The Real Fight Starts after the Stimulus is Enacted
The real stimulus debate hasn't even started yet. Congress will pass President Obama's stimulus package in the next two weeks, more or less as he wants it. The House has already done its part, and the Senate appears likely to follow suit. But when the economy starts to turn up again, perhaps as early as next year, the president will have the real tough decisions to make. He'll have to choose which spending will continue -- or whether any of it will continue at all.
Sixteen years ago, Bill Clinton came to Washington with his own ambitious plans to reverse widening inequality, rebuild the nation's crumbling infrastructure, create an efficient and affordable healthcare system and address the growing environmental crisis. But because of raging budget deficits and a towering national debt, he was unable to accomplish most of this. As his secretary of labor, I shared his frustration. Alan Greenspan, then Federal Reserve chairman, and most of Wall Street warned that the nation couldn't afford the risk of runaway inflation.
Some aspects of Obama's stimulus package look eerily familiar to me, although the price tag is far higher than Clinton ever dared imagine. Yet today, economic advisors across the political spectrum support Obama's plan. A few weeks ago, Martin Feldstein, Ronald Reagan's chief economist, told Congress that the stimulus should be $800 billion. (Although he apparently has quibbles with exactly how that sum will be spent, he's not taking issue with the total amount.)
The biggest difference between Clinton's original agenda and the public investments Obama is proposing is that Clinton came to office as the U.S. economy was emerging from a recession; Obama is facing the worst downturn since the Great Depression. Even fiscal conservatives concede that when consumers stop buying and businesses stop investing, as they are now, the government must step in as the buyer and lender of last resort.
But the moment the economy appears to be on the mend, conservatives such as Feldstein will want the government to cut spending. In their view, this is the only way to get the economy fully back on track. But others believe that it is precisely the track we were on that got us into this mess in the first place.
Those who support the stimulus as a desperate measure to arrest the downward plunge in the business cycle might be called cyclists. Others, including me, see the stimulus as the first step toward addressing deep structural flaws in the economy. We are the structuralists. These two camps are united behind the current stimulus, but may not be for long. Cyclists blame the current crisis on a speculative bubble that threw the economy's self-regulating mechanisms out of whack. They say that we can avoid future downturns if the Fed pops bubbles earlier by raising interest rates when speculation heats up.
But structuralists see it very differently. The bursting of the housing bubble caused the current crisis, but the underlying problem began much earlier -- in the late 1970s, when median U.S. incomes began to stall. Because wages got hit then by the double-whammy of global competition and new technologies, the typical American family was able to maintain its living standard only if women went into the workforce in larger numbers, and later, only if everyone worked longer hours.
When even these coping mechanisms were exhausted, families went into debt -- a strategy that was viable as long as home values continued to rise. But when the housing bubble burst, families were no longer able to easily refinance and take out home-equity loans. The result: Americans no longer have the money to keep consuming. When you consider that consumers make up 70 percent of the economy, the magnitude of the problem becomes apparent.
What happened to the money? According to researchers Thomas Piketty and Emmanuel Saez, since the late 1970s, a greater and greater share of national income has gone to people at the top of the earnings ladder. As late as 1976, the richest 1 percent of the country took home about 9 percent of the total national income. By 2006, they were pocketing more than 20 percent. But the rich don't spend as much of their income as the middle class and the poor do -- after all, being rich means that you already have most of what you need. That's why the concentration of income at the top can lead to a big shortfall in overall demand and send the economy into a tailspin. (It's not coincidental that 1928 was the last time that the top 1 percent took home more than 20 percent of the nation's income.)
Other structural problems are growing as well. One is climate change and our dependence on oil. Another is the United States' growing reliance on foreign capital, mostly from China, Japan and the Middle East. Neither is sustainable.
Meanwhile, our broken healthcare system drains more of our dollars yet delivers less care. When President Clinton tried to tackle healthcare in 1994, it represented 14 percent of our GDP, and 38 million Americans were uninsured. Now, the nation spends 16 percent of its GDP on health, and about 44 million of us are uninsured. Most cyclists acknowledge these problems, but they tend to think of them as separate from the current crisis -- issues to be tackled after the economy has recovered, and then only to the extent that we can afford to do so.
But structuralists like myself don't believe that the economy can fully recover unless these underlying problems are addressed. Without policies that put the nation on the path to higher median incomes, higher productivity, renewable energy and a more accessible and efficient healthcare system, we'll face deeper and more prolonged recessions, followed by ever more anemic upturns. Bill Clinton's inability to do enough about these problems in the 1990s, followed by George W. Bush's negligent disregard of them, allowed them to grow to the point where any major triggering event can cause a vicious downward spiral.
As early as next year, the business cycle may hit bottom and begin climbing. At that point, cyclists and structuralists will want two different things -- and which side the president chooses will be, as Will Marshall of the Progressive Policy Institute puts it, the "central drama" of the Obama administration. The president recently sought to placate the cyclists by promising to focus on controlling the future costs of Social Security and Medicare. Perhaps Obama has in mind a "grand bargain" that would allow him to continue his structural agenda after the business cycle turns upward in return for limiting spending for those two giant entitlement programs.
Let's hope he has something more in mind, something more fundamental: a debate about public investment and sustainable growth. For structuralists, the size of the federal debt itself is irrelevant. Debt has to be considered in proportion to the economy as a whole. According to government projections, the national debt will exceed half the nation's gross domestic product by the end of this year -- not including the stimulus package. That's certainly high, but not close to a record. The debt was far more than 100 percent of GDP at the end of World War II. That mammoth debt, not incidentally, put Americans back to work, financed industrial production, underwrote a new generation of science and technology and created a wave of demand for consumer goods when the war ended. In short, it got the economy on a new and faster track, thereby allowing the United States to pay down the debt and ushering the country into a new era of widely shared prosperity.
Even a high ratio of debt to GDP isn't especially worrisome if much of that debt comes from investments that put the economy on a path toward solid growth. One recent study from Columbia Teachers College, for example, shows that cutting high school dropout rates in half would generate $45 billion in new tax revenues and savings on expenses such as welfare and incarceration.
We cannot assume, however, that gains from these sorts of public investments will grow the economy enough to reduce the relative size of future debt. We must consider the tax code's structure as well. Should marginal taxes be raised on the most affluent? That could help finance what must be done to put the economy on a sustainable growth path.
But I don't think that our new president should wade into this debate right away. He has his hands full. He needs to implement the stimulus package and reverse the downturn. Bill Clinton had to choose sides almost right away -- and had little choice but to cave in to the cyclists and forfeit most of his long-term economic agenda. The severity of the current crisis gives Obama more time.
But he will need to open the larger debate sooner rather than later. This downturn is revealing the U.S. economy's underlying flaws. Once the business cycle turns up, the public and its representatives may be less inclined to tackle the things that truly drag us down. Clinton was, after all, reelected in 1996 on the wave of a cyclical upturn in the economy. But the structural problems that he failed to address -- widening inequality, sagging median incomes, a broken healthcare system, crumbling infrastructure and global warming -- are that much larger now, making the current crisis all the worse.
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