When Richard Nixon announced that we are all Keynesians now, stagflation was confounding liberal economists, and conservatives were about to take over the commanding heights. Similarly, when Bill Clinton announced that "the era of big government is over," economic conservatism was about to take us off the cliff. Now "the era of big government is over" is over.
Garry Wills says Americans think of government only as a "necessary evil," a last resort. Well, folks, all the other resorts are boarded up. In November, America shed more than 500,000 jobs, the worst single-month record in thirty-four years. We lost more than 2 million over the course of 2008–and the crash is accelerating across the globe. At the same time, America is falling apart, literally. We’ve witnessed the ghastly spectaculars: failure of the levees in New Orleans, collapse of the I-35W bridge in Minneapolis, bursting of the steam pipe that shut down ten square blocks of Manhattan. But these tragic catastrophes are a small part of the growing costs of a conservative-era failure to invest in our future.
Conservative scorn for government has produced a crippling public-investment deficit. America’s core infrastructure–roads, bridges, sewers, airports, trains, mass transit–is overcrowded, outdated and crumbling. The evidence, assembled by Eric Lotke in The Investment Deficit in America, issued by the Campaign for America’s Future, is stark. Poor road conditions cost Americans billions in repairs and countless hours in delay. Though China opens a new subway system every year, and Europeans travel from Paris to Frankfurt on high-speed rail, American railroads don’t have the funds needed even to maintain their outmoded infrastructure. Cities are suffering an epidemic of broken pipes and sinkholes, with the Environmental Protection Agency estimating more than 40,000 discharges of raw sewage into our drinking water, streams and homes each year from collapsing and overwhelmed sewage systems. The Education Department found that one-third of our schools are in such a severe state of disrepair that it "interferes with the delivery of instruction."
While the old basics are crumbling, twenty-first- century needs are being ignored. We maintain our addiction to oil while forfeiting our lead in renewable-energy technologies that will drive the green markets of the future. As two-income and single-parent families spread, we are failing to provide the high- quality childcare and pre-kindergarten programs vital to educating the next generation. Even as college or advanced training are deemed essential in the modern economy, more and more Americans find them priced out of reach. Our healthcare system is broken, consuming too many resources while providing care for too few. We invented the Internet, yet we rank about fifteenth among developed countries in access to broadband. In Japan, the average broadband speed is many times faster than our own. US federal investment in research and development is half what it was as a percentage of GDP in the 1960s.
It is time to invest in America. Recovery from this crisis provides the imperative; the investment deficit the targets. But turning the crisis into opportunity isn’t sufficient. The fundamental question is whether the short-term response will lead to a new New Deal, a permanent expansion of the social contract.
‘Substantial, Strategic and Sustained’
In December more than twenty union presidents, 120 economists and 100 progressive leaders, organized by the Institute for America’s Future (IAF), released a statement calling for a "substantial, strategic and sustained" recovery plan for Main Street. The alliteration was an intentional contrast to the "timely, temporary and targeted" stimulus bill passed by Congress this past February. That mantra led to a timid plan focused on tax rebates. With Americans reeling from the collapse of housing prices and the stock market, stagnant wages, increasing debt and growing pessimism, the rebates had little effect. Less than 30 percent actually went into spending, as consumers sensibly used the bulk of the money to pay down debt. A good portion of what they spent went to goods imported from China or elsewhere. "Wal-Mart gift certificates," as the Rev. Jesse Jackson dubbed the rebates, had only a marginal and temporary effect on the economy.
The recovery plan has to be substantial–much bigger than the $150 billion spent on tax rebates last spring. Nobel Prize-winning economists Paul Krugman and Joseph Stiglitz call for $1 trillion over two years; the IAF statement says the "floor" should be $900 billion over the same time span. The numbers floated for the Obama plan rise with each passing week as the downturn gets worse.
The reason is simple: government spending is the last resort. Interest rates are already near zero; in December fearful investors were essentially paying the Treasury interest to hold bonds. Consumers are cutting back; businesses are laying off workers and postponing investments. Exports will decline as the global economy turns down and the dollar moves up. States and localities are facing deep deficits and beginning to lay off police and teachers. The government is all that is left. The danger, as Krugman says, is that we’ll do too little rather than too much.
Many recognize the need but worry about the deficit, headed toward $1 trillion for 2008. But a $14 trillion economy won’t get the necessary boost from a small program. And with investors rushing to the dollar, the United States has no problem financing its ballooning deficits. Moreover, if the economy continues to sink, deficits will rise anyway, as tax revenue plummets and the costs of unemployment, welfare foreclosures and crime rise. Better to run the deficit of putting people to work than pay the price of their ruin.
The recovery plan should be strategic: spending on public works has a far greater effect on the economy than tax cuts. More money is spent; more jobs are created here rather than abroad. And if we invest in vital areas like energy, transportation and education, we can make a down payment on a more productive and competitive economy.
Finally, the recovery plan should be sustained. It will take a prolonged effort–two years is optimistic–to get the economy moving. Conservatives argue that New Deal spending failed to solve the Depression. In reality, Roosevelt’s program dramatically reduced unemployment until, eager to return to balanced budgets, he raised taxes and cut spending in 1937 and immediately sent the economy back into a tailspin, which ended only when the deficit-financed mobilization for World War II kicked in. Again, the greater danger is to stop too soon, not to continue too long.
The Political Moment
From all indications, President-elect Obama gets this. In his November 24 press conference announcing his economic team, he pledged to "do what’s required to jolt this economy back into shape." In his December 6 radio address, he committed to a bold recovery plan founded on strategic public investment to "help save or create" 2.5 million jobs "while rebuilding our infrastructure, improving our schools, reducing our dependence on oil and saving billions of dollars." Elements of the plan include a "massive effort" to make federal buildings energy-efficient, a project that would save taxpayers billions each year; the "largest new investment in national infrastructure since the creation of the federal highway system in the 1950s"; a "sweeping" program to upgrade and repair the nation’s schools; and a new push to extend broadband to every corner of the country. Aides have floated numbers as high as $800 billion over two years.
There will be pitched battles in Congress over the size and composition of the recovery plan, but it will move rapidly into law. Some conservatives have already begun to discover their suppressed Keynesian ids. Emil Henry Jr., an assistant treasury secretary under Bush, writes that "investment in key infrastructure is consistent with Reagan principles" and that investment in "renewable energy will be key in our future." Neocon William Kristol suggests that "small-government Republicans" are an endangered species and urges Republicans to support a "huge public works stimulus package," directing the dollars to the "underfunded defense procurement rather than to fanciful green technologies." (Apparently, spending about as much as the rest of the world combined on our military isn’t enough.) The rabidly antigovernment business lobbies– like the Chamber of Commerce and the National Association of Manufacturers–are climbing aboard the infrastructure bandwagon, their corporate patrons desperate for contracts.
Democratic majorities in the new Congress will make House Republicans irrelevant to the debate, which is a good thing, since minority leader John Boehner argues that tax cuts alone, particularly capital-gains tax cuts, will fix what ails us. Senate Republicans will have greater sway, but given the state of the economy it is hard to imagine even minority leader Mitch McConnell–the Senate’s Dr. No, who recently blocked aid to the struggling automakers–standing in the way of a massive recovery plan. Democratic Congressional leaders hope to have a plan ready for Obama to sign soon after he is inaugurated.
At the heart of this effort will be an expanded public sector making the necessary and strategic investments. An early emphasis will be on repairing existing roads and bridges, with immediate efficiency gains. Investment in a smart grid will accelerate the move to decentralized renewable energy. Retrofitting schools and public buildings will save energy and money. Computerizing medical records promises significant savings. Increasing Pell Grants will keep more students in college. As studies from the Minneapolis Federal Reserve show, investing in pre-K on the front side of life saves big time on the back side in lower crime, better health and lower dropout rates.
The New New Deal
Once the economy begins to recover, which may take much longer than people expect, we’ll face the real challenge: sustaining the expanded public investment as a centerpiece of the new economy we build out of the collapse of the old.
If the United States wants to retain a broad middle class in a global economy, it has little choice but to finance a public social contract–from healthcare to lifelong learning to pensions above Social Security– that will be vital to providing the security that families need to prosper. Expanded public investment– in research and development, twenty-first-century infrastructure and new energy–will be essential to sustaining a competitive high-wage economy. The new economy will also need several other building blocks: a new global economic strategy (see "Redoing Globalization" on page 30); a sensible industrial policy, beginning with a transition to new energy; an aggressive wage policy (providing living wages, empowering workers to organize, curbing executive plunder and fat bonuses) that helps distribute the benefits of profits and productivity gains fairly; and a reregulation of finance to make banking boring once more.
This broad transformation–a true new New Deal–entails a sea change in values and policy from the conservative era of the past thirty years. It will have to rally a public that yearns for greater security but is sensibly suspicious, after decades of conservative misrule, of the government’s capacity to do anything. One of the monumental challenges facing the Obama administration will be to create a government that works. A vastly expanded and revitalized public sector will require a permanent expansion of expenditures that, once the economy revives, can’t be funded by deficit spending. Most sensible economists agree that running a small fiscal deficit makes sense. So long as it is below the rate of inflation, the burden of our debt–its relation to the GDP–will continue to decline. But sustained expansion will require new resources that can come from a combination of new priorities and progressive taxes. Bring home the money squandered in follies like Iraq and reduce the flatulent military budget. Collect the $350 billion of taxes owed that the IRS estimates goes uncollected. Pass progressive tax reform, close egregious loopholes and simplify the tax code.
Is Obama ready to lead this broader fight? He’ll have to forget about the "postpartisan" era of good feeling that is all the rage. The creation of a new New Deal will be the mother of all battles. In order to transform priorities, he will have to take on entrenched special interests–epitomized by the iron triangle of the military-industrial complex. Gearing up new investments and progressive taxes will require heroic efforts to overcome conservative resistance in both parties and then to avoid squandering the money on local boondoggles. Putting the necessary shackles around the financial sector will challenge the power of Wall Street. A revamped global economic strategy will threaten multinationals like Wal-Mart that prosper from driving down wages across the world.
Obama should have little trouble rallying public support for a bold recovery plan. People voted for change, and they are terrified about the economy. Aid for Main Street rather than Wall Street will be widely applauded. But forging a new New Deal out of the crisis, developing a new social contract and a new global strategy, will be a central struggle of the next few years.
Progressives shouldn’t see this fight as a spectator sport. The New Deal we remember from Roosevelt–Social Security, the Wagner Act, the forty-hour week and fair labor standards–didn’t take shape in his first 100 days or in his first year in office. It came only as Roosevelt was preparing for re-election and dealing with a broad populist challenge–a growing and militant labor movement, Huey Long, the Townsendites and more. The threat they posed helped spur Roosevelt and persuade legislators to move on what became known as the second New Deal. Progressives should be pushing hard now, girding ourselves for the battle royal that can no longer be avoided.
About Robert L. Borosage
Robert L. Borosage is president of the Institute for America’s Future.
About Eric Lotke
Eric Lotke is research director of the Institute for America’s Future.