The Great Recession and its aftermath shattered the policy consensus on economics. What would come next? It’s taken a while, but we’re witnessing the emergence of an important new vision.
Before the crash, complacent Democrats, whatever their disagreements with their Republican peers, tended to agree with them that the economy was largely self-correcting. The Federal Reserve possessed the tools to nudge the economy to full employment, they thought. What’s more, government programs, while sometimes a necessary evil, were likely to be an inefficient drag compared with the private market. Inequality was something to worry about, sure, but hardly a crisis, and policies were correspondingly timid and market-focused.
But there’s been a quiet revolution in thinking about economic issues — at least on the left. Call the developing consensus the "new liberal economics." Emerging from a wide range of academic research, popular writing, and activist energy, it reflects an economic liberalism that is both more comprehensive and self-confident than what was produced during the era of conservative dominance. Yet it’s not a nostalgic throwback but a forward-looking set of ideas and policies building out of the failures of the old paradigm.
The Democratic primary, and now the general election, have provided a sense of the degree to which the policy baseline has been reset. The shift is evident in the way Hillary Clinton has not only engaged with these ideas but incorporated them into her platform.
The new liberal economics makes several claims:
- Inequality is not a regrettable but inevitable byproduct of an efficient economy, nor a temporary, self-correcting trend. It’s driven by policy choices, and new choices can make a difference.
- The economy will not simply bounce back from any weaknesses, as was assumed under Alan Greenspan’s Great Moderation. Rather, there are deep structural problems that include a global savings glut and unwillingness by US companies to make investments.
- "Nudging" the private market is not always the best way to deliver core goods and economic security. Deploying government services directly can be more effective.
Inequality is a choice
The clearest indication that something has changed is the new conception of inequality. An older consensus saw the rise of the top 1 percent of income earners as driven by market forces and technology. Inequality wasn’t anything to worry about, and might even have been helpful (by encouraging people to work harder, to climb the ladder). To the extent that a rise in inequality was sustained, it would gradually decline as new markets matured. Efforts to push back against these trends would punish workers by dragging down the overall economy.
Now inequality research is all the rage, and a new culprit is becoming clear: The rules of the economy, meaning the regulatory, legal, and institutional frameworks that underpin our markets, are a major driver of inequality. Since the 1980s, there have been a series of changes to these rules, and the result has been greater inequality with no extra growth as recompense.
We see this in research that finds that the top share of income has historically been driven by changes in top tax rates, and in other studies that show the mighty growth of incomes in the financial sector correlates closely with an increase in financial deregulation.
We also have learned that power inside the workplace matters for inequality. Not only has union membership declined from 30 percent of workers in 1960 to 11 percent today but market structure changes have led to skyrocketing CEO pay, to shareholders exerting more short-term pressure, and to firms reshaping themselves to avoid labor laws. When the law creates incentives to shed full-time workers with benefits for contract workers and create huge windfalls for bosses and owners, why be surprised when companies do just that?
One of the big takeaways in Thomas Piketty’s much-discussed Capital in the Twenty-First Century was that deep gulfs of inequality are the historical norm, and the relatively low inequality of the mid-20th century was in fact an anomaly. There is no reason, in other words, to assume inequalities will flatten without policy changes.
The International Monetary Fund has also done research showing that there is no clear link between inequality, redistribution, and growth among rich Western nations. So we know that smart efforts to push back on inequality and provide economic security won’t — as conservative economists love to argue — make us all poorer. Inequality, in sum, is a choice, and we can make a different choice.
There is growing realization that government action is the only reason poverty fell since the late 1960s, and likely the only reason it would fall again in the future. This recognition has spurred liberals to become much more aggressive in defending the winning parts of the war on poverty, which, properly measured, cut poverty by 40 percent. There’s been a renaissance for the minimum wage in terms of cutting-edge research and activism. The debate is now not whether it should rise but how high it should go.
People don’t care about inequality per se, though. Conservatives are right about that much. They do care about fairness, which is why an emphasis on challenging unearned profits and massive, unearned salaries has become more central to the liberal agenda. Some of the big energy here has been expended on pursuing broader financial regulations and higher taxes on the rich, and on tackling monopoly, as concentration and persistently high profits are becoming the norm.
Fighting structural barriers to full employment
For the two decades before the Great Recession, the core argument driving the economy was that we were in the middle of a "Great Moderation." The elite consensus held that the Fed was capable of stabilizing the economy, no matter the headwinds, so its actions weren’t a political priority for liberals. Therefore, worries about demand and investment were replaced with worries over balanced budgets.
The elite consensus also assumed that the labor market basically worked for people who really wanted jobs and who had acquired a reasonable set of skills. Thus, weak median income growth had to be the result of people lacking the right education and motivation.
But the Great Recession exposed the absurdity of the Great Moderation. The Federal Reserve has consistently floundered in getting the economy back on track, and in getting inflation where it wanted it to be. (It has not yet succeeded.)
But the consensus was weakening even before that. The income returns to college have not increased for 10 years. Instead, highly skilled workers are taking over less-skilled occupations and facing weakening career trajectories. People are seeing their ability to move between jobs diminish even as their wages collapse. Black Americans, in particular, have suffered during these periods of weak demand.
In the wake of the crisis there’s a newer demand-side politics, one that's focused on whether the labor market is tight enough to give workers real raises, whether private firms can make the investment necessary to grow the economy, and what the government can do to keep the economy out of recessions. Joblessness and weak income growth is seen less as an individual failure and instead a market-wide one.
Liberal economists are debating the causes of secular stagnation — the idea that excessive global savings are driving down demand so much that growth suffers and the economy remains stuck in neutral. The immediate agenda is a focus on sympathetic appointments to the Federal Reserve, fighting short-term financial pressures that prevent long-term investment, and coming up with creative ways to boost the overall economy.
"Full employment" is back in the Democratic platform
To make this concrete, consider the Democratic platform. A demand for full employment was in every Democratic platform from 1944 to 1988; then it was taken out in 1992, when the party nominated Bill Clinton. Activists, such as the "Fed Up" campaign, successfully fought to put it put back in this year’s platform.
In a speech this week in Chicago, Lael Brainard, a member of the Fed’s board of governors, discussed how there’s a "new normal" among Fed leaders – a fresh understanding of the risks of undershooting inflation, greater labor market slack, and lower interest rates. She contrasted this with the "old normal" that prioritized inflation and was less concerned with unemployment. Confirmed to her post in 2010, Brainard seems to reflect new thinking at the Fed. "The case to tighten policy preemptively is less compelling," she said.
This will play out in 2017, as the Fed debates raising rates even as liberals warn the economy is too weak to sustain such a move. More broadly, the new liberal economics holds that while the economy is still weak and the private sector doesn’t want to invest, the absolute best thing we can do is to build infrastructure while interest rates remain at historic lows — and not focus on reducing the national debt.
Public options to the rescue
The discredited old model focused only on using "nudges," especially in the form of tax credits, to encourage private market actors to carry out social goals. The idea was to keep government nimble. As Gov. Mario Cuomo summarized this position in the 1980s: "It is not government's obligation to provide services, but to see that they're provided."
Once again, this approach has hit a wall. Take, as just one example, the tax deduction that encourages people to invest in 401(k)s and other private retirement savings. Tax deductions are most beneficial to those with the highest tax burden, and nearly two-thirds of this value goes to the top 20 percent of earners.
It’s not even clear that the deduction encourages people to save. Studying a similar program in Denmark, the economist Raj Chetty and others found that such programs only encourage rich people to shift the way they save to pay less in taxes without actually saving any more, and have virtually no impact on poorer savers. In embracing 401(k)s over other kinds of retirement policies, we’ve ended up with a regressive policy that doesn’t even accomplish what it sets out to do.
This problem, writ large, is why liberals see a bigger role for "public options" — government programs that compete with private ones. This is on display in the campaign activists have waged to expand Social Security, for example. The focus on expanding a public program that works and is popular, rather than trying to force through more private subsidies, is a big conceptual shift.
The trend extends to other public policies. In January 2015, President Obama announced a plan to make public community colleges tuition-free – making them an even more attractive option for people considering private (or for-profit) colleges.
Public options can also contribute to family security. Liberals in the Senate, led by Sen. Kirsten Gillibrand (D-NY), have focused on the FAMILY Act, which would create 12 weeks of paid leave for both men and women, funded by a broad-based tax. Instead of trying to nudge employers to provide paid leave, it would be required and funded by taxpayers, like Social Security but for new parents.
Hillary Clinton has adjusted to the new economic realities
President Obama was caught in the middle of these changes. Though his presidency evolved to embrace much of them, the foundations of his approach were rooted in the old regime. Hillary Clinton is the first Democratic nominee to have to put forward a new agenda in light of the Great Recession and the policy revolution, and her agenda energetically incorporates these ideas.
On inequality, her proposals build on Dodd-Frank and seek to regulate financial activities more broadly. She would increase taxes on top earners, building on Obama’s successful efforts to push back on after-tax inequality with his 2013 tax increases on the rich.
Somewhat under the radar is Clinton’s focus on "steps to stop corporate concentration in any industry where it’s unfairly limiting competition," while also preventing "concentration in the first place by beefing up the antitrust enforcement." She has specifically mentioned high-speed broadband, airlines, and pharmaceutical companies. In the aftermath of the EpiPen price hikes, Clinton announced an expansive plan to tackle rents — unearned unjustifiable profits — in drug prices.
When it comes to investment and full employment, Clinton herself has said that she will "also defend the Fed's so-called dual mandate," including full employment, with her appointments. Clinton has highlighted short-term financial pressures blocking long-term productive investment in innovation by calling out "quarterly capitalism," the obsessive focus on quarterly earnings reports.
She has resolutely ignored deficit hysteria throughout the entire campaign, instead proposing a $275 billion infrastructure plan, though there will be debate over whether it is debt-financed or not. New infrastructure bonds would be just what a jittery market needs, though Clinton hasn’t yet embraced a new debt package to fund it this way.
Her embrace of the new liberal economics certainly extends to public options. She is on board with the plan to build on Social Security, proposing an expansion for poorer retirees, particularly widowed women, and she has drawn a sharp line against any cuts to the program as it currently exists.
Within a year and a half of President Obama’s community college plan – under pressure from primary challenger Bernie Sanders — Clinton announced a plan to make all public colleges free for families making under $125,000, a complete shift from the old regime of simply subsidizing college admissions.
And on a subject that has long been one of her specialties, Clinton has called for a public option in the health care exchanges – a Medicare-like alternative that would compete with private insurers, or replace them if those insurers withdrew from certain markets. Such an option would ensure a baseline of quality, cost control, and access.
It’s clear that family security will be a focus for Clinton. She strongly supports paid family and medical leave, and her initial transition team has appointed Heather Boushey, the head of the Center for Equitable Growth and a longtime proponent of policy efforts to ameliorate work-life conflicts, as its chief economist.
Republicans stick with the old Kempist playbook
Agree or disagree with them, all of Clinton’s policies add up to a coherent view of the modern economy and the challenges it places in the path of many Americans. Of course, it remains to be seen how closely she will hew to this agenda if elected.
But Republicans, in contrast, have yet to really face up to changes in the economy in the aftermath of the Great Recession. Mitt Romney’s 2012 plan to fix the economy was famously identical to John McCain’s pre-crisis plan of 2008. The mix of Kempism, austerity, and favorable taxes and regulations for businesses that characterizes Paul Ryan’s ideas seems out of place in 2016. Trump’s agenda of mercantilism and a chauvinistic welfare state is a genuinely new agenda, but it is unclear to what extent it will take hold in Republican politics.
The new liberal economics is still evolving. There are many contradictions, gaps, and different points of emphasis. It still is far from declaring that the state should be much bigger and we should all pay into it more, as people like sociologist Lane Kenworthy argue. How it incorporates the demands of policy-focused activists like the Movement for Black Lives and the DREAMers will be crucial for building a broad-based movement.
But change happens slowly and then suddenly all at once. The nature of liberal economics was no doubt going to evolve in the wake of the Great Recession and an increasingly unequal economy. Hillary Clinton is the first to propose a new agenda in light of this. How well a President Clinton continues to center this agenda will determine its fate. But for now, ideas have consequences, and the people with the exciting ideas trying to address our current situation are on the left.
Mike Konczal is a fellow with the Roosevelt Institute, where he works on financial reform, unemployment, inequality, and a progressive vision of the economy. He blogs at Rortybomb, and you can find him on Twitter @rortybomb.
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