B005HFI0X2 EBOK (54 page)

In promoting American manufacturing, the United States, in the future as in the past, within the limits of trade treaties that can always be amended or ended, will have a variety of methods to choose from, ranging from public ownership and tax incentives to regulations such as tariffs, quotas, and domestic-content rules. Clay’s American System used tariffs to protect American infant industries, but Hamilton preferred bounties, or subsidies, on the grounds that their cost was spread over the tax-paying population as a whole, instead of falling solely on consumers. Either method may be appropriate in particular cases and either method may be abused by special interests. Abuse, though, is not an argument against a manufacturing policy, any more than it is against any other government policy, including defense, which depends on the national manufacturing base.

From the foundation of the republic, American industry has been supported by government at every stage, from federally funded invention to early adoption with the help of military procurement and protection from foreign competition during development. The federal government subsidized early American aviation and performed aeronautic research to support it, while atomic energy, jet propulsion, computers, rockets, and satellites were invented and developed in government laboratories. Early steamships and radio networks benefited from initial government-granted monopolies, while automobiles benefited from tax-funded roads and highways. The government has built and turned over telegraph lines and factories built during wartime to private owners and has set standards of best practice for private enterprise, as the nineteenth-century federal arsenals did when they taught American businesses to use the arsenal system of interchangeable parts. The American states, and the colonies before them, have been even more involved than the federal government in American enterprise, in some cases wholly or partly owning their own banks, canals, and railroads.
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Government in America has never been limited to enforcing property rights, educating workers, and acting as an impartial umpire in competitive markets. Industrial policy is not alien to the American tradition. It is the American tradition.

THE NEXT AMERICAN SYSTEM: INFRASTRUCTURE

In the decades ahead, the United States needs to spend more money on infrastructure, merely to maintain the roads, railroads, airports, power lines, and water systems that have already been built. Unlike in earlier generations, when it was clear that a particular kind of infrastructure needed to be built out—canals, railroads, interstate highways, and rural electric grids—today there is no national consensus about the next American infrastructure.

In recent years many urban intellectuals and politicians in the dwindling downtowns of America have favored mass transit, high-speed rail, and renewable energy, out of a mixture of self-interest and idealism. But fewer than 4 percent of Americans commute using mass transit each day. It is wishful thinking to hope that the automobile-centered society that took shape in the twentieth century will somehow give way to pedestrian villages connected by mass transit in the twenty-first. High-speed rail might be justified in a few dense regions like the East Coast, but in most of the country it is not a plausible alternative to intercity travel by airplane or bus. The unexpected abundance of natural gas made possible by fracking means that natural gas pipelines are more likely to be in demand that high-voltage lines carrying energy from solar panels that carpet the southwestern desert or vast arrays of windmills.

A more likely scenario is the automation of otherwise conventional automobiles and airplanes. The Defense Advanced Research Projects Agency (DARPA), which in previous generations contributed to the development of the computer and the Internet, has done pioneering research in “robocars,” which has been built on by Google and companies and universities around the world. The chief barriers to the automation of transportation will be legal and psychological, not technological. Another possibility is telecommuting, which may finally live up to its long-prophesied potential.

Both a transition to automated vehicles and a partial shift from commuting to telecommuting would require infrastructure investment on a grand scale. Like other capital projects, infrastructure should be paid for by borrowing—for example, by means of a federal infrastructure bank. The present federal system of funding infrastructure chiefly through the highway trust fund, which has become a slush fund allowing members of Congress to “earmark” pet projects, needs to be rethought and replaced.

THE NEXT AMERICAN SYSTEM: FINANCE

The fourth element of a new American System, financial policy, should support the previous three. One component should be an expanded system of public purpose banks, like an R&D bank and an infrastructure bank, which can tap large amounts of private capital for public investment to increase the productivity of the American economy.
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Successful public purpose banks have a long and successful history in the United States. They include not only the Reconstruction Finance Corporation, which was abolished after World War II, but also the Farm Credit System and the Home Loan Bank System. The worst failures were Fannie Mae and Freddie Mae. But those two government-sponsored enterprises (GSEs) failed not because they were public but because they were compelled to act like profit-maximizing corporations instead of public utilities. Free-market ideology was responsible for the privatization of Fannie Mae and the creation of Freddie Mac as a would-be competitor. Ginnie Mae, which remained a government corporation, did not engage in similar profit-driven risk taking. Nor did the Federal Home Loan Bank system, which, like the Farm Credit System, is a nonprofit cooperative, owned by risk-averse member banks. The lesson of the Fannie/Freddie debacle during the housing bubble and subsequent crash is not that public financial institutions are a bad idea, but rather that they work only when they are organized as nonprofit government corporations or public-private cooperatives.

In addition to creating new public-investment banks, Americans need to create a replacement for the dysfunctional American financial system, in which “too big to fail” financial institutions reap huge profits from highly leveraged gambling when they succeed, while their losses are socialized by the taxpayers when they lose their bets.

Because the system of financial regulation created by the New Deal created several decades of financial stability before it was dismantled in the late twentieth century, many seek to turn back the clock to the mid-twentieth century. But that would be a mistake. The purpose of New Deal financial reform was not simply to stabilize the financial system, but also to preserve small local banks from interstate and even intrastate branch banking. In other nations during the same decades, like Canada and Australia, major financial crises were also rare or absent, even though their banking systems were organized as national oligopolies with a handful of big banks.

What matters is not the size of the banks but the absence of a toxic mixture of competition for market share with explicit or implicit government insurance. Problems arose in the United States when deregulation gave banks, savings and loans, and other financial institutions opportunities to compete for market share and high profits, while pressure from shareholders compelled them to do so. In other words, banking is an industry, like railroads, airlines, and telecommunications, in which “ruinous competition” can be the problem and in which restraints on competition can be the cure.

In the first few years of the Great Recession, however, the most popular proposed reforms were inspired by ideas that assumed that the solution involved more competition, not less. On the right, libertarians failed to recognize the utility-like nature of massive, interconnected financial institutions such as megabanks by arguing that they should be allowed simply to go bankrupt periodically, as though they were corner umbrella stands. On the left, many progressives naively called for breaking up big banks into little banks, without understanding that the small-bank system of the New Deal era worked only because of the anticompetitive limits on branch banking. If big banks were broken up but mergers and branch banking were still allowed, then a few megabanks would soon grow by devouring their rivals, defeating the intent of the reform. And if megabanks were allowed to engage in risky behavior, as long as the government did not bail them out when they failed, then their periodic collapses could bring the economy down with them.

A better approach would be to focus on functions, walling off casino banking from utility banking and redefining investment banking. Proposals to revive the Glass-Steagall separation of commercial and investment banking make sense, even if other elements of the New Deal system are anachronistic. In addition, a modest financial transaction tax, or Tobin tax, which would hardly be noticed by most individuals and businesses, could raise large amounts of revenue, while discouraging the diversion of capital to unproductive, high-frequency speculation.

As in the past, merchant banks or investment banks could specialize in connecting capital with promising investment opportunities. The utility functions of banks, such as small savings accounts, deposits, and payments, might be assigned to banks that are designed as boring, low-profit utilities, whether they are publicly owned or privately owned, but highly regulated. Utility banks would resemble other utilities, like water and electricity, and other than tradition there is no reason why they should not be regional or national monopolies, with fees set by utility-regulatory commissions in the interest of the public. In other countries, public postal savings banks provide basic financial services, and the United States had its own postal savings system from 1910 to 1967. The American postal savings bank could be revived, as a low-cost national public bank for small savers and ordinary transactions.
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In the words of Alexander Hamilton: “Public utility is more truly the object of public banks than private profit.”
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HOW MALDISTRIBUTION OF INCOME AND WEALTH THREATENS THE ECONOMY

A new American system, if it is successful, can increase the productivity of the US economy in the generations ahead. But productivity-driven economic growth by itself is not enough. The gains from growth must be widely shared among the citizens of the American republic.

The maldistribution of income and wealth that has occurred in the United States since the 1980s should not have come as a surprise. What else could one expect to happen, once unions were crushed, the minimum wage was reduced by inflation, labor markets were flooded with low-wage immigrants, taxes on the rich were dramatically lowered, and salaries and stock options for corporate executives were raised to obscene levels?

Apart from their tendency to fray the social fabric of a democratic republic by diminishing the middle class, extreme concentrations of income and wealth are undesirable for purely economic reasons. Modern technology-based industries benefit from increasing returns to scale, which in turn are made possible by mass markets of middle-income consumers. Even the most profligate rich people tend to spend less of their incomes on consumption than the thriftiest poor do out of necessity. As Keynes observed, the poor have a greater “marginal propensity to consume.”

When too much of the wealth of a nation or the world is channeled to too few people, industries are starved of the mass demand they need to keep running or to expand. At the same time, the economy can be destabilized, when the rich try to become even richer by speculating with the money they do not consume or save. The series of asset bubbles the world economy has experienced in recent years—in housing, in stocks, and in commodities such as gold and energy—is a telltale sign that too much money is going to the rich, who use it to gamble on assets, rather than the middle class and the poor, who would have spent the money on goods and services generated in the productive economy.

The maldistribution of income is a global problem, not just an American one. While debt-led growth replaced wage-led growth in the United States in the 1990s and 2000s, on the other side of the Pacific investment-led growth replaced wage-led growth in China and other East Asian mercantilist nations. If every country tries to minimize wage costs, then global aggregate demand will be artificially suppressed, to the detriment of most of the world’s people.

THE NEXT AMERICAN MIDDLE CLASS

In a Fourth Republic of the United States that emerges from the wreckage of the Great Recession and its aftermath, a new American System should be complemented by a strategy for building the next American middle class.

The middle class in America, outside of the South, has always been in part a creation of economic engineering by means of laws and public policies. The first American middle class consisted of white yeoman farmers, who benefited from land reforms like fee-simple land sales and the abolition of primogeniture and entail, the banning of slavery from the northern states and territories, the Homestead Act that allowed farm families to purchase farms with their labor, and infrastructure projects sponsored by local, state, and federal governments that connected farmers with national and global markets.

The second American middle class was based on white male factory workers. Among the measures that sought to ensure married men would earn a breadwinner’s wage so they could support a homemaker wife and children were wages-and-hours regulations, government support for labor unions, and policies to create tighter labor markets by limiting immigration and removing convicts, children, and women from the labor force.

The third middle class was based in the service sector after World War II. Its members were office workers, a group that increasingly included women. Access to this new, suburban, service-sector middle class was enlarged first by compulsory public high schools and then by expansion of public colleges and universities and financial aid for higher education, including the G.I. Bill, student loans, and Pell Grants.