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Scholarly Response: “It’s Hard to Put a Happy Face on This Recovery”

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Scholarly Response: “This Economic Recovery Is Still Being Built”

Debaters on ABC's This Week

On Sunday, April 29, the Miller Center partnered with ABC’s “This Week with George Stephanopoulos” on the second of six special episodes examining some of the key issues heading into the 2012 Election.  On Sunday, six distinguished panelists discussed and debated whether or not America’s economic recovery is “built to last.” Today’s guest post is from historian and former Miller Center Fellow Julia Ott offering her assessment of the arguments presented in the debate.

On Sunday, George Stephanopoulos asked a panel of six distinguished commentators whether or not America’s economic recovery is built to last.  No one answered “no” outright, but pessimism pervaded. 

We can scarcely fault the panelists. The mixed bag of economic data released last Friday hardly inspired optimism. Last quarter’s tepid 2.2 percent growth rate in GDP seemed to be driven by a 2.9 percent growth in consumer spending, a 19.1 percent increase in housing investment, and strong corporate earnings. But on the other hand, business spending fell for the first time in two years while government spending continues to taper off. Levels of consumer debt and inequality remain at historically high levels. And as George Will pointed out, employment has not recovered to pre-recessions levels even after 50 months. 

The illustrious panelists could not reach consensus about why the economic ground under our feet remains so shaky. Nor could they arrive at any agreement about the prescriptive road ahead, that is, what policies our elected officials should pursue to solidify these weak economic gains. 

According to Carly Fiorina and Eric Schmidt, misguided government policies—particularly too much regulation and taxation of business—continue to hamstring job creation in the private sector, especially among the small businesses that they identify as most generative of jobs and growth. Paul Krugman, by contrast, favors additional federal stimulus modeled more on the “effective recession-fighting strategies” of developing nations like China, rather than austerity follies playing out in Europe. Still, Sunday’s debate failed to spark a detailed discussion about specific proposals that might solidify and accelerate recovery. 

This recovery is still being built. For it to last, economic policy must overcome inequality, maintain and even increase stimulus measures, pursue public investments (including those in human capital), and commit to serious reform of the financial industry.  In other words, the nation must not fall back into the supply-side and austerity fallacies that produced the Great Recession in the first place (incidentally, they also yielded the double-dip ‘Roosevelt Recession’ of 1937-1938 that made that era’s Depression so Great).

George Stephanopoulos invited the panelists to consider broadly “this whole issue of income inequality,” but the discussion quickly turned down a narrow path. Contrary to Schmidt’s claims, increasing returns-to-college education does not explain the acceleration of inequality in the United States since the 1980s. Overcompensation of corporate executives and of the entire financial sector contributed significantly to that trend. Highly educated engineers, for example, witnessed nowhere near the relative income gains enjoyed by B.A.s and M.B.As who entered finance, as economists Thomas Phillippon and Ariell Reshef demonstrate. The steady decline in top marginal tax rates (from 70 percent during the 1970s to 35 percent today) and in capital gains tax rates (from 40 percent in the late 1970s to 15 percent today) allowed the wealthiest to compound their wealth until inequality reached Jazz Age levels. Meanwhile, productivity growth decoupled from workers’ compensation. While workers produced more after 1980, their standard of living failed to rise as it had in the three decades after World War II. And whatever recovery we may be experiencing, “the much ballyhooed ‘1 percent’ have recovered far better than everyone else,” as Derek S. Hoff astutely observes.    

Reversing these trends requires that we maintain payroll tax cuts and unemployment insurance for the middle and working classes while raising taxes on top marginal incomes, capital gains, and carried interest. This course would not only distribute the burden of taxation more equitably. It would boost aggregate private demand (because the not-rich spend more) and raise tax revenue that could be used to pare budget deficits and to create jobs. As the Economic Policy Institute points out, “Congress could simply use tax fairness reforms to pay for job creation policies.” These could include investment in infrastructure projects, green technologies, and education—all of which would create jobs now and lay the foundation for future productivity growth across all sectors of the economy. Instead—as Paul Krugman notes—forced austerity at the state and local level (like firing teachers and other public sector workers) has nearly nullified federal stimulus initiatives and thus hindered a solid recovery.

True, Fiorina, Schmidt, and Walker all called for tax reform in Sunday’s debate: equalizing the tax rates levied on earned income and capital gains, eliminating deductions, and closing loopholes. But they assigned responsibility for job creation solely to the private sector, especially those valorized small businesses. George Will correctly characterized their prescription for tax reform as a political impossibility, given Americans’ widespread and long-standing support of (and dependence upon) deductions of mortgage payments, employers’ health insurance contributions, and state and local taxes.

Several panelists identified the “quality” and “quantity” of education as a key issue for our workforce—and by extension, the long-term health of our economy. But remarkably, the panel paid relatively little attention to the astronomical costs of higher education and the crushing burden of debt faced by today’s graduates. 

According to the Progressive Policy Institute, average student debt load rose 24 percent (adjusted for inflation) between 2000 to 2010, although the average earnings of full-time workers aged 25-34 with no more than a bachelor’s degree fell 15 percent in the same period. Since 1999, the volume of outstanding student loan debt has grown by a factor of 4.5, according to John Quinterno. The findings of the Federal Reserve Bank of New York indicate that total student debt now exceeds outstanding credit card balances and auto loans—and it continues to rise even as borrowers ‘deleverage’ elsewhere. One in ten student-debtors is behind in their payments. In time, an even grimmer picture may emerge: nearly half of student-debtors now enjoy deferments until graduation and/or post-graduation grace periods.

How can young men and women acquire twenty-first century skills, seize hold of their entrepreneurial birthright (so celebrated by Carly Fiorina), and unleash their powers of innovation when they are saddled with so much debt? Recommitting to public funding of higher education, maintaining low interest rates on federally subsidized Stafford loans, and restructuring student debt—even allowing it to be discharged in bankruptcy as it had been prior to 2005—may prove just as important for achieving sustainable recovery as the restructuring of delinquent and underwater mortgages.    

Eric Schmidt’s discussion of the challenges faced by our educational system correctly celebrated the American university’s historical successes in incubating innovation. But Schmidt ignored the key role that federal spending has played historically in funding basic research (it funded 58.6 percent of all R&D between 1952 and 1975)—something that budget hawks compromise considerably.

And despite all the talk of innovation and entrepreneurialism, none of the panelists drew attention to corporate policies—particularly stock buy-backs intended to buoy stock price—that drain corporate cash away from real investments in innovation. As William Lazonick shows, S&P 500 corporations spent over $2 trillion to repurchase their shares between 2000 and 2008. If they had retained those funds, they would have been far better positioned to weather the financial crisis.     

Which leads us to the most glaring omission in Sunday’s debate: the glacial pace of Wall Street reform. Ideally, the purpose of the financial system is to channel savers’ funds into investment in worthy enterprises. Two years after its passage, Dodd-Frank has not moved us much closer to that ideal. The largest banks still dominate the market in derivatives and do not post prices on a central exchange where customers might see and select the best prices. The financial system remains highly leveraged and oriented towards proprietary trading in esoteric, speculative financial instruments. Capital and debt limits, the elimination of conflict of interests such as those identified by Greg Smith, restrictions on compensation, strict and expedited application of the Volcker rule—regulators should be pursuing all these measures vigorously.  Otherwise, an unfettered Wall Street will ravage our economy once again, rendering Sunday’s debate moot.

Julia Ott is assistant professor in the history of capitalism at the New School in New York City. Her book, When Wall Street Met Main Street: the Quest for an Investor's Democracy, was published by Harvard University Press.  She was a Miller Center National Fellow in 2005-2006.

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