This is a follow-up rejoinder by Brookings Institution scholar and TDS Founding Co-Editor William Galston as a supplement to the joint American Prospect/Democratic Strategist forum, Progressive Perspectives on the Future of the New Deal/Great Society Entitlement Programs. It is cross-posted from the Prospect.
It would be neither edifying nor productive to respond in kind to Bob Kuttner’s critique. Instead, I’d like to identify some of the key analytical points that divide us, in the hope that focusing on them will elevate the debate.
But let me begin with where we agree. Kuttner points that that between 1973 and 2011, productivity soared while wages stagnated. It may surprise him and others to learn that this development is the focus of my most recent weekly column in the Wall Street Journal. I cite and discuss an OECD study showing that this trend has been pervasive throughout the developed world in recent decades. I advocate a new American social compact to close the gap between compensation and productivity, which I call the central economic challenge of our time.
Kuttner points out, again rightly, that beginning during the Great Depression and continuing after World War II, we forged a social settlement that restrained inequalities of wage and salary income. But here’s the problem: that settlement could be sustained only in the special circumstances that prevailed for the quarter century following the war. The U.S. economy was completely dominant, and almost as completely closed. U.S. firms depended on purchasing power in the domestic market, and they faced almost no international competition. In these circumstances, firms could raise wages and pass on the increased costs to consumers. And because our market was closed, increased household incomes raised demand for US products. Within a wide range, this system of negotiated wages and take-it-or-leave-it prices was not zero-sum but rather mutually beneficial.
Those days are gone, and they are not coming back. The arrangements that served us well in the post-war period are no longer workable. The challenge (which we have not yet begun to meet, intellectually or politically) is replacing them with new arrangements consistent with new realities, which include global markets and a post-industrial technological revolution that shows no signs of abating. ATMs have largely replaced bank tellers; automated counters are in the process of replacing supermarket checkout clerks; computerization makes it possible to produce steel with only a fraction of the labor input required a generation ago. We have a range of possible responses to these new facts. What we cannot do is ignore them or pretend that they are transient.
Another crucial issue is the relationship between spending on social insurance programs and on public investment. I pointed out the obvious: right now, the correlation of political forces has spared social insurance at the expense of basic research, education, job training, and infrastructure. When you get right down to it, Republicans won’t push to reduce Social Security and Medicare, and Democrats won’t fight very hard to preserve public investments. If President Obama’s 2013 budget had been adopted with no changes, we would be on track to the lowest level of domestic discretionary spending–out of which public investments are financed–since at least 1947. The recent budget agreement, which loosens restraints on discretionary spending for the next two years, does nothing to change the longer-term trajectory. I’m not alone in thinking that this path endangers our future.
Kuttner thinks I’m naïve for suggesting that changes in social insurance programs consistent with the principle of progressivity would free up needed resources for public investments. I’m not in favor of leaving this to chance; it would have to be negotiated. And if it couldn’t be, I’d walk away from the table. I’ll leave it to readers to decide whether Kuttner’s alternative–do more of everything and finance it with huge tax increases–is more or less realistic than mine.
In the end, Kuttner and I agree (I think) on a core proposition I articulated: In the absence of much more vigorous economic growth the fruits of which are widely shared, the United States will find it increasingly difficult to sustain the arrangements that assist the poor and vulnerable and secure a decent retirement for elderly Americans. Nearly five years after the official end of the Great Recession, unemployment remains elevated, long-term unemployment is shockingly high, workers’ compensation is stagnant, and household incomes languish below the level of the late 1990s. If we can’t figure out how to do better than this, the debate that Kuttner and I are having will remain moot. That’s why serious discussion of social insurance and public investment must start by addressing the challenge of growth. Within this framework of shared ends, let’s argue about means. I’m confident that a discussion along these lines is more likely to lead to productive results.