The Agenda

The Politics of U.S. Economic Underperformance

Brad DeLong observes that U.S. GDP per capita will reach and exceed its 2007 level in 2014:

[D]uring the two business cycles that preceded the 2007 downturn, the US economy’s real per capita GDP grew at a 2% average annual pace; indeed, for a century or so, the US economy’s real per capita GDP grew at that rate. So US output is now seven years – 14% – below the level that was reasonably expected back in 2007. And there is nothing on the horizon that would return the US economy to – or even near – its growth path before the 2008 financial crisis erupted. The only consolation – and it is a bleak consolation indeed – is that Europe and Japan are doing considerably worse relative to the 2007 benchmark.

The US economy’s annual per capita underperformance in 2014 will thus amount to $9,000. That means $9,000 per person per year in consumer durables not purchased, vacations not taken, investments not made, and so forth. By the end of 2014, the cumulative per capita waste from the crisis and its aftermath will total roughly $60,000.

If we project that forward – with nothing visible to restore the US to its pre-2008 growth path – at the annual real discount rate of 6% that we apply to equity earnings, the future costs are $150,000 per capita. If we use the 1.6% annual real discount rate at which the US Treasury can borrow via 30-year inflation-protected Treasuries, the future per capita costs are $550,000. And if we combine the costs of idle workers and capital during the downturn and the harm done to the US economy’s future growth path, the losses reach 3.5-10 years of total output.

That is a higher share of America’s productive capabilities than the Great Depression subtracted – and the US economy is 16 times larger than it was in 1928 (5.5 times larger in per capita terms). So, unless something – and it will need to be something major – returns the US to its pre-2008 growth trajectory, future economic historians will not regard the Great Depression as the worst business-cycle disaster of the industrial age. It is we who are living in their worst case.

DeLong then suggests that income inequality is one of the chief reasons we haven’t seen a more robust policy response, as high-earners, who wield disproportionate political influence, have fared relatively well in recent years. There is something to this thesis, as high-earners, particularly college-educated, highly-ideological high-earners, are overrepresented in the social networks of elected officials, and the fact that they’ve fared relatively well might make them more risk-averse in assessing new policy initiatives. 

But it’s not clear to me that DeLong is right in his assessment of the past seven years:

When income inequality began to rise in the 1980’s and 1990’s, those of us who cut our teeth on the long march of North Atlantic history expected to see a political reaction. Democratic politics, we thought, would check the rising power of a largely parasitic economic over-class, especially if its influence caused governments to fail to live up to their commitments to provide full employment with increasing – and increasingly shared – prosperity. 

After all, in early-nineteenth-century Britain, growing inequality caused by the Industrial Revolution gave rise to movements for government regulation in the interests of the middle and working classes, and for a rebalancing of real incomes away from rich landlords. Similarly, the Great Depression produced enormous political pressure for reform and change (often for destructive and dangerous change, to be sure, but pressure nonetheless).

Why can’t America launch similar movements today? To the extent that this has become a valid question, most Americans should be as worried today about the quality of their democracy as they are about the inequality of their incomes.

First, it’s not at all clear that the top tenth and the top 1 percent of the income distribution, the groups DeLong (correctly) identifies as particularly politically influential, constitute “a largely parasitic economic overclass”; this might be a reasonable, or at least defensible, description of some subgroup of rent-seekers, but most of the people who fall into these groups are productive upper-middle-income professionals, many of whom are part of two-earner households. That is, these people are often pretty morally appealing and difficult to caricature or demonize as members of a parasitic economic overclass, nor can it be targeted on grounds of linguistic or ethnocultural distinctiveness, a device that has been used by populists in other eras and in other societies. During the Depression era, many of the movements that pressed for “reform and change” drew on ethnonationalist resentments to achieve their political goals. Though U.S. high-earners are disproportionately white (and Asian), this constituency is still relatively diverse.

Second, it seems churlish of DeLong to ignore the Obama administration’s efforts to promote redistribution. Though some of these efforts, like the Making Work Pay tax credit and the Social Security payroll tax cut, have lapsed, due in large part to political resistance from Republican lawmakers focused on deficit reduction (arguably to a fault), others, like the Affordable Care Act, required an enormous investment of political capital, and which promise to have large and significant effects over time. Though Obamacare isn’t exactly being celebrated at the moment, its a key part of the center-left strategy to make the U.S. welfare state more redistributive in the years to come. One assumes that DeLong doesn’t believe that Obamacare is sufficiently redistributive, but that doesn’t mean that a significant segment of the U.S. political class backed Obamacare precisely because it aims to transfer resources from high-earners to low-earners, though of course these transfers flow through medical providers. Indeed, a more interesting left-of-center critique of the Obama era might be that it has generally chosen redistribution that benefits medical and other social service providers as well as the poor rather than redistribution that cuts out the middleman. And the reply to this critique could then be that redistribution that cuts out the middleman is either unpopular (not just with the affluent but with middle-earners who resent the prospect of programs that reward people who don’t work, or who don’t work much) or that it fails to secure the support of influential service providers who are a key part of the coalition for redistribution. In other words, it could be that while President Obama shares Brad DeLong’s basic worldview, he is constrained by political realities that necessitate rewarding rent-seekers. 

I agree with DeLong that America’s economic underperformance is a tragedy, and I am open to his implied suggestion that there were spending initiatives that might have helped mitigate it, though I am more inclined to favor Michael R. Strain’s jobs agenda than the center-left prescriptions I imagine DeLong favors. But is the problem inequality or a pervasive cynicism about the efficacy of government — a cynicism that is not limited to the affluent, and that isn’t obviously a product of the underfunding of social programs?

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