Arguing About Growth

Lifting the economy will require more spending now and fundamental budget reform later. William Galston and Lawrence Mishel continue their exchange on growth and the progressive agenda.

William Galston: I want to begin by thanking Lawrence Mishel for joining the debate in such a civil and productive manner. [“What Anti-Growth Agenda?” Issue #22] He and I agree on the central points. Nothing that Democrats care about will be possible without sustained, vigorous economic growth, the fruits of which are widely shared. The question before us concerns means, not ends.

Let’s argue about our real disagreements. Although I believe that the Economic Policy Institute (EPI), Mishel’s organization, hasn’t focused enough on innovation, I’m happy to acknowledge that it has offered a number of proposals to stimulate growth, many of which I find congenial: a job-creation tax credit and renewing the payroll tax cut, for example. In turn, I hope that Mishel will take in the full range of what I’ve been saying since Barack Obama’s inauguration. Progressive entrepreneurship, the focus of my article in Democracy, is but one piece of the much broader agenda we need. Democrats must be able to walk and chew gum at the same time: While we attend to the imperatives of short-term recovery, we must remain focused on our long-term investment and budget deficits as well.

As Mishel says, I’ve been skeptical about the adequacy of the traditional demand-side stimulus strategy that the Administration has pursued. That’s not because I thought then, or think now, the government should stand back and do nothing, or because I thought stimulus was completely wrong-headed. Rather, I was an early convert to the thesis put forward by economists Ken Rogoff and Carmen Reinhart that financial crises differ from cyclical downturns, not only in severity, but also in kind. If it is accumulated debt that stifles demand, then it is unrealistic to expect vigorous growth to resume until policy-makers take action to reduce the debt burden.

Today, most corporate balance sheets are in good shape. Not so for households, which more than doubled their debt as a percentage of disposable income in the quarter century from 1982 to 2007, only to be left high and dry when the economy tanked. Mortgages are the epicenter of household debt, and thus of our economic woes as I understand them. Stimulus without debt relief palliates the pain without curing the disease. That’s why I’ve criticized the Administration for its failure to move early on a bold plan to reduce not only interest rates, but also principal amounts on millions of underwater mortgages that could avert foreclosure with suitable adjustments.

While I agree with EPI that allowing homeowners with underwater mortgages and weakened credit scores to refinance would be a step in the right direction, I believe that we need to act more boldly. In a New Republic piece entitled “Three Ways Obama Can Fix the Housing Crisis,” I explored serious mortgage relief proposals that had been in the public domain since 2009. Their authors showed how strategies such as immediate principal reduction in return for equity participation in future real-estate price increases could relieve pressure on hard-pressed households without blowing a hole in financial institutions’ balance sheets. I do not understand why the Administration did not take these ideas more seriously. President Obama now acknowledges that housing has been the least successful element of his Administration’s economic recovery policy.

I’ve been a staunch and consistent defender of public investment, starting with infrastructure, which our country has neglected for a generation. With record-low interest rates and millions of willing workers, now is the perfect time to jump in, as Virginia’s conservative Republican governor has recognized by successfully pushing through legislation authorizing more than $3 billion in borrowing for backlogged transportation projects. But there’s no chance that we can mobilize enough public capital to fill the accumulated infrastructure gap, now estimated at $2.5 trillion. That’s why I’ve published half a dozen articles advocating a national infrastructure bank that could leverage federal seed capital with private funds to create significant lending capacity for projects that can satisfy rigorous economic criteria. This initiative, backed by the AFL-CIO and the Chamber of Commerce among many other groups, was included in President Obama’s jobs bill, which failed to meet a 60-vote threshold in the Senate. Senior Republicans in the House have declared the idea dead on arrival.

In a Brookings Institution paper, “Priority No. 1: Creating an Agenda to Spur Job-Creating Economic Growth,” published in July 2010, I made a number of other suggestions. For example, we should invest more in education, especially community colleges, which can help build the skills that emerging economic sectors require. In addition, retrenchment under fiscal duress at the state and local level is bound to weaken federal government efforts to stimulate growth and job creation. To be sure, many states and localities exacerbated their problems by making promises during flush times that turned out to be unsustainable. But that’s no reason to leave the problem unaddressed. Instead, the federal government should initiate permanent but conditional revenue sharing, extending bridge loans to states with the enforceable expectation that these borrowers would enact binding plans for long-term fiscal reforms. More recently, I published an article arguing that whatever the flaws in the process that led to the ill-fated Solyndra decision, conservatives are dead wrong to generalize its significance. Of course government can help foster commercially viable technological innovation, as examples throughout our national history demonstrate.

While the federal government makes pro-growth investments, it must also preserve the safety net for vulnerable groups and maintain its commitments to retired Americans. Given demographic trends such as the aging of the population and the increase in child poverty, I’ve argued the federal government will have to grow as a share of GDP in coming decades. Historical averages are irrelevant to current realities.

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