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Upward Spiral Instead of a Downward One

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When I was young, the purpose of public policy was to raise our standard of living. Not so much, anymore. Now, public policy is designed to make business succeed, or be "competitive."

Our current policies are particularly well-crafted to the goal of making large multinational businesses succeed. Our policies benefit those businesses directly, while workers and small businesses make a leap of faith that boon will trickle our way. Corporate profits are at historic levels.

This has not raised our standard of living. Wages, adjusted for inflation, are stuck at 1975 levels, even though productivity has doubled in that time.

Years ago, public goals were inspiring. We believed in the promise of shared prosperity. We sent astronauts to the moon. Parents assumed their children would have opportunities to flourish economically and socially.

Now, public policy is all about a Lesser America, where we cling to whatever we have, invest little in our future, and irritably accept a shabbiness creeping over the country.

It's not that hard to make big businesses succeed. They will succeed if we lower wages, cut pensions, shift medical costs to employees, grant tax subsidies, and pay for R&D with public resources. Multinational businesses will succeed by moving production offshore to pursue lower wages and relaxed environmental rules, or to ignore labor rights and human rights. Businesses will succeed, at least in the short term, if we let them forego their share of investment in our education, public infrastructure, health care or affordable housing.

Policy-makers are trying. The stimulus was intended to "prime the pump," as we used to say. Unfortunately, the pump leaks. To the extent that it works at all, our economic waterworks pump most of the jobs to low-wage countries. That won't rebuild our economy.

Quantitative easing seems to be a heroic effort to reduce interest rates. That policy is completely unconnected to me, my family's well-being, or the well-being of anyone I know. I'm sure the banks love it. After all, it was designed to help banks succeed. That won't rebuild our economy, either.

It is worth noting that credit does not create new jobs. Demand creates new jobs. Businesses, large and small, will grow and hire when they have prosperous customers. It comes back to the question Henry Ford asked nearly a century ago -- which would you rather have, low wages or prosperous customers?

Four policy ideas -- among many others.
We should design policies that benefit communities. We can let multinational businesses make the leap of faith that boon will trickle their way. We have at least four large opportunities to rebuild our economy. One is access to our domestic markets. Another is publicly funded R&D. A third is tax policies at the local state and federal level. The fourth is purchases by governments.

1. Access to our domestic markets. I am 100% in favor of a trade policy that raises my standard of living. The one we have now doesn't. We let any goods come into the country, even if they come at the cost of practices that we would forbid in our own country.

We should hold imported goods to standards similar to ones we follow at home.

For instance, we don't allow sweatshops in America. We should insist on sweat-free goods in our domestic markets. If our domestic producers must meet minimum standards for environmental controls, human rights, and health and safety rules, then foreign producers should meet comparable standards, before they can sell in our domestic markets. We are insulting our domestic producers by forcing them to compete against foreign producers who undercut the values we expect at home.

In the jargon of trade, such conditions are known as "non-economic barriers to trade." Free trade advocates say these are bad. In fact, they are necessary. We are doomed without them. If we don't inject our social and political values into our trade policy, we will continue to flail and decline. As it is, market forces look at us (figuratively) and say, "Your standard of living is unjustifiably high." We cannot let that continue.

Let's be clear. The goal of trade policy is not maximum possible trade. It is not lowest possible prices. The goal of trade is mutual gain, which basically means our exports and imports are roughly in balance. Free trade will never be in balance, until the race to the bottom is near the finish line. The sweet spot in trade could easily be at a lower level, overall, than we have, now.

2. We mismanage our investment in R&D. We fund hundreds of billions of dollars in R&D, and then assume that new inventions will create jobs in America. Everything we know about globalization says that is no longer true. Globalization means billions of dollars in new investment flow out of America, to build new facilities in low-wage countries.

The right thing to do is continue to fund R&D, and for each new publicly-funded invention, we should recognize that the new intellectual property is ours, at least in part. We should require that new publicly-funded inventions be licensed for 10 cents per unit (let's say) if production stays in America, or four dollars per unit for production overseas. Any foreign business that wants to create jobs in America is welcome to the lower licensing fee. That's common sense and a good return on our public investment in R&D.

3.Tax incentives. A lot has been said about tax policy. Let's add one new idea. Businesses are very successful in demanding tax incentives to locate a new facility in a particular taxing jurisdiction. Whichever jurisdiction offers the biggest tax cut gets new jobs. One jurisdiction competes with the others to give away public resources. This is self-destructive.

Instead, we could create a limited pool of public funds, such as the biotech development funds in California and Washington State. Any employer seeking the public good (money) explains what wonderful things they will do with the money, including how many jobs they will create, what benefits they offer, and so on. Employers can then compete against each other for the limited public resource, voluntarily stating what they expect to accomplish for America.

To make this stick, any employer receiving public resources should report annually on progress toward their voluntary goals. Any shortfall in public benefit would trigger recapture of the public resources, which would go back into the pool for the next year.

The key features are:
  • competition among employers for limited public resources,
  • public reporting of progress toward voluntary goals, and
  • recapture in the event an employer falls short of goals.

Here's a simple variation on that theme.

Each year, we issue about 150,000 H-1B visas for temporary high-tech workers. We could treat that as a limited public resource, and let employers bid for them. Instead of handing out visas (to help business succeed), we could assign them to the bidders -- starting with the highest bid, then working down. When the visas are gone, employers who failed to bid high enough must wait for next year. Each year, employers would report W-2 earnings and benefits. If a successful bidder failed to pay the voluntarily stated wages and benefits, they would pay penalties and go into the "willful violators" category.

4. Government procurement. "Buy American" has a bad name. It shouldn't. There is a proper place for local procurement. In the boisterous Air Force tanker procurement, it made perfect sense to favor a domestic supplier. In fact, both major bidders boasted of their domestic footprints.

Elsewhere in the aerospace industry, "offsets" are common. When a foreign customer pays $3 billion for military or commercial products, they insist that we invest millions or billions in their industry, or give them a major work package, or buy something from their domestic economy. We accept these foreign offsets as a matter of course.

Why not have domestic offsets?

Universities and government agencies can set a standard for procurement practices. Many are already leading the way in sweat-free procurement policies.

We want green industries. Germany, China and Denmark favor their domestic industries. We wonder why we fall behind.

Lower prices
Let's think for a moment, about our obsession with low prices. Cheap goods come at a price. The costs are there, if not in the price tag itself, then in the long term consequences.

Suppose, for the purposes of discussion, that China had remained a closed Communist economy for the last 25 years. What then? Our prices would be a little higher, and we would still be making things. We did OK before China flooded us with cheap goods. It wasn't that bad.

Japan grew dramatically with national industrial policies and higher prices at home in the 60's, 70's, and 80's. Korea, Taiwan and most of Europe have industrial policies and maintain high living standards. America industrialized under strong industrial policies. Canada pays more for gasoline than we do, and it's not the end of the world.

We can have an upward spiral of wages and prices, or a downward spiral of wages and prices. The key difference is whether workers have any leverage in their labor markets. With our current policies, workers have no leverage, and our living standards are going down. With real industrial policies, we will make things at home, and we will begin to rebuild the connection between jobs and prosperity.

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