Innovative breakthroughs are the key to long-term prosperity. They are particularly essential to an economy bogged down with massive amounts of debt. But here’s the problem: Broad-based prosperity requires more than a handful of glitzy technological breakthroughs, such as the smart phone, coming from rarified places such as Silicon Valley. History shows that significant increases in per capita income arise from what economist Edmund Phelps calls “mass flourishing” at the grassroots level. In this process, average folk become “idea machines” in an environment where ordinary people reinvent ordinary products and services from the bottom up. For Washington policymakers, the greatest challenge is to figure out how to make the entire economy, not just Silicon Valley and the dozen or so other tech centers, the innovative economy.
POLICYMAKERS HAVE got it all wrong. America’s economic destiny is not a matter of luck. Human initiative and creativity are not irrelevant in determining economic success or failure. Attitude is everything. The health of an economy depends on behavioral elements that don’t always fit on an Excel spreadsheet or follow the confines of a predictable theory. Economies involve a complex ecosystem and are linked to psychology.
How else does one explain the phenomenon of why so many Americans have quit their jobs, mortgaged their homes, maxed out their credit cards, and borrowed from family and friends—all to pursue the commercialization of some new idea or vision in an environment where 90 percent of such pursuits fail? Americans are unique in the world for their sheer daring in taking on entrepreneurial risk.
People may be the problem, but they are ultimately also the solution to a growing economy. Main Street capitalism begins with a new mind-set about the role of human drive, courage and ingenuity in the process of economic growth and job creation. After all, how can the experts capture in an econometric model a scenario in which 325 million Americans all collectively become inspired to re-engage and reinvent their economy behind a bipartisan leadership that removes obstacles to growth and changes today’s negative expectations toward the future?
How do you forecast the effect of a new paradigm that results from daring leadership brushing aside the ideological extremes and charting a new course backed by achievable common-sense policy reforms.
To achieve successful deployment of today’s central-bank liquidity, policymakers need to better understand the hopes, dreams and fears of average folk. In other words, they need to discover why so many working Americans have lost faith in the future. Why has the rate of business start-ups halved? Why are existing businesses not expanding as much as they have in the past?
Is it because the rest of the world is so terrifying? Is it that people are simply afraid of the future? Are people holding back because of America’s, and the world’s, enormous debt? Is it, again, that the world is holding trillions of dollars in U.S. dollar-denominated debt, but there is now a global shortage of dollars? Thus there is the potential for a growing global liquidity crisis? Or is it that the world’s undercapitalized banks in some cases are hanging by a thread?
Is it, as both Trump and Bernie Sanders claimed, the result of bad deals on trade and currency relationships? Is it the problem of America’s own compromised fiscal, regulatory and immigration policies? Is it that the world’s central banks, including the Federal Reserve, appear to have run out of monetary ammunition despite today’s challenging environment? With past recessions, the Fed, as a weapon, has been able to cut short-term interest rates by 3 percent to avoid a so-called economic “hard landing.” But now that short-term interest rates are much lower than the 3 percent level, the Fed has relatively few bullets available.
Is it that Washington is held captive by partisan hacks so nothing ever gets done? Is it because the public is well aware that potentially dangerous problems, including the financing of the entitlement system, remain unaddressed like a ticking time bomb?
Is it that our central bankers can’t tell us with much credibility whether the risk ahead is inflation or deflation (or disinflation), and whether global stock markets in today’s age of central-bank intervention are grossly overvalued, undervalued or priced just right?
Is it that America’s leaders still believe in top-down economic design even as the world, whether through Facebook or ISIS, is ironically in the midst of a bottom-up revolution?
Is it the result of the consolidation of finance since 2008, with a dozen giant, risk-averse zombie banks now in control of 75 percent of U.S. bank financing? The big and established firms receive loans; small ones often do not.
Is the entire nation simply overloaded on change? Is technological change, in particular, coming at people so fast they are feeling helpless? Is it that people feel artificial intelligence will someday make their kids, even the math and science majors, permanently unemployed?
Or is it simply an attitude problem? Have Americans themselves lost the courage, daring and optimism that have traditionally made the United States the world’s hotbed of innovation? Some people assume that there are no more major technological advances forthcoming. Others in the big-data economy are overwhelmed by the sheer quantity of information available and find the sorting process difficult. Because technology allows people to verticalize, people tend to associate only with those of similar views. Thus they tend not to see opportunities not immediately relevant to their present environment. Does this trend make everyone more risk-averse and afraid of the new?
THE TRUTH is, all of these elements are impeding America’s GDP growth. They all collectively make up the headwinds holding back prosperity. And they all need to be addressed.
Trump’s first task is clear. The goal is not simply to apply more stimulus, but to produce a series of paradigm shifts that change the nation’s expectations toward the future—that reverse today’s negative psychology.
Growth is everything. The American economy’s long-term growth rate, in particular, has huge implications for the level of an economy’s ability to deliver prosperity. For example, in the period from 1789 to 2000, U.S. real GDP grew by an average annual rate of 3.73 percent. Had the economy grown by an average of today’s “new normal” growth rate of roughly 2 percent, America’s per-capita income would not reflect the output of the world’s most powerful economy. U.S. per-capita income instead would be lower than Papua New Guinea’s. That is, it would be below the per-capita income of a relatively poor country in the Southwestern Pacific Ocean.
But to try to create higher levels of growth, we first need a better understanding of money. Since the 2008 financial crisis, the world’s central bankers have injected massive amounts of liquidity into the global banking system. To their credit, in the face of the most devastating financial collapse since the 1930s, the world’s policymakers responded boldly. Governments and central banks collectively committed, in terms of both present and potentially future resources, a mind-boggling $17 trillion—almost one-quarter the size of global GDP at the time—for bailouts, guarantees, stimulus packages and an ocean of monetary stimulus.
Thankfully, the immediate free fall in global aggregate demand was arrested. Stock markets rebounded. But then, beginning in 2010, the world economy progressively slowed. But why? The U.S. economy could never quite gain momentum on a sustainable basis. Something always held it back. True, there were months when the data looked to be highly promising. But the sugar rush always faded.
Central-bank liquidity failed to be the magic pill for prosperity and, in fact, produced unintended consequences that distorted financial markets and increased inequality. The reason is that low interest rates mean very little to a person terrified of the future in an environment where risk capital for the little guy is hard to come by.
What policymakers should be more concerned with is another type of liquidity: the liquidity of confidence. Confidence—in particular, stemming from the knowledge that our leaders have a game plan for prosperity—creates liquidity. In a sense, liquidity is confidence.
The economic task, therefore, is not just to “put money into people’s pockets” but to shift expectations toward the positive to produce sustainable long-term growth. Washington policymakers should enact a series of bipartisan “grand bargains” on issues including infrastructure modernization, entitlement reform, healthcare reform, the financing of start-ups, the bolstering of existing businesses, more favorable corporate-tax treatment (repatriation) in exchange for purchases of 1 percent infrastructure bonds (in an environment of even broader tax reform), elimination of corporate efforts to gain competitive advantage through regulatory arbitrage, Dodd-Frank bank regulatory reform to restore the health of regional and community banks, the workhorses of small business expansion, and ways to allow families to be more economically mobile.
America needs a game plan, and it should be bipartisan. Passing Obamacare on a party-line vote was a major mistake. On both of his major tax initiatives, Ronald Reagan sought to make the legislation bipartisan. This added a greater sense of credibility to the exercise. Today by making the economic-reform package bipartisan, the entire country will prosper with a renewed sense of confidence that America now has an economic game-plan backed by a solid majority of its citizens. The extremes, both the Left and the Right, will resist, but it is time to unleash what rock star and social activist Bono called America’s “radical center”—the 70 percent of the country desperate for common-sense reform.