Lifting Our Economy

Jason E. Bordoff

Theda Skocpol rightly draws attention to President Obama’s focus in his inaugural address on promoting more broadly shared prosperity: “The success of our economy has always depended not just on the size of our Gross Domestic Product, but on the reach of our prosperity,” he said.

Indeed, to date, too many Americans have failed to benefit from our nation’s economic growth. Between 1947 and 1973, productivity and real median family income both grew by 2.8 percent a year. Since 1973, however, productivity has grown by 1.8 percent a year while real median family income has risen by less than half of that. The disconnect between aggregate economic growth and the income of typical families is accompanied by a large increase in inequality. Since 1979 the share of income going to the top 1 percent has risen by 8 percentage points while the share of income going to the bottom 80 percent has fallen by the same amount. The problem has been particularly acute in recent years, with the gains of economic growth accruing largely to those at the very top; the tax cuts enacted since 2001 have reinforced this long-term trend, increasing after-tax incomes for high-income families substantially more than for the rest.

This lack of broadly-shared growth is not only inconsistent with the principle that all Americans should have the opportunity to contribute to and benefit from economic growth but also inconsistent with historical experience in this country. As Harvard economist Benjamin Friedman writes in The Moral Consequences of Economic Growth, “A rising standard of living for the great majority of our citizens has in fact been the American norm, and it is we, today, who are failing to achieve it.”

Various factors are responsible for rising inequality and insecurity–including technological change that increasingly rewards skilled workers, institutional changes such as the decline of unions, immigration, and the decline in real value of the minimum wage. Pushing back against these forces requires investments to help people succeed, such as in education and science, and higher levels of private saving to help give families a cushion when shocks hit. Strengthening our social insurance system can also help people rebound when they face hardship.

As Skocpol notes, one direct way to share the gains of growth more broadly is with progressive taxation. Given that progressive taxation is justified by a desire for “equal sacrifice” and by the more fortunate’s greater “ability to pay,” then to the extent that the share of the nation’s income accruing to those at the top increases, their ability to pay should increase as well. Thus rising inequality strengthens the case for progressive taxation.

But it’s still not possible to share the gains of economic growth more broadly if there’s no growth. That’s why President Obama, in the above quote, observes that the size of GDP matters too. Economic growth and economic security go hand-in-hand. That is why it is so encouraging that the administration has already helped Congress develop a recovery plan to boost our economy, proposed ways to better use the Troubled Assets Relief Program (TARP) to address the turmoil in our credit markets, and called a bipartisan fiscal summit for February to address our long-term fiscal imbalance.

In the near term, expanding opportunity and prosperity is about creating jobs, which we’re currently losing at the rate of half a million a month, driving millions into poverty. It is estimated that the unemployment rate will not peak until 2010 at more than 9 percent. Typically the Federal Reserve has boosted employment by cutting interest rates, but rates are already about as low as they can go. That is why the administration has proposed an economic recovery package–because the economy is operating at less than full capacity and fiscal stimulus can help boost aggregate demand. Spent wisely, this money can not only make up the shortfall in our economy and put people back to work, but can also promote broad-based prosperity by targeting low- and middle-income workers through tax cuts, benefits to help workers hurt by the economy, and lower health care costs. It should also, as much as possible, be used to invest in things of lasting value, such as infrastructure and energy efficiency.

The TARP has been widely criticized as a bailout of the privileged on Wall Street that caused this problem in the first place. Skocpol’s analysis reflects this perception, noting that “the privileged will pressure Obama to bail them out in this ’emergency’.” To be sure, this program must be improved–such as with better transparency and accountability, requirements that banks receiving assistance also increase lending, and more help to homeowners. Yet it also important to recognize that if we want banks to lend again–to people who want to buy a home or car, to students who want to get an education, or to businesses large and small looking to make payroll or hire more workers–efforts will be needed to recapitalize banks and address the toxic assets on their books.

Policies to get our economy moving again are going to be costly–the economic recovery package carries a price tag of $825 billion and the second half of the TARP is an additional $350 billion–and that’s on top of the more than $1 trillion dollar deficit Obama is inheriting this year from Bush. Such deficits are unsustainable. The long-term fiscal imbalances that we face due to projected growth in entitlements are a threat to our future prosperity. “Entitlement reform” need not be a “term of art for . . . giving ordinary working people less,” as Skocpol claims. Indeed, as OMB Director Peter Orszag has frequently noted, addressing our long-term imbalances is primarily about “bending the curve” (that is, slowing the growth rate) of medical spending, as Medicare and Medicaid pose much more serious fiscal challenges than does Social Security. If this challenge is not addressed, rising costs for health care and the aging of the U.S. population will cause federal spending to grow rapidly, creating unsustainable budget deficits and leaving little left over to provide social insurance and make the investments necessary to boost standards of living for American families.

For the first time in American history, we are in danger of breaking that quintessential American promise of opportunity–that with hard work and education, each generation can do better than the one that came before and that where one starts in life should not determine where one ends up. As Skocpol suggests, our economic performance should be measured by how well economic growth is raising the living standards of all Americans–and thus we must put in place the right policies and make the right long-term investments to achieve more broadly-shared prosperity. But in the midst of the worst economic downturn since the Great Depression, as much attention needs to be paid to getting our economy growing again. Simply put, you can’t lift any boats, and certainly not all boats, unless you make sure there’s a rising tide first.