The Price of Inequality: How Today's Divided Society Endangers Our Future (43 page)

Restoring and maintaining full employment

A fiscal policy to maintain full employment—with equality.
The most important government policy influencing well-being, with the most important consequences for distribution, is maintaining full employment. Unless the United States is careful, it could move into a situation similar to that of some European countries, with permanently higher unemployment—a vast waste of resources, which would simultaneously lead to more inequality and weaken both our economic and our fiscal situation. For seventy-five years we’ve known the basic principles of how to maintain the economy at or near full employment. Chapter 8 explained how well-designed macropolicies can actually achieve all three objectives simultaneously—lower debts and deficits, faster growth and employment, and an improved distribution of income.

A monetary policy—and monetary institutions—to maintain full employment.
Historically, however, there has been greater reliance on monetary policy than on fiscal policy for short-term stabilization, simply because it can adjust to changing circumstances more rapidly. But deficiencies in governance, and in the prevailing economic models, have led to a massive failure of monetary policy. Chapter 9 explained the reforms in theory, in governance, and in policy that are needed: a more accountable and a more representative central bank, and a shift away from the excessive focus on inflation to a more balanced focus on employment, growth, and financial stability.

Correcting trade imbalances.
One of the reasons that total demand is so weak is that the United States imports so much—more than half a trillion dollars more than we export.
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If exports create jobs, then imports destroy jobs; and we’ve been destroying more jobs than we’ve been creating. For a while, a long while, government spending (deficits) made up the difference, allowing the United States to maintain full employment in spite of the gap. But how long can we continue to borrow at such a clip? As I argued in chapter 8, the benefits of borrowing, especially for high-return investment, still well exceed the costs; but sometime in the future, perhaps the not-too-distant future, this may not be true. In any case, politics in the United States is making the sustaining of deficits, even for financing investment, difficult. If that continues, and our trade deficit continues, maintaining full employment will prove virtually impossible.
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Moreover, and perhaps more importantly, with an aging population, America should be saving for the future, not living beyond its means.

From a global perspective, there is another reason to try to correct trade imbalances: global imbalances—the large discrepancies between imports and exports (deficits in the case of the United States, surpluses in the case of China, Germany, and Saudi Arabia) have long been a worry. They (or more accurately, a “disorderly unwinding” of these unbalances, as markets come to believe that they are unsustainable and exchange rates adjust abruptly) may not have been the cause of the last Great Recession, but they could be of the next.

Restoring trade balance has proven extraordinarily difficult. The United States has tried competitive devaluation—lowering interest rates below that of its competitors, which normally lowers exchange rates. But I’ve likened exchange rates to negative beauty contests: bad as American politics and economic management are, Europe seems to have surpassed us; and the trade imbalances have persisted.
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Exchange rates are determined largely by capital flows, and finance pays little attention to its consequences: as capital seeks a safe harbor in the United States, the exchange rate is driven up, exports are hurt, imports encouraged, the trade imbalance increases, and jobs are destroyed. But even if workers’ livelihoods are put at risk, the financier’s money feels safer. This is, of course, just the consequence of market forces working themselves out—but market forces shaped by rules and regulations that allow the free flow of money without restraint. This is just another example of how the well-being of finance is put over the interests of ordinary working people.

There are some interesting proposals that would restore trade balance and help restore the economy to full employment. One of the problems, though, is that the rules of globalization—designed largely by trade lawyers focusing on impediments facing particular industries rather than on big-picture issues associated with systemic performance—are such that some of the reforms
may
contravene existing rules.
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Active labor market policies and improved social protection.
Our economy is going through a large structural transformation.
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The changes brought about by globalization and technology require large movements across sectors and jobs by workers, and markets by themselves don’t handle these changes well. To make sure that there are more winners from this process and fewer losers, government will have to play an active role. Workers will require active assistance to help them move from jobs that are being lost to new jobs that are being created, with heavy investments in education and technology to ensure that the new jobs are at least as good as the lost ones. Active labor market policies can work, but only, of course, if there are jobs for people to move into. If we can’t succeed in reforming our financial system to make it return to its core function of providing finance for the new businesses of the future, then the government may even need to take a more active role in financing the new enterprises.

A new social compact

Supporting workers’ and citizens’ collective action.
The rules of the game affect the bargaining strength of different participants. We have created rules of the game that weaken the bargaining strength of workers vis-à-vis capital, and workers have suffered as a result. The dearth of jobs and the asymmetries in globalization have created competition for jobs in which workers have lost and the owners of capital have won. Whether that is the result of an accidental evolution or of a deliberate strategy, it is now time to recognize what has happened and to reverse course.

Maintaining the kind of society and the kind of government that serve all the people—consistent with principles of justice, fair play, and opportunity—doesn’t happen by itself. Somebody has to look after it. Otherwise our government and our institutions get captured by special interests. At the very least, we need countervailing powers. But our society and our polity have grown off kilter. All human institutions are fallible; all have their weaknesses. No one proposes abolishing large corporations because so many exploit their workers or damage the environment or engage in anticompetitive practices. Rather, we recognize the dangers, we impose regulations, we attempt to alter behavior, knowing that we will never fully succeed, but that these reforms can
improve
behavior.

And yet, our attitude toward unions has been the opposite. They are vilified, and in many states there are explicit attempts to undermine them, but there is no recognition of the important role that they can play in countervailing other special interests and in defending the basic social protections that are necessary if workers are to accept change and to adjust to the changing economic environment.
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Affirmative action, to eliminate the legacy of discrimination.
One of the most invidious—and hardest to eradicate—sources of inequality is discrimination, both ongoing discrimination today and the legacy of past discrimination. In different countries it takes on different forms, but almost everywhere there is racial and gender discrimination. Market forces on their own won’t eradicate it. We’ve described how, together with social forces, they can enable it to persist. But such discrimination corrodes our basic values, our basic sense of identity, the notion of nationhood. Strong laws prohibiting discrimination are essential; but the effects of past discrimination continue, and so even if we were successful in eliminating discrimination today, its consequences would still be with us. Fortunately, we’ve learned how to improve matters through affirmative action programs—softer than hard quotas, but when implemented with good intentions, they can help our society evolve in ways that are consistent with our basic principles. Because education is the key to opportunity, such programs are perhaps even more important there than elsewhere.

Restoring sustainable and equitable growth

A growth agenda, based on public investment.
We explained why trickle-down economics doesn’t work: growth doesn’t automatically benefit all. But growth does provide the resources with which to tackle some of society’s most intractable problems, including those posed by poverty. Right now the main problem confronting the U.S. and European economies is lack of demand. But eventually, when total demand is enough to fully use our resources—putting America back to work—the supply side will matter. Supply, not demand, will then be the constraint. But it’s not the supply-side economics emphasized by the Right. One can raise taxes on corporations that don’t invest and lower taxes on those that do, and on those that create jobs. Doing that is more likely to lead to growth than the kinds of across-the-board tax reductions that some businesses demand. While the supply-side economics of the Right has exaggerated the importance of tax incentives, especially when it comes to the corporate income tax, it has underestimated the importance of other policies. Government investments—in infrastructure, education, and technology—underpinned growth in the last century, and they can form the basis of growth in this century. These investments will expand the economy and make private investment even more attractive. As the economic historian Alex Fields has pointed out,
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the decades of 1930s, ’40s, ’50s, and ’60s were periods of high productivity increases—higher than the decades before and after—and much of this success had to do with
public
investments.

Redirecting investment and innovation—to preserve jobs and the environment.
We need to redirect investment and innovation from saving labor (a euphemism under current circumstances for creating unemployment) to saving resources. This won’t be easy; there will have to be both a push and a pull. For instance, in innovation, we can do this both by the kind of basic and applied research that the government funds and by forcing firms to pay for their full environmental damage. That will provide them with incentives to save on resources, diverting their attention away from replacing workers. Rather than across-the-board low interest rates (as now), which encourage the replacement even of low-skilled workers by machines, we could use investment tax credits to encourage investment; but the credits would be given only for investments that save resources and preserve jobs, not for investments that destroy resources and jobs.

Throughout this book, I’ve emphasized that what matters is not just growth, but
what kind of growth
(or, as it’s sometimes put, the quality of growth). Growth in which most individuals are worse-off, where the quality of our environment suffers, where people endure anxiety and alienation, is
not
the kind of growth that we should be seeking. The good news is that sometimes we can both shape market forces for the better
and
derive revenues that can be used to promote growth and enhance societal well-being.

T
HE
I
MMEDIATE
I
SSUES

I have laid out a long-term economic reform agenda, but right now the largest causes of suffering among the 99 percent are in the labor market and housing.

In housing, we saw how accounting standards were a major impediment to restructuring, and that government programs for restructuring were designed not to force, or not even to encourage, principal write-downs. The rules of the game favored the banks over the homeowners, and those rules must be changed. We saw that in our discussion of foreclosures in chapter 7.

The banks need to be given incentives, and perhaps be required, to restructure mortgages. Requiring them to recognize the losses of their mortgages—which is called “marking to market”—would eliminate a major obstacle to restructuring. Tax incentives—allowing favorable treatment of losses if incurred as part of a restructuring now, and less favorable treatment of losses that result from foreclosure—might provide a carrot. And if that doesn’t work, forcing a restructuring may be necessary.

We have a provision in our bankruptcy code, Chapter 11, that gives corporations that have become overindebted (even as a result of foolishness on their part) a fresh start; we recognize the value of keeping enterprises going, the value of the jobs that are retained. But, as we argued in chapter 6, if it’s desirable to give corporations a fresh start, it’s equally valuable to give families a fresh start. Current policy is devastating families and communities. We need a homeowners’ Chapter 11 that would write down what the family owes, in return for a share of the capital gain when the house is sold.

The Obama administration, through Fannie Mae and Freddie Mac, the two private mortgage companies
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that the government took over as they collapsed at the beginning of the crisis, now owns a substantial fraction of all mortgages. It is unconscionable that they have not restructured the mortgages that they hold.
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Taxpayers, homeowners, and our economy would all be better-off.

Fixing the mortgage problem is necessary to get our economy going, but it’s not sufficient. The labor market, too, is in shambles, with close to one in six workers who would like a full-time job unable to get one. More aggressive stimulation of the economy, through fiscal policy, as described in chapter 8, could substantially lower the unemployment rate, and more active labor market policies could train workers for the new jobs that the economy will create as it recovers—which may be different from the old jobs in manufacturing and real estate that have been destroyed.