Economic growth and the US presidential election

August 01, 2019 09:53
There is a strong case for public investment in research and development when there are sufficiently strong spillover effects – for example, through the creation of new knowledge and techniques. Photo: Xinhua

Economic growth in the United States was just 2.5 percent in 2018 and, according to the latest “advance” estimate, may have slowed to only 2.1 percent in the second quarter of 2019.

The economy is growing at roughly the same pace as it did during Barack Obama’s second term as president (GDP growth was 2.5 percent in 2014 and 2.9 percent in 2015, before slowing to 1.6 percent in 2016 – perhaps related to election-induced uncertainty).

Such growth rates pose a problem for President Donald Trump, who promised repeatedly that economic growth would accelerate under his administration and always remain above 3 percent per year. It is therefore an opportunity for the Democratic presidential contenders. But will the Democrats prove capable of coalescing around the kind of policies that would really make a difference?

The problem to be solved, of course, is not only – or even especially – the headline growth numbers. Several profound imbalances have emerged in the structure of the US economy.

Smaller towns and rural areas are experiencing an outflow of working-age people. College-educated people are moving to where the opportunities are, while those with only a high school education, for example, are increasingly stuck in areas with weak economic prospects.

And while the superstar cities on the coasts (Seattle, the San Francisco Bay area, Los Angeles, Boston, New York City, and the Washington DC area) are attracting a disproportionate share of the country’s tech talent and risk-taking capital, they are burdened by very high real estate prices and extreme congestion.

So, how can the US boost productivity growth, in a sustainable fashion, while also sharing the benefits of that growth much more broadly across the income scale and all geographic regions?

There are two important strands of ideas currently under development which should help. Some versions of them may appear during and after the next round of Democratic candidate debates.

The first idea is that the US can strengthen its national manufacturing capabilities through public investments in “translational innovation” – meaning the ability to turn scientific ideas into practical engineering applications and, crucially, scale them up and launch domestic commercial production.

This general idea has attracted bipartisan support, both in terms of the 14 advanced manufacturing institutes that have been developed during the last decade and – potentially – the next-generation version (bigger and better) being put forward by Sridhar Kota of the University of Michigan and his colleagues at MForesight: Alliance for Manufacturing Foresight.

As Jonathan Gruber and I argue in our book Jump-Starting America, there is a strong case for public investment in research and development when there are sufficiently strong spillover effects – for example, through the creation of new knowledge and techniques.

Potential spillovers can be extremely valuable, but they tend to discourage private sector investment – people who raise capital, after all, are rightly focused on the return their investors will receive. And that means the private sector, left to its own devices, underinvests in developing engineering talent, building the ability to scale up manufacturing, and strengthening America’s ability to compete with China, South Korea, and other manufacturing powerhouses.

What exactly should our priorities be? The 2018 “Manufacturing Prosperity” report by Kota and Tom Mahoney of MForesight has some fascinating suggestions, including nanotechnology and flexible electronics, and smart (“digitized”) manufacturing.

Our view, in Jump-Starting America, is simple: do it all, because creating new sectors is precisely what will create the good jobs of the future – and in all corners of the country. Every state, as far as we can determine, has the potential to participate constructively in this kind of initiative.

But faster productivity growth and even good job creation is only one part of the puzzle. What ensures that everyone has a chance to benefit from the prosperity and opportunities that result?

For this second dimension, we now have an appealing overarching framework, provided by Ganesh Sitaraman and Anne L. Alstott in their new book The Public Option: How to Expand Freedom, Increase Opportunity, and Promote Equality. Their proposal is not that the public sector should displace the private sector, but rather that offering a publicly-run alternative would expand everyone’s choices and ensure that no one is left too far behind.

Leading historical examples include the post office, libraries, swimming pools, and national parks. In each instance, the availability of a public option at least ensures access to a basic service at reasonable cost. Well-run public options also put pressure on the private sector to perform better.

Just think of all that people need and the private sector does not provide, at least not currently in an affordable, effective form that is widely available: health insurance, retirement funds, basic financial services, and childcare.

In all these instances, Sitaraman and Alstott have simple proposals which, at the very least, would move America’s policy debates in the right direction – toward ensuring broader participation in future prosperity. Let us hope that the Democratic presidential contenders champion these and other ideas for achieving that goal.

Copyright: Project Syndicate

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Simon Johnson, a former chief economist of the IMF, is a professor at MIT Sloan, a senior fellow at the Peterson Institute for International Economics, and co-founder of a leading economics blog, The Baseline Scenario. He is the co-author, with Jonathan G