In the US, a domestic political shift from cosmopolitanism to nationalism, and from left-leaning metropolitan “elites” to right-leaning rural “populists”, seems, to many, to be under way. The prevailing economic ideology is also shifting, from a redistributive, regulatory corporatism to something like the old interventionist corporatism.
Disaffected voters are behind both changes. For decades, Americans believed that they were riding a magic carpet of economic growth, owing to advances in science and, later, to the rise of Silicon Valley. In fact, growth in total factor productivity has been slow since the early 1970s. The 1996-2004 Internet boom was only a fleeting departure from the trend.
Over time, as businesses have cut back on investment in response to diminishing returns, growth in labour productivity and hourly wages has slowed, and workers in many households have dropped out of the workforce.
This is the “secular stagnation” that the economist Alvin Hansen once described. It has not particularly affected established wealth, because ultra-low interest rates have led share prices to skyrocket. But a sizeable proportion of the public has become exasperated with government leaders who seem to have other priorities than restoring broad-based growth. Some commentators are even concluding that capitalism has run its course, and that the economy will now end at a relatively stationary state of capital saturation.
In fact, since 1970, aggregate labour compensation has grown only a little more slowly than aggregate profits, and average wage growth at the bottom of the income scale has not slowed relative to the “middle class”. But the average hourly compensation of private-sector workers (production and non-supervisory employees) has grown far more slowly than that of everyone else. And the male labour-force-participation rate has declined significantly relative to that of women. In 2015, the share of manufacturing in total employment was just one-quarter of its level in 1970.
Manufacturing job losses in the Rust Belt have left predominantly white working-class men with a standard of living little better than their parents had. For many years, particularly in Appalachia, they have felt that society has shown them little respect. They can no longer fill an important role in their family, community, or country, and the perception that high earners are not paying their fair share, while others receive benefits without working, magnifies their sense of injustice.
In determining an appropriate response to this problem, we should first consider the underlying causes of Western stagnation. Hansen, in a 1934 paper, wrote that “secular stagnation is caused by the lack of new inventions or new industries”; and, as I show in my book Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge, And Change, American innovation first began declining or narrowing as far back as the late 1960s.
By that time, America’s innovative spirit—the love of imagining, exploring, experimenting and creating—had been weakened by a corporatist ideology that permeated all levels of government and replaced the individualist ideology upon which capitalism thrives. While private ownership remains extensive, the government now exerts control over much of the private sector. A private actor with a new idea often needs government approval to start up; and firms that enter an existing industry must compete with incumbents that usually already have government support.
To revive innovation, we need to change how business is done. The Donald Trump administration, for its part, should focus on opening up competition, not just cutting regulations. Unfortunately, this has not been Trump’s focus so far: He has rarely mentioned innovation, and his team is considering a dangerous approach that could actually undermine it.
For starters, Trump blames trade, rather than lost innovation, for the plight of US workers. To be sure, some very able economists seem to share this assumption. But while traditional “innovation nations” such as the US, UK and France have experienced large declines in male labour-force participation, participation rates have actually increased in “trading nations” such as Holland and Germany. This suggests that lost innovation is the main culprit.
Second, Trump is assuming that supply-side measures to boost after-tax corporate profits will raise incomes and create jobs. But such an approach could also lead to an explosion of public debt and ultimately precipitate a deep recession.
Finally, and worst of all, Trump thinks that bullying corporations, such as Ford and Carrier, and aiding others, such as Google, will boost output and employment. This is an expansion of corporatist policy the likes of which have not been seen since the fascist German and Italian economies of the 1930s. If this thinking persists, there will be more interference in the business sector to protect incumbents and block newcomers. This will clog the economy’s arteries, most likely preventing far more innovation than it stimulates among the established insiders.
Policymakers must wake up to the dangers of resurgent corporatism under Trump. Such an approach to today’s economic stagnation and deprivation threatens to drive a silver spike into the heart of innovation—and the American working class. ©2017/PROJECT SYNDICATE
Edmund S. Phelps is the 2006 Nobel laureate in economics and director of the Center on Capitalism and Society at Columbia University.
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