January 31, 2012
President Obama’s State of the Union address was largely devoted to explaining the administration’s plans to provide a more secure economic future. As president Obama made clear is his speech and in his follow-up along the campaign trail, a key part of the administration’s strategy is to revive manufacturing in the US.
At first I was skeptical that this could work. But it does appear that an outsourcing reversal is underway, and that production costs in China and other countries will increase as their development progresses. This will reduce the advantages from offshore production, so perhaps there’s hope after all.
It’s certainly worth a try. Looking forward, if things remain as they are it’s difficult to see anything but struggles for the working class. We have rising inequality, stagnant or even falling incomes for most households, and declining “good job” opportunities due to offshoring and technological advances, particularly for those with just a high school education. The result is a “dangerous” decline of the middle class. I am often asked how to restore jobs that provide hope and opportunity, and like most economists, I mutter something about better education and hope for the best. But the truth is that economists do not have good answers to this problem.
However, we still need to do all that we can to create the conditions for positive change. How can we increase the chances of economic growth that will benefit all Americans, not just those lucky enough to be at the top? Here are some suggestions:
Don’t pick winners; instead create the conditions for winners to emerge: Manufacturing may be our best hope now, but it is not the only path to a better future. We need a strategy that creates the conditions for new, innovative firms of all sorts rather than focusing too much on any one area.
Support areas of excellence: Although we shouldn’t pick winners, that doesn’t mean we shouldn’t support areas of excellence once they emerge. Government should not lean against declining industries but there are times, as we learned with the recent bailout of the auto industry, when nursing important economic sectors through bad times can be beneficial.
Reduce inequality and increase opportunity so that winners can emerge from all strata of society: When some parts of society do not have equal opportunity, important potential is wasted. The more people that we have who are able and willing to discover new innovations or contribute in other ways, the better chance we have at discovering important sources of economic growth that benefit us all. Don’t let talent go to waste.
Provide the social insurance we will need to support the transition to a more secure future: If we want to make the transition to a new economy as smooth as possible, providing generous social insurance to those who will be asked to pay the price of change is essential. Workers are already fearful for their futures, and if things continue as they are or get even worse, severe social unrest is not out of the question.
As the economy recovers and we begin to take on the long-run deficit, social insurance programs will be an easy target. But cutting social insurance at a time of increasing turmoil and expecting the middle class – or what’s left of it – to take it silently is asking a bit much. We will grow wealthier over time, and we can afford to provide more insurance to displaced workers. If we fail to protect those who are vulnerable, the growing resistance to change will make it even harder to transform the economy.
Remove barriers to entry: The ability of new firms to enter industries is essential to achieving a robust, innovative, flexible economy. But entry hurts existing firms and they will attempt to block potential competition. For this reason, active enforcement of anti-trust laws – far more than we’ve seen in the recent years – is needed to ensure that the door is open for new ideas to be tried in the marketplace. In addition, though I don’t think overregulation is a problem generally, just the opposite, powerful firms often use regulations such as licensing laws to make it harder for new firms to enter. Barriers to entry, regulatory or otherwise, should be as low as possible.
Enhance technology, increase productive capacity, and invest in labor: Economic theory tells us that growth depends upon three things: growth in technology, growth in our productive capacity – including public infrastructure – and growth in the size and ability of the labor force. Education, while not the answer for everyone, is a big part of both discovering new technology and labor force ability and we need to do more to make education accessible to all.
Avoid setbacks: Recessions like we are experiencing set us back tremendously and we must do our best to prevent this from happening again. Increased oversight of the financial sector is an essential step toward this goal.
There's no guarantee that we will reach the promised land of good, middle class jobs, but if we don’t try we are much less likely to succeed. It’s imperative that we do all that we can to set the stage for a future that offers promise and opportunity for all, and to give those who are cast aside in our attempt to realize a more secure and prosperous future the social support that they’ll need.