Economic choices facing the United States: Why we need a new direction
First in a weekly series on the economic choices facing the United States and its relations with the rest of the world. For other entries, click here.
OVER THE NEXT several weeks, I will explore the economic choices facing the United States and its relations with the rest of the world. The election season obviously makes this timely, yet the real choices facing our country will not be settled in November. The debates will take place over many years. We had best become informed about our real choices, dilemmas, and opportunities.
My contention is that with the right choices — far better choices than we’ve been making recently — America’s economic future is bright. Indeed, we are the lucky beneficiaries of a revolution in technologies that can raise prosperity, slash poverty, increase leisure time, extend healthy lives, and protect the environment. Sounds good, perhaps too good to be true; but it is true. The pervasive pessimism — that American children today will grow up to worse living standards than their parents — is a real possibility, but not an inevitability.
The most important concept about our economic future is that it is our choice and in our hands, both individually and collectively as citizens.
The reasons for the pessimism are real. The United States is experiencing the lowest growth rates in the postwar era. Economic growth recorded since the 2008 financial crisis has been about half of what was forecast in mid-2009: 1.4 percent annual growth during 2009-2015 compared with a projected growth rate of 2.7 percent. Around 81 percent of American households, according to a recent McKinsey study, experienced flat or falling incomes between 2005 and 2014. At the same time, the inequality of income has soared over the past 35 years, adding to the concentration of wealth and income among the top 1 percent of the population. In 1980, the top 1 percent took home 10 percent of household income; in 2015 it was around 22 percent.
While unemployment has declined, from a peak of 10 percent in October 2009 in the depths of the recent financial crisis, to the current low rate of 4.9 percent, part of that recovery has been achieved because individuals of working age have left the labor force entirely, out of frustration at low-paying jobs or no job opportunities at all. The ratio of overall employment relative to the working-age (25-54) population has declined from 81.5 percent in 2000 to 77.2 percent in 2015.
If this were not enough, the headwinds seem set to continue. The antitrade sentiments in both political parties this year, leading to the rejection by both Hillary Clinton and Donald Trump of a draft trade agreement with Asia, reflects a widespread feeling that America has lost jobs in large numbers to low-wage competition with China and other countries, and that more such job losses are to come. Recent research suggests that such fears, long-scoffed at by economists, are based on reality. US manufacturing sector jobs have shifted overseas, as well as being lost to automation. Counties in the United States in the front lines of competition with Chinese manufacturing have experienced the largest job losses.
Automation has become another source of high anxiety. Here, too, economists have long scoffed at the public fears that machines will take away our jobs. Hasn’t the entire industrial era proved that view wrong, they ask rhetorically? Haven’t new machines and technology always created more jobs than they have cost? These are fair questions, but so too are the worries. The advent of smart machines seems to be shifting income from workers to capital, driving down wages, and contributing to the frustration low-wage workers feel about finding a job with a livable wage. Some workers do seem to be squeezed right out of the labor force, and the share of labor earnings in national income is falling, a sign that decent jobs indeed are being overtaken by the robots.
So, yes, Americans have the right to lots of economic fears: of Wall Street traders who destabilize the economy; the top 1 percent who corral the lion’s share of economic growth; and of jobs and wages lost to China and the robots. But there are still more reasons to worry.
The federal budget deficit this year will be around 2.9 percent of GDP, but with a tendency to rise to around 4 percent of GDP in the coming years. The consequence of chronically high budget deficits, of course, is rapidly increasing public debt. The Treasury debt owed to the public here and abroad has soared from 35 percent of US GDP at the end of 2007 to 75 percent at the end of 2015. The Congressional Budget Office warns that under current fiscal policies, the debt is likely to reach around 86 percent of GDP in a decade (2026) and 110 percent of GDP in two decades (2036).
Debt sustainability is one part of the future we leave to today’s children. Environmental sustainability is of course the other. And if there is one endangered elephant in the room, one existential worry to keep us up at night, it is the relentless, punishing, ongoing damage that Americans and the rest of the world are doing to the environment. We can’t rest easy on our economic future, and I would not advise doing so for a moment, until we find a path to climate safety and true sustainability for our water, air, and biodiversity. First and foremost, we need to overhaul the energy system, to shift our reliance from carbon-based energy — coal, oil, and gas — to noncarbon energy sources — wind, solar, hydro, nuclear, and others that do not cause global warming.
Finally, add to these challenges our nation’s highly divisive and corrupted politics, and the near-paralysis in Washington brought about by the overuse of filibustering, arbitrary holds on presidential nominations, and other devices to stall or block decision-making. It’s not hard to be gloomy. Some leading economists have even declared the end of two centuries of economic growth. We are, to use their jargon, in a new era of “secular stagnation.” And if growth is at an end, social stability could be jeopardized as well, with the economy turning into a zero-sum struggle wherein the gains for some groups must be the losses for others.
The doyen of the pessimists (and author of a wonderful new book, “The Rise and Fall of American Growth”), Robert Gordon, also argues we’ve simply run out of big new inventions to keep the economic engine going. Gordon argues that smart phones and the Internet simply don’t measure up to mega-breakthroughs like the steam engine, electricity, TV and radio, the automobile, and aviation — the great technological drivers of two centuries of economic advance.
My argument, to be detailed in the coming weeks, is that the pessimists have a point — indeed, several of them — but that overall they are mistaken. We are not at the end of progress, at least not if we get our act together. And we can. Even the political paralysis can end if we can discern more accurately and clearly the right path out of our very real and complicated problems. America has solved horrendously large problems in the past and can do so again.
My starting point is a concept — sustainable development — that conveys a new and better approach to national problem solving. Luckily, it’s a concept that’s been around for a while, long enough to build an extensive body of knowledge and extensive evidence of what to do. And long enough to be acknowledged widely not only by scientists, engineers, and a growing number of investors, but also by governments around the world. Last September, all 193 governments of the United Nations adopted sustainable development, and 17 specific Sustainable Development Goals (SDGs) as the basis for global cooperation on economic and social development during the coming 15 years. Last December, the same governments adopted the Paris climate agreement, also built on the concept of sustainable development.
Sustainable development argues that economic policy works best when it focuses simultaneously on three big issues: first, promoting economic growth and decent jobs; second, promoting social fairness to women, the poor, and minority groups; and third, promoting environmental sustainability. American economic policy has tended in recent years to focus only on the first, economic growth, and has largely neglected the growing crises of economic inequality and environmental ruin, even as those have worsened dramatically in recent years. Now, even growth itself is imperiled.
But economic growth, social fairness, and environmental sustainability are mutually supportive, and future growth itself now depends on addressing these two neglected pillars of sustainable development. The idea of “choosing” our economic future is the key idea. Economies don’t just grow, achieve fairness, and protect the environment on their own accord. Economic theory and experience make clear that there is no “Invisible Hand” that produces economic growth, much less sustainable development. Even Adam Smith was clear on that point, and wrote Book V of “The Wealth of Nations” to emphasize the role of government in infrastructure and education.
But how do we choose? Mainly, we choose our economic future through the decisions we make concerning saving and investment. Societies, like individuals, face the challenge of “delayed gratification”: We achieve future growth by holding back on current consumption and by investing instead in future knowledge, education, skills, health, infrastructure, and environmental protection. And if we invest well, we hit the trifecta, achieving growth that is also fair and environmentally safe.
Investing well, in turn, will require two things on which America is decidedly out of practice, so much so that even the hint of them will cause many to squirm. The first is planning. We need to plan for our future. I can recall when the very idea of planning became a dirty word, associated with the “central planning” of the defunct Soviet Union. Yet we need planning now more than ever to overcome complex challenges such as overhauling our energy system, an effort that will require decades of concerted action.
The second is the need for more public investment to spur private investment. Ever since Ronald Reagan told us, “Government is not the solution to our problem; government is the problem,” we have cut public investment to the bone. We experience it every day with decrepit highways, bridges, levees, and urban water systems; aging airports and seaports; and neglected hazardous-waste sites. Yet without government’s role in building infrastructure and guiding the energy transition, private investors — with trillions of dollars under management — will remain stuck on the sidelines, not knowing where to place their bets.
With breakthroughs in smarter machines and information systems, new materials, remote sensing, advanced biotechnology, and much more, there are innumerable ways forward toward sustainable development and higher living standards, including healthier lives and more leisure. But can a complex modern society, with all of the stresses, actually achieve these goals and balance the budget at the same time? I’m going to show why the answer is yes, and even better, look to other countries that are ahead of the US in forging the way to the future in certain key challenges, such as education, training, fairness, and low-carbon energy.
In a recent study, my colleagues and I measured how 150 countries, including the United States, stack up on sustainable development, and notably on the progress that the countries will need to make to achieve the recently adopted SDGs. The news was eye-opening, sobering, but also strangely inspiring. The United States came in 22nd out of 34 high-income countries, far from the lead held by Sweden, Denmark, Norway, and Switzerland, respectively. Canada came in 11th. This may seem a bit depressing for a country that likes to think of itself as first, but it’s also exciting to know that we can learn from others as we seek our own way forward.
In the coming weeks, I will take care to go into depth on these key points: the future budget choices, including tax reform; the future of energy; fighting inequality; creating good jobs alongside the robots; making trade deals work for all; slashing our outlandish health care costs; and achieving a long-delayed peace dividend. We shall see that we do indeed have choices — good ones — that can deliver renewed progress and sustainable development for America.
Jeffrey D. Sachs is University Professor and Director of the Center for Sustainable Development at Columbia University, and author of “The Age of Sustainable Development.”