Reviving the American Dream: The Economy, the States and the Federal Government
It really was “the economy, stupid” that elected Mr. Clinton to the presidency. He also emphasized a parallel and important theme: “change.” Its potential significance is suggested by the fact that even Mr. Bush, that apostle of domestic passivity, tried to represent himself as the candidate of “change.”
The content of “change” was never made clear by anyone. If it means anything at all—which is not to be taken for granted—it must presumably mean more than just making things better: increasing employment, restraining inflation, raising SAT scores. “Change” sounds more qualitative than that. There were occasional pseudo-clarifications, like the mention of “structural” change. But “structural” often appears to be a word used to communicate that one is talking about something deep, but doesn’t actually know what it is.
Alice Rivlin is much more concrete. In Reviving the American Dream she proposes a major change in the way government relates to the economy. She would like to reshuffle the specific responsibilities of the federal government and the state governments, with the states (and cities) taking over a considerably larger share of economic policy than they have ever done since the Great Depression of the 1930s. It is a standard conservative ploy to say that the states should do more because they are closer to the people, while at the same time failing to suggest where the states are to get the financial and intellectual wherewithal to carry out their greater responsibilities. That is not an oversight: the conservative goal is not to redistribute the economic functions of government but to diminish or eliminate them. Dr. Rivlin is not in that game at all. She means what she says, and the fact that the idea comes from her lends plausibility to it in a special way.
Dr. Rivlin is President Clinton’s appointee as deputy director of the Office of Management and Budget. The director is Leon Panetta, an experienced California congressman, wise in the ways of making and negotiating the budget. There is no reason to think that he or Mr. Clinton would be willing to accept the “change” advocated skillfully by Rivlin, although it is hard to imagine that they did not know about the ideas contained in their colleague’s book. It speaks well for Mr. Clinton that he is willing to have, at the analytical heart of a centrally important agency like OMB, an articulate believer in a way of organizing the economy that may not be his own.
What makes Rivlin’s advocacy of devolution to the states and cities noteworthy is the fact that she has worked in Washington throughout her professional career. It is an eminent career—she has been president of the American Economic Association—but carried on essentially outside the universities. Her long-term association has been with the Brookings Institution, the preeminent Washington think tank, where the elite meet to eat and to write their books.
Then, when the Congressional Budget Office was established, she was its first director. In discussions and negotiations on policy, whoever has done the research and written the memo has a tactical advantage. The CBO was created so that Congress could have intellectual parity with the Executive Branch in fiscal policy. Otherwise the Executive, backed up by the Council of Economic Advisers and the OMB, is always a step ahead. Under Rivlin’s leadership, CBO was a quick success. Congress is no longer in the position, for example, of being forced to accept the president’s self-serving revenue forecasts for lack of an alternative. The directorship of CBO was intended to be an essentially nonpartisan position, serving the whole Congress. Nevertheless, at the beginning of the Reagan administration, the Republican right tried to drive Rivlin out. She dug in and remained in office long enough to establish the point that CBO is an analytical agency, the same for everyone, and not a purveyor of cooked research. (She was succeeded by Rudolph Penner, whose leanings are more conservative, no doubt, but who is also an excellent, careful economist. Rivlin had made her point. The tradition continues.)
When an eminent close-up student of economic policy, with Rivlin’s history and credentials, concludes that the federal government is in over its head, the rest of us have to take notice. We do not have to agree in the end, but the traditional presumptions cannot be taken as self-evident.
Rivlin’s diagnosis of the economic problem facing the US is squarely in the mainstream of current analysis. The most important fact of American economic life is that the real income of the average family, which had been rising at about 3 percent a year in the 1950s and 1960s, fast enough to double every twenty-five years, slowed to a crawl (or worse) about 1973. For the past twenty years, growth has been negligible. I reproduce one of her graphs because it tells the story so clearly.
It takes only a little imagination to see that a society with that history might turn mean and crabbed, limited in what it can do, worried about the future.
The story of the average family hides important diversity. During the period of slow growth or non-growth the inequality of incomes has been widening. The families at the bottom (not the same families every year, of course) have been actually getting worse off. Their incomes, corrected for inflation, have been falling. Families in the middle 60 percent have been scraping along, sharing a little in what growth there has been, but only a little. The families at the top (again not always the same people) have been doing all right; their incomes have been rising quite nicely.* If one characteristic of a good society is that the degree of inequality should not be too wide and should not be getting wider, then the years since 1977 or so have not been good for American society.
These facts about the growth and distribution of family income in the US are reflections of something going on at a deeper level. The average income in the US is governed in the long run mainly by the level of productivity, i.e., by the capacity of the economic apparatus to generate output per hour worked and by the number of hours worked per person in the population. The growth of family income slowed in the 1970s and 1980s because the growth of productivity slowed. A revival of income growth will require a revival of productivity growth. (It is true that there has been a partial improvement in productivity in the past two years. Some of it, however, comes from shedding obsolete capacity, and there is no future in that. It is too soon to know whether the remainder is more than transitory.)
The productivity story has been studied to within an inch of its life. (The slowdown is visible in Europe and Japan too, by the way; it is not strictly an American disease.) Rivlin gives a brief but clear summary of the outcome of all that research. There is no single explanation. A number of minor causal factors can be identified. When all that is done, there remains an unexplained and perhaps unexplainable puzzle. No law of nature says that the trend in productivity growth should always be the same. Some periods are better than others.
Changes in the degree of inequality can also be traced back to events in the sphere of production. The widening of inequality is clearly visible in incomes before tax and without income support payments. The Reagan-Bush achievement in taking from the poor and giving to the rich made things only slightly worse. If that policy had resulted in a resurgence of growth, the net result might have been adjudged beneficial. But the supply-side revolution was a dud. High-income earners appear to have done well because the demand for skilled, educated labor kept going up. The bottom of the heap did badly because it consists mainly of those with no skills or very limited skills. The market for those workers is shrinking even in service industries, and they are increasingly in competition with poor countries with wage levels much lower than our own.
It hardly matters whether we can identify all of the causes of the productivity slowdown and the stagnation of incomes. Everybody knows roughly what the solutions are (although it is a lot harder to prescribe just what form they should take and estimate exactly how effective they will be). Any action that incurs costs now in order to produce rewards later is, generically, an investment. A country that wants to have higher incomes in the future than it has now will have to invest more. The list of possible productive investments is fairly diverse. Spending on industrial equipment, the latest in tooling and machinery, certainly qualifies as productive investment. But so does spending on technological research and development and on the year-to-year improvement of existing goods and processes. So does spending on the country’s transportation and communication networks, water supply, and waste disposal systems, usually classified as infrastructure. And so does spending on the creation and maintenance of an educated, skilled, adaptable labor force.
This last category of investment has something else going for it: the chance that it could reverse the worsening inequality of incomes. If the disappearing demand for unskilled labor is the main force behind the deterioration of the status of the lowest income groups, then they would gain disproportionately from a serious and successful campaign to improve the quality of the labor force. Investment in education and training that was directed at the lower-income groups might both raise the average of earned incomes and reduce the gaps between the rich and poor.
These items of investment comprise what Rivlin calls “the productivity agenda,” and getting it carried out efficiently is, for her, the main goal of economic policy. The first thing to note is that investment requires savings: costs are incurred and there is no immediate output to cover them. On the national scale, the costs of an investment program have to be covered by domestic saving, either by the private sector or by governments, or else borrowed from abroad, as the US has been doing since 1981. We do not, as a nation, save enough to cover our current investment, let alone to finance a desirable increase. Why is that?
The superficial answer is that private saving in the US more or less collapsed and the federal deficit (which amounts to negative saving) increased substantially. Only the second of these can be blamed on the fiscal policy of the Reagan administration. The superficial answer is correct as far as it goes. It does not tell us why private saving tell from 9.0 percent of national income in 1974–1980 to 6.9 percent in 1981–1985 and 4.9 percent in 1986–1990. Nor does it quite explain Ronald Reagan’s policies, for that matter.
See "The Rich, the Right, and the Facts," by Paul Krugman in The American Prospect (Fall 1992), pp. 19–31, for some details.↩
See “The Rich, the Right, and the Facts,” by Paul Krugman in The American Prospect (Fall 1992), pp. 19–31, for some details.↩