November 5, 2008
A statement on the economic implications of Barack Obama’s historic election victory, by Lawrence Mishel, president of the Economic Policy Institute, a Washington DC think tank founded in 1986.
New Day for U.S. Economic Policy
At long last, the center of economic thinking in the United States has shifted, and we can declare with confidence and relief that the conservative era is over. It is now possible to build an economy with widely shared prosperity.
The bundle of approaches favored by supply-siders from Ronald Reagan to George W. Bush, and embraced by candidate John McCain — featuring tax cuts for corporations and the rich; deregulation of business and financial activity; weak environmental, consumer and workplace protections; and unrestrained globalization — has been soundly rejected by voters, who overwhelmingly identified the economy as their single most important issue.
It is now clear that the failed supply-side, market fundamentalist experiment has wrecked the economy. Misguided monetary policies, deregulation and lax oversight created stock market and housing bubbles that suddenly popped, erasing trillions of dollars in household wealth. Meanwhile, middle class wages and incomes have stagnated, inequality has soared, manufacturing has been put on life support, and millions have been thrown out of work. Voters realized that the policies that led us into the current crisis won’t get us out. They want pragmatic government intervention to solve our energy problems, fix the health care system, restore manufacturing competitiveness, obtain more progressive taxation, generate broad-based wage growth, and provide retirement security for working Americans.
Democrats were already aligning their policies to this new reality before the recent financial meltdown made change all the more urgent. This can be seen by comparing the proposals of the leading candidates in the recent Democratic primaries to those offered in 2000 and 2004. All the recent candidates emphasized major public investments in energy efficiency and alternative energy sources (green jobs), and endorsed universal health care proposals relying on a large, public plan (such as Medicare) alongside existing employer-provided plans. They recommended caution in moving ahead with further globalization and endorsed enforceable labor standards as a core element in trade policies. All were vocal in their support for a vibrant labor movement (and thus, the Employee Free Choice Act) and for substantially raising the minimum wage. There was less talk about balancing the budget and more talk about balancing the need for public investment with other fiscal goals.
The fact that the American people are now open to change does not mean that they are no longer skeptical of government intervention. Who would not be skeptical after the last eight years of misguided or incompetent policies, a time when the effect of government intervention was mostly to erode individuals’ constitutional rights?
The task ahead is to fashion policies that will improve the economic circumstances of the vast majority, and thereby restore confidence. There is much to overcome. For roughly thirty years, with the exception of the late 1990s expansion, there has been little wage growth for the vast majority and increased economic insecurity, primarily related to health care and retirement security. The last business cycle from 2000 to 2007 failed to generate any growth for middle class working families — on average, they lost over $2,000 a year in inflation-adjusted income. This erosion of earning power happened even as the economy, through its workers, became increasingly productive. In fact, productivity growth — which measures the creation of goods and services per hour worked — has been historically high since 1995, but the fruits of that growth have gone to the already-wealthy. Our economy has been a huge skimming operation for the well-to-do.
On top of these long-term problems, a new recession brought us to 6.1% unemployment in September, even before the global financial meltdown. Now we are looking at several years of high unemployment (peaking at 8% or more) and widespread income losses that will take many more years to overcome.
To address this set of challenges we will need bold — even ‘audacious’ — policies. We at EPI have compiled an Agenda for Shared Prosperity to get us back on track and an economic recovery package to pull us out of the unfolding recession. The basic capacities of government will need to be rebuilt and policymakers will need to rigorously focus on cost-effective policies. The solutions will need to be ambitious, at the scale of the problems we face, rather than a timid tweaking at the margins.
We certainly can no longer grow based on asset bubbles in housing or in stocks or from increased personal debt: the demand for goods and services from our increased productivity will need to come from consumers who earn family-supporting paychecks. We will need new government spending on infrastructure, education, health care and the safety net, re-regulation of the financial and insurance markets, changes in and enforcement of our labor laws. Above all, we need a guiding philosophy that understands the purpose of government is not to get out of the way, but to help lead the way through difficult times.
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