than revenues. We need these programs; cutting them is both undesirable and politically infeasible—even Donald Trump recognizes that. It is irresponsible to scare older people by implying that benefits they rely on might be cut. But we can take steps now that would reduce benefit growth for relatively affluent future retirees, or raise more tax revenues or both. It would not be hard to hammer out a bipartisan plan—similar to President Reagan’s deal with Speaker O’Neill–for preserving those vital programs for the future and reducing the growth in debt. But there is no chance of that when Republicans and Democrats have stopped talking to each other.

So that is my list of economic policy changes that would move us toward sustainable growth broadly shared. Others would have different lists or variations on mine. The point is that our political system too broken to focus on its job to creating compromises that move us toward sustainable, inclusive prosperity. What we have instead is a policy-making apparatus reduced to finger-pointing, blaming the opposition, lurching from one manufactured crisis to another, and accomplishing almost nothing. These days a policy victory is keeping the government running and not defaulting on the debt!

The problem isn’t polarization of political views; it is failure to communicate across the ideological chasm.

  • There is no doubt about polarization of political parties and politicians. Plenty of solid political science research shows that there are:
    • Far fewer centrists in the House and the Senate. Liberal or moderate Republicans have been knocked off in primaries by challengers with more conservative views—or dropped out of politics in frustration. Conservative Democrats (heavily from the South), have lost or become Republicans.
    • Fewer contested congressional districts. Safe districts are partly the result of gerrymandering, but mostly of residential sorting (people living with people like them).
    • Hardly any bipartisan votes.
    • Less bipartisan conversation and socialization. Members don’t move to Washington; they are only there midweek when congress in session. They don’t socialize much and their families don’t get to know each other.             
  • There is more doubt about the polarization of the public’s views on policy. Primary voters reflect extremes on some issues, but there are rising numbers of independents. We have long been a pretty centrist country averse to big changes in policy. It is not clear that either Trump/Cruz or Sanders voters want radical changes in policy. Many say they just want to shake things up.
  • But there is no doubt about gridlock in Washington and rising incivility.
    • Budget process has broken down. Budget-making has become an exercise in crafting a minimal short-term agreement that will avoid shutting down the government or defaulting on the debt. It is an embarrassing way for policy makers to behave; damaging to our prestige abroad. The fact that markets don’t move more when congress threatens debt default appears to reflect a touching faith that the shenanigans are just theatre and we will soon come to our senses.
    • Hardly any legislation is moving. Continuing Resolutions and omnibus appropriations have replaced normal appropriations bills. A few exceptions, such as the minimalist rescue of the highway trust fund or replacing the unsustainable Medicare reimbursement formula for doctors, stand out because they are so rare.
  • The primary system gets much of the blame for polarization. Primary voters reflect the “base” and are more extreme than general election voters. Ironically, primaries were supposed to be a reform that would get the choice of candidates out of the smoked filled rooms and into the hands of voters. But those old guys in with their cigars wanted to win, so they tended to pick candidates they thought were electable.
  • But whatever the causes of congressional polarization, it should not inevitably lead to the breakdown of policy-making. That breakdown reflects rejection of the art of compromise and denigration of the search for common policy ground.
    • The Founding fathers were intent on avoiding tyranny and protecting rights of minorities, suspicious both of a strong executive and mob rule. They did not give us a winner-take-all parliamentary system that would allow a majority party to change policies. They didn’t much like parties or factions at all!
    • They gave us a constitutional structure that requires multiple levels of detailed negotiations (between the House and the Senate, Congress and the Executive, and sometimes even with the Supreme Court) to make economic policy, even when the same party dominates all branches.
    • Compromise is an even more obvious imperative if we have divided government, and divided government may well become the new normal. The electoral map is more favorable to the Democrats in presidential years and to the Republicans off years.
    • Moreover, a two-party system fosters polarization in any constitutional structure. If we had multiple parties arrayed across the ideological spectrum, they would have to form coalitions in order to govern and that would tend to pull policy to the center. But multiple parties don’t fit easily into our governmental structure, so we keep reverting to two.

Blaming, not solving

The fact that political leaders are not working together to solve problems infuriates the public—as it should. Barack Obama’s rather naïve hope that he could change the atmosphere in Washington and get warring sides working together was part of his enormous appeal in 2008. But instead of taking the hint that constructive compromise would be popular, politicians have spent most of their energy blaming each other for obstructionism.

My two favorite analyses of how the policy process broke down have terrific titles. One is: It’s Even Worse than You Think by Tom Mann and Norm Ornstein, which details the plunge of congress into total dysfunction with the rise of the intransigent Tea Party. The other is EJ Dionne’s recent book, Why the Right went Wrong, which traces the Republican refusal to compromise back to Goldwater’s losing campaign in 1964. Dionne focuses on Goldwater, rather than Reagan, who campaigned as an uncompromising conservative, but governed as a pragmatist and dealmaker, both as president and as governor of California. We didn’t have a chance to find out what President Goldwater would have done, but I doubt he would have governed as he campaigned either.

Both books stress that rejecting compromise is incompatible with our constitutional structure, which actually requires it. Both put most of the blame for Washington gridlock on the Republicans, especially the Tea Party wing, with their ideological purity tests, demonizing of President Obama, willingness to hold policies hostage to irresponsible demands, and eagerness to discipline of members who strayed from the party line or consorted with the enemy, namely Democrats. I agree that the record supports their case, but Democrats, too, have become more intransigent and more focused on ideological litmus tests, such as unwillingness to consider any Social Security benefit changes despite dramatic increases in longevity.

But which party is most to blame is not the right question. The right question: is what can we do to restore elected officials’ ability make policy, especially economic policy?

People who believe, as I do, that there are policies that could command broad support and move us in the right direction have got to figure out how to make it happen. Otherwise we are just talking with each other.

So, what can we do?

I am not very hopeful that changing the rules about who can vote in primaries or how to draw election districts will make a lot of difference, although I certainly applaud California for trying and will watch the outcomes with great interest.

I am more hopeful than many that after this election congress and the executive, with strong leadership in both places, can get back to working together across party lines and put in place at least some of the agenda I have outlined. This could happen if the election outcome is a Hillary Clinton presidency and a Paul Ryan speakership. Both are smart, experienced leaders who care about policy and, I think, understand that another four years of partisan sniping and gridlock would be devastating for American economic leadership and bad for both political parties.

My optimism reflects my own experience:

  • The Clinton Administration, in which I served, engaged in continuous negotiation with congress. It was hard to get our first deficit reduction package through the Democratic congress in 1993—it passed by one vote in each chamber after a lot of deal-making. After the Gingrich victory in 1994 every legislative move involved strenuous bipartisan negotiation and skillful use of the presidential veto. But major legislation passed, including welfare reform and the 1997 budget deal that was followed by the large budget surplus that both parties claim credit for.
  • In 2010-11 I served on two bipartisan groups—the Simpson-Bowles Commission and the Domenici-Rivlin Task Force that put together similar blue-prints for a bipartisan “grand bargain.” In both venues we held serious, constructive policy discussions in which Republican and Democratic leaders found common ground.
  • I have also worked over the years with large scale citizen engagement projects (American Speaks, The Fiscal Wake-up Tour)—a heartening experience that convinced me that average citizens are much more able to craft bipartisan, fiscally responsible budget solutions than their elected representatives are.
  • I’ve also worked with impressive national organizations devoted to bipartisan problem solving: Convergence, No Labels, Bipartisan Policy Center, Concord Coalition, Committee for a Responsible Federal Budget, The National League of Women Voters and other.

But nothing will happen unless citizens speak out, make clear that they value pragmatic solutions to problems over intransigence in the name of either conservative or progressive principles and will reward problem solving at the polls.

I see big role for universities here, especially public policy programs.

  • Universities need to help students understand the importance of political compromise in making policy under our constitutional system. We can’t be sure that the founding fathers meant to guarantee individual gun rights when they endorse a “well-regulated militia” or believed that corporate campaign contributions were free speech. But we can be sure that they believed compromise was necessary to policy-making because they practiced it in writing the Constitution itself.
  • Universities can also help students understand the difference between dialogue and debate and the importance of dialogue in solving problems—interpersonal problems or political ones or whatever. In a debate, you are trying to win. In a dialogue, you are trying to find common ground. Part of the experience of being at a university should be to practice understanding what another person’s point of view is. If students were encouraged to practice dialogue frequently, we would train a whole generation of policy problem-solvers.

All this may sound hard, but without a big effort to get the political system working again, we will miss the opportunity to enjoy a potentially great economy with sustainable, inclusive, rising prosperity. So if we care about economic policy and the importance of economic policy research—and SIEPR folks do–we have to figure this one out.

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