China and its Discontents

Here’s an idea, of which I was reminded of in the Brookings Institution’s “Export Nation” report: a National Infrastructure Bank. These days it seems the only way Congress is able to act is when it spins off its powers to another institution (re: the Independent Medicare Advisory Committee, or IMAC). Regardless, I would look forward to an infrastructure bank. Instead of re-appropriating funds every year, which could be discouraged in times like these, an infrastructure bank could be more nimble and light on its feet. This is a useful quality when one considers the vast demand for infrastructure investment.

One of Ezra Klein’s blog posts today reminded me to write a little note clarifying an earlier post – “Rebuilding America”. That post was more of a broad overview on the inability of the federal government to enact any further fiscal or monetary stimulus. I argued that President Obama needs to make an unequivocal case for ‘rebuilding America’ with the type of “Grand American projects” associated with the strategic visions proposed by Steve Clemons and James Fallows.

What I was unclear about was what the term “Grand American projects” meant. My working definition now is long-term fiscal policy designed to quantitatively improve the working class’ quality of life and productivity, and to reduce the income gap. In short order, to revitalize the social mobility that was characterized by the 90’s. This is a broad definition – it includes investments in renewable energy, transportation networks, urban renewal and planning, other infrastructure, and education (this list is by no means exhaustive). These policies need to be passed now and take effect over the next several decades, rather than serve as a reactionary measure a la the 2009 stimulus.

What about what has already been signed into law? I view financial reform as a necessity, but not a Grand American project; it’s mainly a reactive measure. Part of health-care reform would qualify – R & D, IT investment. The rest of the bill is absolutely vital in improving quality of life and productivity, but is not intended to radically improve social mobility. Finally, tax-code reform (this calculator from CEPR is useful – I would add more income levels in the tax code and tax the top marginal rate higher) is necessary to fund these investments and reduce our debt obligations.

The US has been wracked for the past decade with what Ed Luce calls “the Great Stagnation”. Real income has decreased, and we’ve let our regulatory system grow dysfunctional from disuse and our infrastructure system decrepit from under-investment. We’re also competing with foreign industries to accomplish the same goals. I don’t believe foreign growth is bad – on the contrary, Chinese growth opens up Chinese markets to our goods and services. But I do think that US stagnation is bad. We vitally need a positive vision of a more equitable America. I don’t use the word ‘vision’ lightly. It can’t be anything less than a ‘vision’. Anything less would be disastrous.

The lede from a WSJ article yesterday made me laugh – conservatives continually harp that Ben Bernanke and the Fed must do all in their power to curb the inflationary tendencies associated with the coming economic recovery. Of course, no inflation has arrived, and neither has economic recovery – the US is in a deflationary period. But this doesn’t stop the WSJ now complaining of the Fed’s inaction in dealing with unemployment. The paper finally takes the Fed’s inflation targets at face value – a rare occurrence.

But this raises the question – what can the Fed actually do to combat the recession now? Monetary policy is a blunt hatchet – lowering interest rates makes borrowing easier across all sectors of the economy, but isn’t guaranteed to work. In this analogy, fiscal policy is a scalpel. Congress can target individual economic sectors – construction, for example, can be boosted through infrastructure expenditures. Unfortunately for us, neither looks likely to happen any time soon. Interest rates are now at their lowest, and a second stimulus (despite statements to the contrary) is dead in the water. And even if the Fed or Congress did manage to take action of some sort, it would be far too late now to affect the economy before the the end of the year.

What else is left when policy fails? Politics. In a utopia, the benefits of a particular policy would be obvious to completely rational, politically-engaged citizens. But that’s not how it works. The only way for the Obama administration to inspire confidence in the public is to act confidently. Those who are actually committed to sane economic policy (i.e., not deficit hypocrites who would vote for the 2001 and 2003 tax cuts) need to think big – rebuilding America big – because politics, unfortunately, comes before policy.