By Geoffrey Garrett, Dean of the Wharton School
I recently argued that even if the Trump slump continues, we should take Trump-ism very seriously. With 80% of Americans having suffered declining incomes since 2005, there is a deep structural foundation to Donald Trump’s electoral appeal. Let’s call it “stop the world, I want to get off.”
This is a giant wakeup call for all of us who have benefitted from the two biggest forces driving our world — globalization and technology — but have not been sufficiently attentive to the very real harm they have caused many Americans. It is the apparent tone-deafness of “the establishment” to Middle America’s pain that has given Trump-ism traction.
But the 2016 presidential election is part of a broader and very real challenge to the neoliberal paradigm that has dominated the Western world since the end of the Cold War — not only Trump, but Bernie Sanders, the Brexiteers, the Tea Party, and populist movements throughout Europe.
How should leaders who believe that globalization and technology are not only desirable but also inevitable respond? Authentic recognition of the pain and anguish so many people are feeling is job #1.
Both candidates have to lift their game where connecting with the country is concerned. Trump is long on anger and alienation and short on hope and unity. Hillary Clinton’s generic response to Bernie Sanders, i.e. “love your ideals, just too hard to put into practice,” is a downer with millennials. The sense that she and Bill believe there is one set of rules for the Clintons and one for everyone else is her Achilles heel.
Facing the Hard Truths
Connecting with the people is only the beginning. Next comes the very difficult job of acknowledging and then explaining why so many Americans have suffered declining standards of living in the past decade. Barack Obama hasn’t done so. Instead, he has insisted on talking up how well the U.S. has recovered from 2008. This has not only fueled the improbable Sanders and Trump runs. It will also make things harder for Hillary Clinton should she win the Oval Office, as the polls and the markets are predicting.
I think there are two basic truths that the next president must acknowledge:
Truth 1: We are living in a “low growth” era
Average U.S. GDP growth dropped from 3.2% in the 1990s to 1.8% in the 2000s, a decade plagued by the burst of the dot.com bubble, 9/11, the wars in Afghanistan and Iraq, plus the fall of Lehman Brothers and the near collapse of the financial system. But things have only gotten marginally better so far this decade, with average economic growth of only 2.1% through 2015 (despite the largest combined fiscal and monetary stimulus the world has ever seen).
If the U.S. had grown as quickly since 2000 as it did in the 1990s (i.e. 3.2% per year), the U.S. economy would be about 20% larger than it is today — roughly $4 trillion bigger, or $12,500 for every person living in the country. Real money.
Truth 2: American growth has not been “inclusive”
Since Occupy Wall Street and Thomas Piketty, everyone has become aware of the high and rising gap between haves and have-nots. According to the U.S. Census Bureau’s Current Population Survey, in 2005 household income at the 80th percentile of the U.S. income distribution was 4.78 times that of households at the 20th percentile. In 2014, this “80/20” ratio had increased to 5.24. That is a lot of inequality, even without getting anywhere near the top “1%.”
But there is yet another way to slice the data that I think is arguably more important. In addition to comparing the income gap of different households, we must look at individual standards of living. That is, the income of people in relation to themselves at earlier times.
Here are the Census Bureau’s own data for changes in real (i.e. inflation adjusted) household income at different points in the income distribution between 2005 and 2014:
Top 20%: +$4,328
Middle Quintile: -$1,624
Bottom 20%: -$1,164
An increase of four thousand dollars for a household earning close to $200,000 (the top quintile cutoff in 2005) is nothing to celebrate. But it is much better than the decline of over one thousand dollars for a household earning $12,000 (the 20% percentile). Things like the Earned Income Tax Credit, unemployment insurance, and Medicaid have certainly cushioned the blow for the poorest Americans. But these welfare payments weren’t available for households in the middle of the income distribution, who lost $1,600 from median household income of around $55,000.
The next American president has both to explain this terrible one-two punch for the economy, and then chart the course to stronger and more inclusive growth. With that in mind, here are my 5 economic policy suggestions for the next president to stimulate growth and spread its benefits more widely.
Don’t look to Keynesianism
With interest rates near zero and public debt hovering near 100% of GDP, the U.S. risks not being able to respond to the next major economic downturn in the tried-and-true manner of cutting interest rates and deficit spending. That means Janet Yellen’s Fed is right in trying to find the first available opportunity to raise U.S. interest rates back to something like normalcy — not to ward off inflation (no signs of that) but to give room for interest rate cuts when they are needed. High public debt also means cutting the federal budget deficit. With interest rates near zero, the costs to the government of borrowing are unprecedentedly low. But that can’t and won’t last forever.
Infrastructure is about more than jobs and building bridges
With near zero interest rates and a landscape of aging roads, railways, airports and ports, it’s no surprise that big infrastructure spending initiatives are near the top of the political agenda. But listen carefully to the pitches for new infrastructure projects and the spin is all about short term job creation — in the construction industry above all. This is the wrong way to think about infrastructure. The goal of better infrastructure should be to increase the productivity of the economy. That means the U.S. should focus its attention on things like 5G or a national fiber optic network, even if these aren’t shovel ready/job creating in the same way as fixing bridges.
Focus tax breaks on innovation and entrepreneurship
What to do about U.S. corporate taxes is an issue up for grabs in the presidential election. Trump wants to cut rates across the board (one of his few places he and the Paul Ryan wing of the party see eye to eye). Hillary Clinton says there are too many loopholes that let companies write down their profits in ways that unfairly cut their tax bills.
Instead of this traditional partisan spat, why not focus on tax policies that promote innovation? This certainly means tax breaks for corporate income that is productively reinvested in the business. But since we now know more innovation tends to come from startups than mature businesses, a tax code that stimulates entrepreneurship is a real growth imperative.
Stay the course of globalization and technology
The fact that Hillary Clinton has been forced to distance herself from the Trans Pacific Partnership free trade agreement — Barack Obama’s signature international economic policy priority and the cornerstone of his geopolitical pivot to Asia — tells you just how hard “stay the course on globalization” will be. But it is essential.
Global markets are more efficient markets and, if you care about growth, global efficiency is really important. What’s more, it is extremely difficult to envisage how you would put the globalization genie back in the bottle. Just look at how long Brexit is likely to take.
Or consider U.S.-China trade. Few people apparently see the irony of criticizing (in the same breath) free trade agreements and the U.S.’s trade deficit with China. The U.S. does not have a free trade agreement with China. But that hasn’t stopped U.S.-China trade mushrooming in the past 15 years, because it makes economic sense. Does anyone really think there would be public support for telling Apple it can’t assemble iPhones in China? And even if there were, Apple would just find another low wage cost country like Vietnam to do the job (unless, of course, the Apple assembly line could be fully automated).
It is even more unthinkable that the U.S. would try to stop technological innovation. McKinsey might be right that over time almost half of today’s jobs might be done by robots and artificial intelligence — from sifting through legal precedent, to driving our cars. But would that be a bad thing for jobs that are repetitive (the kind of things computers do better than humans)?
From an economic perspective, it is not an overstatement to say technological innovation is the single most important driver of the U.S. economy. But even if we wanted somehow to turn off innovation, how could we do it? I don’t see how. The better path is to remain proactive about managing innovation. Let me now turn to that.
Be smart about education
If the march of technology and globalization are inevitable and desirable, and both tend to harm employment opportunities for less skilled workers, isn’t the answer to America’s woes “more education?” You would expect the Dean of the Wharton School not only to ask this question but also to answer “yes.” And I do, but with some important nuances.
Small countries like Sweden have done a good job embracing technology and globalization by using “active labor market” policies to help people move people up the skills (and opportunity) ladder. Telling Americans to become more Swedish is a non-starter. But the basic idea is one we should embrace.
Bernie Sanders was right that a college education is today what a high school diploma was 50 years ago — the necessary precondition for a career of good jobs. As a result, we have to do all we can to ensure that everyone who could benefit from a college degree has the opportunity to get one at a cost they can afford.
But we also need to ensure that the education universities offer position graduates for productive careers. Certainly, our students are becoming more professional, with 20% of American undergraduates studying business as their degree or major — the single biggest field in U.S. higher education. It may be no surprise Introduction to Computer Science is the biggest class at Stanford. But it is also the biggest class at Harvard.
This doesn’t mean the demise of liberal arts. Far from it. Indeed, countries with strong technical education that crave the innovativeness of America are doing all they can to adopt and adapt American style liberal arts education to promote a culture of creativity (think China, India and Singapore). What we need is liberal arts + professional skills — the creativity needed for innovation + the professional know-how to turn great ideas into great outcomes. That is certainly what we try to do at the Wharton School.
We also must recognize that in a world where the pace of change only continues to accelerate, learning can’t stop when we leave college or university. “Continuous professional development” is more than a homily for chief learning officers; it is the way to ensure we have the workforce to drive and to benefit from technology-led growth. Not more degrees, but short courses (increasingly online) that provide the just-in-time training necessary to fuel and surf the wave of innovation.
The British public intellectual Martin Jacques is positioning himself as the anti-Francis Fukuyama. More than 25 years ago, Fukuyama famously predicted “the end of history” with democracy and markets sweeping the globe after the fall of communism. In 2016, Jacques says we are witnessing “the death of neoliberalism.” He is right that low and non-inclusive growth is a massive challenge to the West. That doesn’t mean the system will collapse. It does mean the time to meet the challenge is now.
Editor’s note: This article was originally posted on LinkedIn on August 25, 2016.
Bio: Geoffrey Garrett became Dean of the Wharton School at the University of Pennsylvania in July, 2014. He also serves as Reliance Professor of Management and Private Enterprise, and Professor of Management.