My new book, The Reconnection Agenda: Reuniting Growth and Prosperity, is out today! Woohoo!
So, what’s it about? Here’s the complete intro, but the idea is simple, as expressed right out of the gate in the first paragraph:
While there are many uniquely positive attributes about the U.S. economy, something is fundamentally wrong and here’s what it is: economic growth can no longer be counted on to deliver broadly shared prosperity. Moreover, the policy agenda put forth by those with the power to do something about this fundamental problem has either proven to be inadequate to the task or has been blocked by gridlocked politics.
Like many of my econo-colleagues, much of what I’ve written to address the growth/income disconnect has been 90 percent problem, 10 percent solution. Our diagnostic skills tend to surpass our prescriptive skills.
For this book, though, I’ve flipped that ratio around. Chapter 2 provides the evidence in support of the fundamental problem I’m setting out to solve, and every subsequent chapter offers policy solutions designed to reconnect growth and prosperity. It’s almost as if there were a big election coming up wherein this issue will take center stage.
I know what you’re thinking: Why bother contemplating policy prescriptions in a gridlocked world? That problem gets a chapter too, wherein I argue that in fact, there’s great demand for solutions to this problem. But you’ve gotta be able to tell the lip-sync’ers from the real singers.
Which is where the new book comes in. Here’s the rest of the intro:
I do not come to these observations [the ones in the indented paragraph above] lightly. Allow me to take you down the path by which I got there. Let’s start at the beginning, i.e., the beginning of the Obama administration.
December 16, 2008, Chicago, Illinois: On a dark, snowy Chicago afternoon in mid-December, it was my immense privilege to have a seat at an historic table. A few seats away from me sat the president-elect of the United States, the first African American to hold that title, Barack Obama. Next to him sat my new boss, the vice president-elect: Joe Biden. Scattered around the rectangle were some of the top economic and financial policy thinkers in the land: Christy Romer, Larry Summers, Tim Geithner.
If the privilege was immense, so was the anguish. We knew the economy was in deep trouble. But we could not have known precisely how deep. As we sat there in December planning our economic counterattack against what would become known as the Great Recession, employers were cutting 700,000 jobs from their payrolls. The next month, as the new president took office, that number would jump to 800,000—job losses of a magnitude that none of us had ever seen. Real gross domestic product (GDP), the broadest measure of the value of all the goods and services in the economy, was contracting at an 8 percent rate, which, if you follow these sorts of things, is technically termed a “nightmare.”
I vividly recall the president-elect distinctly not emoting the attitude of the dog that caught the car it had been chasing (“OK . . . now what are you gonna do with it?”). Like the rest of us, he viewed this in no small part as a technical problem. That’s not meant to sound callous. He was well aware of the human costs as well as the political costs of the deep recession. And had he not reflected on the latter (political costs), David Axelrod, his top political advisor, was there to remind him and the rest of us of them.
But economists view the economy as a system, not unlike the human body. Given the right environment, which in today’s advanced economies is some version of capitalism, and leavened with various degrees of intervention from the government sector, it will generally flourish. Like the human body, it needs a steady flow of nourishing inputs, including energy, credit, skilled workers, and so on. And as long those flows are robust and the job market is providing adequate, fairly compensated opportunities for people to help convert those inputs into outputs (the goods and service we need and want), then the various sectors (households, businesses, government) will work together to keep the system going and growing.
At least, that’s the theory. Around that table, I’d say we were less focused on econ 101 dynamic flow charts and more on the insight of the renowned economist Mike Tyson: “everyone’s got a plan, until they get punched.”
The U.S. economy had been punched big time by an imploding housing bubble inflated by “innovative finance” and excessive leverage (borrowing), which is the subject of Chapter 7. During the 2000s housing boom, the sharp appreciation of housing values spun off a huge “wealth effect”—literally trillions of dollars of housing wealth—that financed home-equity withdrawals (borrowing against your ever more valuable home) and just a general sense of rising wealth among homeowners. When the bubble popped, the wealth effect shifted into reverse and demand collapsed, disabling the elegant system described above.
Moreover, as Summers and Geithner explained to the newly-minted team, credit flows were shutting down as bank balance sheets were at least partially forced to recognize a bunch of very bad loans. (I say “partially” because I would soon learn a new phrase—“extend and pretend”—where bankers tell themselves non-performing loans will come back to life any day now!). If credit is the blood of the economic system, the veins of the U.S. economy had suddenly become extremely sclerotic.
So the discussion was all about what it would take to get the system back up and running. Large injections of liquidity would get credit flowing again. But it’s one thing to get the blood flowing (to boost the credit supply) and quite another to get the heart beating strongly again (to stimulate demand). For that, we’d need a significant Keynesian stimulus package, and much of the conversation that day focused on the size and content of what would become the Recovery Act (and a big part of my life for the next few years, as VP Biden would be tagged to be its implementer-in-chief).
Credit flows, supply, demand . . . the technical expertise in the room, including my own, believed that our job first and foremost was to get the economic system back to some sort of equilibrium.
I personally was there in part because of a related but different expertise: not just the creation of growth, but the distribution of growth. Obama/Biden ran on a platform that focused not just on getting the economy growing again, but on implementing policies that would steer more of that growth to the middle class.
This was an especially big deal to the new VP. Though I’d met him briefly before, our first of many long conversations had taken place a few weeks prior to the Chicago meeting in his Delaware home. I got there around 10 a.m. (on Amtrak—when you visit Biden, you travel by his favorite mode of transport), and as he walked me into the kitchen and we passed an impressive new latte/espresso maker, Biden asked me if I wanted a cup of coffee.
“Sure,” I replied. So he reached into a cabinet right above the fancy machine and pulled out a jar of instant coffee.
“Really?” I blurted out, pointing at the machine.
“Oh, that’s Jill’s [his wife]. I’ve got no idea how to work it. You still want coffee?”
It’s a test of my blue collar street cred, I decided, so I said, “of course!” and proceeded to drink about the worst cup of coffee I’d had before or since.
But our conversation was as memorable as the instant coffee was terrible. And as the Obama/Biden era comes to an end, this is an important time to revisit what was said.
Joe Biden gets a lot of flack for . . . probably the best way to put it is: for being Joe Biden.
He’s a character who can and does talk himself into all kinds of trouble. But there’s something genuinely remarkable, or remarkably genuine, about him: after being in the Senate, an otherworldly institution that pretty much erases your connection to normal people (Senator E. Warren: take note!), Biden has somehow maintained a visceral concern for the struggles of the middle class.
As he will remind you, he grew up with those struggles. And more than almost anyone else I’ve met in government service, he believes that there’s a role for government in helping middle-class people meet their economic challenges. That’s what he and President Obama campaigned on and it’s what Biden and I talked about that morning. He had his own ideas, of course—they’d been intensely campaigning for a year. But he wanted to know what it would take to reconnect economic growth and the prosperity of the middle class.
My response—thinking ahead to the Chicago meeting—was that the first thing it’s going to take is economic growth. The last few decades had confirmed beyond a reasonable doubt that growth was not sufficient for middle-class prosperity, but it was obviously necessary. And like I said, we were in the midst of a raging downturn.
But Biden pushed me to think beyond the downturn. With considerable foresight, he pointed out that if the past few recoveries hadn’t much reached the middle class, why should we expect the next one to do so? One of the things we discussed—the topic of Chapter 3—was the importance of full employment and what it would take to get there. Seeing the Recovery Act coming, we also talked about using crisis to foment opportunity, particularly as regards building up the nation’s deteriorating stock of public goods, aka, infrastructure investment.
Today, I sit well on the other side of those tumultuous days. The Great Recession is far behind us. The measures we took, along with those of the Fed, worked pretty well—in fact, much as we thought they would. I recall a discussion with Larry Summers, an economist who’s been through enough of these sorts of crises to take the long view, during the early days of our work together, wherein he pointed out the differences between our much deeper interventions than those of the Europeans, suggesting that a bit of a natural experiment was underway. As I write today in April 2015, they’re struggling with anemic growth rates and high unemployment while our macroeconomy is relatively strong.
I’m not saying we got everything right by a longshot. We didn’t. Our interventions ended too soon and we pivoted to deficit reduction years before we should have. But let me assure you that this book is not going to re-litigate this question; we have other big fish to fry.
Instead, my point is this. Present company excluded, that Chicago meeting room was filled with some of the best economists we’ve got, men and women with the clearest understanding of the economic system. The measures we started crafting that day, ones that Axelrod, Phil Schiliro, and others helped to somehow cram through an awfully tough Congress, had their expected impact.
And yet, Biden was right. The ensuing recovery has once again largely failed to reach the middle class. What growth we’ve seen has been concentrated at the top of the economic scale. We are now (in early 2015) more than five years into an economic expansion that began in mid-2009, much to the relief of the folks in that Chicago meeting room. But income and wealth inequality are growing strongly again; corporate profitability has never been higher; the financial markets are again on a tear. Real median household income, on the other hand, is still lower than it was when the recovery began.
And that is why I needed to write this book. The smartest economists I know demonstrably had the expertise to restart the system, even after a major crash. But not to put too fine a point on it, no one knows how to fix the part of the system that’s still broken. In fact, no one seems to know the answer to Biden’s question: How can we reconnect middle-class prosperity and overall growth?
The Reconnection Agenda
This book aspires to answer that question. I’ll spend a few pages explaining the problem as I understand it, but the majority of what follows is less diagnostic and more prescriptive. One of the reasons so many people feel like the country and the economy are “going in the wrong direction” is that they see neither solutions that make sense to them nor policy makers willing to try to help. By the time you finish these pages (if I’ve done my job), you will see a clear, plausible way forward, a way in which growth once again reaches down and lifts the living standards of the vast majority of households, not just a narrow slice at the top of the wealth scale.
Of course, this immediately raises a pressing question. Assume for a moment that I actually lay out a convincing reconnection agenda. Well, just because you can see the path forward doesn’t mean you can start marching down it. What if it’s blocked by hostile forces, or today’s equivalent of the same: gridlocked politics?
It’s a fair question, indeed: What good are great ideas (just assume for the moment that what follows is brimming with them) if no one in power is interested in implementing them? Who wants to be dressed up with nowhere to go?
Despair not. Step one is making a compelling case for the economic policies that our political class should be implementing if they want to reconnect the growing economy with the lives of the many households for whom growth has become little more than a spectator sport. Later steps, as I argue below, grow out of the obvious need for a new policy agenda, a need I believe is recognized by a large majority of the electorate, though of course they have very different ideas about how that need should be met.
In other words, one reason there’s no real political pressure to do much about the disconnect between growth and more broadly shared prosperity—what I’ll call “the fundamental problem” in the pages that follow—is that it’s not at all clear to either the average person or the policy elite what should be done. The choir isn’t singing because they lack the music. Once they get the hymnal, if it makes sense to them—that is, us—we will sing. And if we do so loudly enough, we will be heard.
More plainly, there’s great demand for real, commonsense, easily understood solutions to the fundamental problem. Supply of such ideas, on the other hand, is lacking. By the way, in the basic economic model, that would imply that this book—again, we’re still employing the wholly self-serving assumption that these ideas are “all that and a bag of chips,” as we used to say—would be very valuable (high demand, low supply = higher price). And yet, it’s free. Thus, our first of many examples of how the basic economic model can lead you astray.
At any rate, for now, suspend your justified lack of faith in our political system and let’s start by looking at the lay of the economic landscape, wherein I’ve uncovered bad news and good news.
We’ve already discussed the bad news: neither one of our sharply divided political parties has much in their economic policy toolboxes that would fix the fundamental problem of narrowly shared growth. That’s the motivation for a reconnection agenda.
And we’ve already touched upon the good news, as well: when it comes to growth, we in America have a real advantage over those in other advanced economies. We’ve built a flexible, resilient, resourceful, and innovative economy that, unlike those in Europe, has shaken off the mistakes of the recent past—and we’re talking about some really big mistakes with sharply negative consequences—that led to the deep recession at the end of the last decade. As noted above, we’re more than five years into a stable recovery, posting decent, if not stellar, growth rates and adding jobs at a solid and reliable clip.
But here’s the problem: from the perspective of most working households, that word “recovery” needs air quotes. Adding some numbers to facts stated above, since the current expansion began in the second half of 2009 through the end of 2014, GDP was up 14 percent but the typical household’s real income was 1.5 percent below where it was in June of 2009. Corporate profits, on the other hand, recently reached their highest level on record as a share of national income, with the record beginning in 1929!
Statistics like that are not meant to foment “class warfare”—to be honest, I’m not even sure what that political attack phrase even means, though I tend to hear it bandied about by those whose class is the only one doing great (with this, I’m with Warren Buffett: “. . . there’s been class warfare going on for the last 20 years, and my class has won”).
But let me be unequivocally clear: I celebrate all that growth and profitability. Without it, we can’t even begin to discuss the disconnect that motivates what follows in this book. Early on I said growth is necessary but not sufficient to boost the middle class. Well, it isn’t just necessary; it’s essential, and it constitutes the good part of the recent story of the US economy, especially compared to others.
Recovery . . . What Recovery?
This insight regarding the limits of growth alone was brought home for me during a presentation I gave here in Washington DC to an audience of what you might call “policy elites”—people, like myself, whose job it is to try to figure out what’s going right and wrong in the economy from the perspective of households across the income spectrum. This was during the run-up to the 2014 midterm elections and this particular group wanted to know why President Obama and the Democrats weren’t getting more “love” on the economy from an electorate that was probably most efficiently described as deeply pissed off.
As I was working my way toward the above diagnosis, I kept using the word “recovery,” as in, “the economic recovery that’s been ongoing since the second half of 2009 just isn’t reaching most households.” Out of the corner of my eye, I noticed a man I knew to be a prominent pollster unable to suppress his scowl so I stopped the proceedings and asked him what was bothering him.
“If you mention the word ‘recovery’ to people, they don’t know what you’re talking about. And they conclude you don’t know what they’re talking about. It’s not just that they feel disconnected from an economy that’s supposedly growing. It’s that they don’t think anyone understands or knows what to do about their situation.”
Didn’t President Obama and his economic team—a team of which I was once a member—already try to do just that?
The Inadequate Toolbox
The problem is that we’re rich with diagnoses but poor with prescriptions. And that’s because our economic policy toolbox is woefully undersupplied. Surely, as noted above regarding the actions we took against the Great Recession, we have some of the right tools to fix what’s broken in a broad, macroeconomic sense. But there are too few effective tools devoted to reconnection.
That’s partly because we’ve allowed our thinking on the options to become so narrow, so cramped, that while too many families feel like their economic lifeboats are taking on water faster than they can bail, policy makers—and I’m talking about the minority that actually want to help them—are unable to offer them much more than “we see the holes and the water flowing in. Here’s a graph of the rate of the inflow!”
Try to think of a policy that’s out there in the debate to patch the holes. I’ll wait . . .
I suspect some readers thought “what debate?” Checkmate. Others may respond, “raising the minimum wage!” Fair point, for sure, and I give that movement a lot of credit (Chapter 9). It’s also a solution that’s increasingly widely embraced. In that aforementioned 2014 midterm election, one that was a disaster for Democrats, a number of deeply red states (including South Dakota, Arkansas, and Nebraska) raised their minimum wage levels. But let’s keep it real. A higher minimum wage is a good idea and moderate increases in the wage floor have a solid history of accomplishing their goal of boosting the incomes of low-wage workers without many negative side effects. But a higher minimum only addresses a small part of the problem.
Why is the economic policy toolbox so incompletely stocked? Actually, the fact that the minimum wage is one of the few things in there provides a hint. After decades of asserting that wage mandates are a scourge on free market economies, many economists have become comfortable with higher minimum wages. The New York Times editorial page—decidedly liberal but not exactly “bally five-year-planners,” as PG Wodehouse used to call the commies—and The Washington Post editorial board regularly endorse increases. There’s been a great deal of high quality research on the issue, and it’s solidly disproved the notion that the positive impacts of the policy are swamped by the negative effects that opponents typically raise.
In other words, it has become accepted by many—not all—elites that higher minimum wages do not “disrupt markets,” or at least not very much. Unfortunately, very few other policy ideas targeting the great disconnect make that cut.
Market Failures are a Lot More Common than You Think
I’m here to tell you that this litmus test—“does the idea disrupt markets?” (and if it does, get it away from me!)—is decidedly, definitely, unquestionably the wrong test to be running. It’s the wrong question and as the novelist Thomas Pynchon’s warned, “If they can get you asking the wrong questions, they don’t have to worry about answers.”
The right question is quite different: is the private market economy failing to provide something important and if so, are there policies that can be efficiently implemented to offset that market failure?
Both parts of the question are important and let’s be rigorously bipartisan here: there’s market failure and government failure, and while the right tends to deny the former the left must not deny the latter. It’s not enough to portray the fundamental disconnect, pointing out that some important economic functions are broken (as I’ll do in the next chapter). You have to have a solution that both makes sense and has a decent chance of generating the intended outcome in the context of our economy.
Moreover, as noted in passing above but discussed in detail in Chapter 9, there’s a relatively new wrinkle regarding government failure. Government’s inability to enact and implement useful economic policies in recent years is by no means a sole function of administrative incompetence or feckless bureaucrats. It is a strategy.
When government doesn’t work, whether it’s a website or a Recovery Act (as noted, the latter worked well, despite stiff opposition), it strengthens the narrative of the YOYOs—the “you’re-on-your-own-ers.” The YOYOs are the folks calling for less government without regard for the challenges we face, like climate, an aging demographic, and explosive financial markets, all of which require government solutions (the subject of Chapter 8). They’re the privatizers, the always-cut-never-increase tax advocates, the “we can’t afford social insurance” crowd. Their extreme wing would default on the public debt. They stand against “Obamacare”—very much a government solution to a market failure—as it distinctly embodies the “we’re-in-this-together” (WITT) ethic they diametrically oppose.
So while I readily admit government failure—you’d have to be swimming in de’Nile not to see that in contemporary politics—it’s essential to recognize that such failure is neither an accident nor an immutable act of nature. It’s a tactic that can be reversed.
In fact, it must be reversed if we’re going to correct market failures, the most important of which is the long-term failure of the economy to create the quantity and quality of jobs needed to reconnect growth to the living standards of the majority.
As you’ll see in what follows, to correct this fundamental economic problem, we’re going to need to directly create jobs for those who need and want to work yet can’t find a job. We’ll need to take steps to raise the historically low bargaining power of the majority of the workforce by elevating full employment to a national goal (Chapter 3). We’re going to need to boost our manufactures by fighting back against international competitors who underprice their exports to us (Chapter 4).
Chapter 5 explains how both monetary policy by the Federal Reserve and fiscal policy of the federal government need to step up and play a stronger role in addressing the fundamental problem. Chapter 6 shows that even getting to full employment isn’t enough to reconnect everyone to the growing economy. Part of the agenda must reach out to those who struggle to make ends meet, even when jobs are plentiful, including the long-term unemployed, those displaced from the “old economy,” and the millions with criminal records. And once we get to full employment, for the benefits of growth to really reach the people who need it most, we’ve got to stay there. That means doing away with the “economic shampoo cycle”—bubble, bust, repeat—that’s characterized our economy for decades now (Chapter 7).
We’re going to have to invest more in public goods, from infrastructure to education to a more buoyant safety net to things that slow environment degradation (Chapter 8). Attacking the market failure of poverty and the class immobility of those who start the race with huge odds stacked against them must also be elevated as a national goal.
Thus, I lay out the reconnection agenda in the form of problem, diagnosis, and prescriptions. But after scribbling away in the business for decades now, I’ve learned that a reconnection agenda will not develop just because some economist writes down some ideas and plots some data (I know . . . slow learner). There needs to be a social and political context within these ideas that can gain traction, along with a clear-eyed view of the extent of government failure and what must be done to correct it. That’s a long game for sure, but I end the book in Chapter 10 with some thoughts about why it’s so important and how we can move it forward.
All of which raises this final introductory question:
Who’s this “We” You Keep Talking About?
So far, I’ve told you (in Chapter 2, I’ll show you) that the U.S. economy, strong and flexible as it is, is failing in fundamental ways to provide the opportunities its citizens need to claim their fair share of the growth. I’ve even hinted at necessary actions that can help, to be elaborated in later chapters. But readers who’ve tracked national politics in recent years have a right to ask: just who do you think is going to undertake to do all of this great stuff? As I said right at the beginning, those with the power to do something about the fundamental disconnect are not doing what needs to be done. What’s going to change that?
As already stressed, part of what I’m betting on here is that a large swath of people will respond a lot more positively than you’d think to an agenda of the type for which I’m advocating. Let me reiterate, because I think this is so important: I’m convinced that a significant majority of the American electorate is looking for hope on this fundamental economic problem of disconnected growth and prosperity. They just haven’t heard convincing solutions from the left or the right.
The YOYOs run around arguing, unconvincingly to most, that government is the problem, while most Democrats nibble at the edges with YOYO-light, maybe sprinkling in a minimum wage increase. Everyone treats the private market economy like a delicate vase that mustn’t be bumped, while almost no one in prominence has the courage to stand up and say the following:
Guess what? The economy’s broken. It’s still growing and that’s great, but the critical market mechanisms that we used to be able to count on to fairly distribute that growth are broken and they’re not going to get fixed by ignoring them. Nor will they get fixed by most of the solutions put forth by the left or the right. On the right, cutting taxes and “red tape” and repealing Obamacare won’t do anything to increase the quantity and quality of jobs. On the left, providing better educational opportunities, while an essential piece of the longer-term puzzle, won’t help parents get better jobs today. While the provision of affordable health care is a tremendously important advance, Obamacare won’t solve the disconnect either. Raising the minimum wage—another venerable policy—won’t reach the middle class.
Instead, we’ve got to make full employment a national goal, boost our manufactures, create the needed jobs if the market won’t do it, and stabilize our financial sector so it doesn’t blow everything up every few years. Each one of those calls for intervening in markets in ways that most policy makers eschew, but that reticence is why we’re stuck where we are today.
A convincing agenda built on that foundation could well create the “we” that I’m talking about.
Even if I’m wrong, however, all is far from lost. As I discuss in Chapter 9, while national politics may well remain broken for years to come, sub-national politics has an urgency that’s been lost on the national stage. While Congress muddles about in ideological darkness, governors and mayors have to actually do things. They have real states to run, with university systems, public schools, public safety, and infrastructure to worry about. Of course, they lack the purse strings of Congress and they cannot on their own tackle national problems, like offsetting recessions with countercyclical policy (i.e., policies that switch on when the economy tanks and off when it recovers). But the ideas I put forth could be useful to them as well.
A Note About this Book (important if you plan to read on)
Though I’ve printed some copies, I’m thinking of this largely as an e-book and, as such, I’d like to consider it a “living book,” one that can change and grow and shrink to reflect real time developments in both data and policy. The reconnection agenda is really, of course, a reconnection agenda. There are many ideas that can help reunite growth and prosperity and future economic developments will solve some problems and create new ones. The beauty of an e-book is that I can update the manuscript to reflect the times.
It is also the case (as I fear you’ve recognized already) that this is a largely self-edited volume. As noted in the acknowledgements, my colleague Ben Spielberg read everything closely and provided invaluable feedback and edits, but because a) I wanted to get these ideas out there before the 2016 election debate got too far along, b) I plan to update the text as necessary, and c) publishers are just not that enamored of this sort of wonkishness, the flow here is pretty much right from the kitchen stove to the table, piping hot, but without enough of a copy-edit.
That’s where you come in! I’ve set up a form (http://goo.gl/forms/jM4xzUErZA) where you can send corrections and suggestions. And when I make the fix, I’ll add your name (or “handle”) to the acknowledgements, implicating you too in the goal of reuniting growth and prosperity!
So, with all of that throat clearing out of the way, welcome to the reconnection agenda! I must be crazy or ridiculously hard-headed or just plain boring, but after decades of pushing on these sorts of ideas, I continue to find them not just essential but uplifting. That’s partly due to the WITT (“we’re in this together”) philosophy that guides much of what follows, but it’s also because I see the potential of the US economy to reach everyone in ways that it used to but hasn’t for many years. To not try to realize that potential is unacceptable, and thus, time spent crafting, updating, perfecting and promoting a reconnection agenda is not just time well spent. It’s some of the most rewarding work people in my field can undertake, and I thank you, readers everywhere, for giving it a look and elevating the ideas in any and every way you can.
[And here’s a link to a PDF of the book…I hope you enjoy reconnecting!]