Today the centre for American Progress released a 250-page report full of ideas to grow the economy with a “middle-out” approach focused on strengthening the middle class.
Many of the ideas in the report are bad.
They are too specific and have the government micromanage the economy too much.
The problems with the report fall in four main areas.
Overregulating the labour market: CAP endorses a variety of “pre-distribution” measures that are intended to reduce pre-tax income inequality. These include a drastically higher federal minimum wage, likely around $12 per hour (currently, it’s $7.25); rules that would encourage more workers to unionize; and requirements that firms provide paid sick leave and, in many cases, severance payments to terminated workers.
Combined with another employer requirement coming next year — the requirement in Obamacare that employers must provide health insurance to full-time workers to or pay a penalty — these ideas would significantly increase the cost of employing low-skill workers at a time when unemployment is already high.
A modest increase in the minimum wage (say to $9) is probably a good idea. Existing studies do not give us a basis to assume a rise to $12, plus other rules that raise the cost of employment, wouldn’t drive up unemployment.
Meddling in business investment decisions: CAP urges the creation of a cabinet-level “Department of Business” that would oversee programs to subsidise and otherwise support favoured economic sectors. The conceit here is that the economy suffers not just from overall underinvestment but a misallocation of capital that can be fixed by having the government pick winners and losers.
CAP would have the government support firms that private capital markets won’t because their activities are “not yet commercially viable.” They would also have the U.S. subsidise industries to compete with foreign subsidies — the same logic that has led to U.S. states shoveling billions of taxpayer dollars down the maw of the film industry. And they would have the government financially support “temporarily” troubled industries.
These kinds of interventions can occasionally be justified as second-best solutions (solar subsidies because a comprehensive climate policy is politically impossible) or responses to highly unusual and exigent circumstances (the banking and auto bailouts of 2008-9).
But the government’s overall track record as venture capitalist / economic micromanager is not good. Instead, policymakers should focus on creating the conditions for broad economic growth and capital formation and let private markets allocate capital.
Making questionable new public spending decisions: The report calls for a big, new federal infrastructure spending problem and repeats the claim that the U.S. faces a big infrastructure deficit. But our spending on infrastructure is already similar to our peer countries and our much-lamented bridges have actually been improving in recent years.
The real U.S. infrastructure gap is a cost gap: Big public construction projects cost way more here than they do in other countries. Why would we make a major new financial commitment to infrastructure before fixing the problem that we pay way too much for what we do build?
CAP also calls for a big new federal financial commitment to pre-kindergarten. The effectiveness of Pre-K is controversial and I don’t know the issue as well as infrastructure, but since the U.S. is already outspending every OECD country on K-12 education except Luxembourg, Norway and Switzerland, I am sceptical that net new federal education spending is needed.
Recommitting the federal government to the cult of homeownership: CAP laments the fact that higher lending standards and down-payment requirements are putting homeownership out of reach for many Americans. They urge more flexible lending standards, new programs to support home purchases by people with low and middle incomes, and a replacement for Fannie Mae and Freddie Mac that would retain a taxpayer backstop for mortgage lenders.
The idea that people of limited means should take most of their wealth and put it in one, highly-leveraged real estate investment — and that public policy should encourage them to do so — is a big part of how we got into the housing mess in the first place. I do not share CAP’s confidence that new financial regulations will prevent another credit bust that requires the use of the taxpayer backstop again.
Instead of finding new ways to subsidise people into homeownership, we should encourage Americans to get comfortable with the idea that there is no shame in being a renter.
So, what should we do instead? We should recognise that the problems with the American economy are largely at the macro level and fixable through macro-level solutions.
In 2008, we suffered the collapse of a real-estate bubble that led to a crisis in the banking sector. The proper response to this has been better regulation to discourage speculation, reduce leverage at both the homeowner and financial institution level, and ensure risk does not get shifted to taxpayers.
Since the recession of 2009, recovery has been poor. This has been largely because the federal government has not provided sufficiently stimulative fiscal and monetary policy. The solution is to stop making that mistake.
The recovery has also been hindered by lingering household debts from the housing bust, which should be fixed through more aggressive mortgage modification programs.
Over the longer term, we are dealing with increased economic polarization. Wage growth over the last four decades has not kept pace with economic growth, the returns of which have accrued mostly to people in the top income quintile and especially the top 0.5%. The principal fix to this is to levy more progressive taxes and use them to finance transfers to people with moderate and low incomes.
The CAP report contains recommendations to address many of these problems. Those recommendations are mostly fine, though ought to have talked about monetary policy.
Also, like CAP, I do see structural problems in the American economy that require policy changes beyond broad fiscal and monetary policy, financial regulation, and mortgage relief. The difference is that my changes would focus on deregulation, instead of CAP’s prescription of new regulations and new federal programs.
Markets in health care and education are dysfunctional, which has led to rapidly rising costs without improvements in quality. Reforms here should involve a mix of regulatory and market solutions that focus on holding providers accountable for quality. (In part, this is reflected in the CAP report.)
Local governments should ease their regulation of land use, which currently drives up the cost of housing, especially in the parts of the country where productivity is highest.
States and localities should reduce occupational and business licensing requirements that create barriers to entry and drive up the cost of services.
Protections for intellectual property should be weakened so that useful inventions can be used more widely and firms are encouraged to spend more time innovating and less time suing each other over patents.
Governments at all levels should ease the infrastructure cost gap by (among other reforms) streamlining approval processes, repealing the Davis-Bacon Act, repealing “Buy American” requirements that force us to overpay for infrastructure components, improving competitive bidding processes, and saying “no” to white elephants.
These changes would grow the economy, lower the cost of living and make government more efficient. And they would avoid involving the government in economic decisionmaking that is best left to the private sector.