Off track: America's economy is losing its competitive edge, and Washington hasn't noticed

Washington Monthly, March, 2005 by Benjamin Wallace-Wells

For most of the country's history, both political parties have favored various microeconomic initiatives--though Democrats have been more comfortable with using government to intervene in the marketplace, while Republicans have tended towards a laissez-faire approach that stressed lowering the cost of capital. These tensions sparked big debates in the 1980s about "industrial policy," with (mostly) Democrats arguing for various kinds of sector-specific technology investments and relief from Japanese competition and (mostly) Republicans arguing that the federal government should cut taxes, trust the market, and not "pick winners and losers." Still, each party has traditionally played on both the macro and microeconomic policy fields. Kennedy cut marginal tax rates when they were excessively high in the early 1960s. Clinton cut the deficit to reduce interest rates. Eisenhower built the interstate highway system. Reagan gave crucial tariff protection to America's then-ailing semiconductor industry.

Under President Bush, however, the GOP's natural economic policy tendencies have been hyper-charged by a grand political vision. Karl Rove, Grover Norquist, and other Republican strategists have argued that massive annual tax cuts and the privatization of Social Security will not only increase the flow of capital into the marketplace, but will also put Democrats at a long-term electoral disadvantage and usher in a new era of GOP dominance. That these policies also require the government to take on trillions of dollars in extra debt, just as the first baby boomers are reaching retirement and trade imbalances are reaching historic levels, is seen by GOP leaders as a risk worth taking. And so the White House and Congress have pursued tax cutting and Social Security privatization with relentless focus, to the exclusion of almost everything else. As The New York Times columnist Daniel Altman has written, the president has chosen economic advisers such as N. Gregory Mankiw, Lawrence Lindsey, and R. Glenn Hubbard who support this singular view. "What you have in Washington now is an inability to get beyond the macroeconomic, to understand that there are so many other investments government needs to be making and actions it ought to be taking, and that our future is going to hinge in large part on what decisions we make there," Michael Mandel, the influential economist and columnist for Business Week, told me in January. "And right now in Washington, they're not even looking at any of that."

Even when the Bush administration's leading economists discuss innovation, it is mostly in this light--they argue that reducing the cost of capital will lead companies to invest in new technologies. They rely in part on the research of economists such as Dan Sichel of the Federal Reserve and Dale Jorgenson of Harvard, who examined the sources of the '90s boom and found that capital availability played an important role. But not even Jorgenson thinks this was the whole story: "You need something to invest in, and so all those other things you're talking about were crucially important too, in the long run," he told me in January. "If you're looking at Washington today, you have to ask, what are they doing to make those investments now?"