What Anti-Growth Agenda?

Contrary to centrist critiques, the left has always promoted growth and innovation. A response to William Galston.

By Lawrence Mishel

Tagged budgetDeficitEconomicsJobs

In his essay “Progressive Entrepreneurship: A Work in Progress” [Issue #21], William Galston argues that liberals “must embrace growth as a high priority, and they must therefore endorse its preconditions,” by which he means “innovation and entrepreneurship.” Galston further notes that “innovation advocates must recognize that not all reservations against growth and competition are the product of ideology or ignorance.” “Justice matters,” he continues, “and so do public goods that markets cannot provide.” What we have, then, is the familiar New Democrat formula, arguing for a golden mean, here labeled “progressive entrepreneurship,” that goes beyond the familiar stalemate of left and right positions.

I have two responses, one congenial and the other harder-edged. The congenial response is that Galston, with whom I share many values, is kicking down an open door—progressives readily embrace most of what he suggests and have done so for many years. The edgier response is that Galston, self-identifying as pro-growth, is adopting some of the familiar, baseless arguments made by business about what creates—or blocks—growth (taxes, torts, government mandates), and then compounds the error by falsely claiming that progressives are not pro-growth or pro-innovation.

Galston rightly argues that we need to encourage innovation and the emergence of new sectors, and offers several prescriptions to achieve those objectives. He recommends maximum feasible transparency so that firms report all assets and liabilities fully and intelligibly. He supports making the research-and-development tax credit permanent. He also calls for maximizing public access to government-supported research, and suggests the Commerce Department issue new rules to ensure that university bureaucracies do not impede innovation.

I wish I could agree that these policies will accelerate the pace of innovation substantially. But—and this is more important—though the specifics may matter a lot, there’s no big fight to be had in these areas. Simply put, it would be hard to say that progressives are standing in the way of this agenda.

Galston makes the case for innovation by citing a Kauffman Foundation study showing that “the lion’s share of net new job generation occurred in firms less than five years old.” True enough, but this finding represents much less than Galston makes of it. First, the report itself notes, “To be fair, startups have a definitional advantage because they can’t lose jobs, and some of their created jobs will surely be lost by next year’s age one firms.” Further, “there are two simple categories of existing firms: those that go out of business (Deaths) and those that continue (Survivors). On balance, existing firms lose more jobs than they create. But once Deaths are set aside, Survivors usually create more net jobs than startups do.” In other words, the focus on startups turns out to be somewhat misguided. One could just as easily push for a slowdown in the death rate of existing firms rather than an increase in the growth rate of startups to promote jobs.

Still, I accept the need for innovation, so let’s proceed with Galston’s argument. After recommending policies that are neither bold nor objectionable, Galston argues that we need to take seriously our tax policies, government mandates, and regulation, and investigate how they impact new ventures and startups. He asserts that they “hit smaller firms harder than larger ones,” but offers no evidence that our current policies actually impede innovation or startups. Given that most employment mandates exempt many small businesses, I’m not sure that’s true. In fact, I don’t think there is any significant body of research that demonstrates that innovation is harmed by taxes, regulation, or government mandates. Quite the contrary: Michael Porter of Harvard Business School has argued that regulations actually spur innovation (for example, environmental regulations can lead to production innovations that reduce the use of costly chemicals or lower waste disposal costs).

It’s worth noting that in cases where deregulation is especially aggressive, innovation can lead to harmful consequences, a fact its boosters rarely scrutinize. Let us remember the roots of the current global fiscal crisis. Corporate interests argued that financial sector deregulation would encourage financial innovations. Encourage financial innovation it did, helping lead to the meltdown from which we have yet to recover. To his credit, Galston seems very aware of this downside of innovation-mania: As he acknowledged in a recent New Republic essay, these “innovations helped crater the world economy.”

Galston anticipates progressive concerns that the fruits of innovation will not be evenly distributed. He rightly couples “accelerating the pace of innovation” with a call for “concrete measures for ensuring that its fruits are widely shared.” Curiously, the agenda for obtaining widely shared growth is missing from his essay. But this line is simply a new name for an old argument neoliberals have been making for a long time now: All you have to do is substitute the word “productivity” for “innovation.”

We know that wage or income growth over the last three decades did not come anywhere near the productivity growth rate of the same period (specifically, 73 percent productivity growth from 1979 to 2007). Neoliberals like Brookings Institution economists Barry Bosworth, Martin Neil Baily, and Charles L. Schultze focused their attention on the productivity slowdown that began in the early 1970s and told us that productivity was the basis for future growth in living standards. Rising inequality, according to their narrative, was not the main factor behind wage stagnation—low productivity growth was. Productivity actually accelerated in the mid-1990s—and yet the wages of the typical worker did not grow correspondingly. In fact, the inflation-adjusted wages of both high school and college-educated workers haven’t risen in ten years, including the five years of recovery starting in 2002.

It is commendable that Galston acknowledges the problem. But progressives are still waiting for centrists and the business community to offer and agree to measures that could make a difference: enforcement of labor standards, a higher minimum wage, a true right to collective bargaining, and a commitment to low unemployment, among other policies. Strengthening social insurance, both health care and retirement, would make a huge difference, as workers would have benefits regardless of the particular jobs they have and growth would be channeled to a wider array of people. Instead, Galston chides progressives for not wanting to address “structural challenges in entitlement programs.”

The assertion that progressives are not pro-innovation or pro-growth is unfounded. For the last 25 years, my organization, the Economic Policy Institute (EPI), has been putting forward a pro-innovation and pro-growth policy agenda. In a budget plan we assembled with the think tanks Demos and the Century Foundation released last November, we included a paid-for and permanent research-and-development tax credit, which is the most prominent federal innovation policy directed at the private sector. In other work, EPI has focused on policies that ensure subsidized R&D innovations (and subsidies to green energy such as solar and wind power) lead to domestic production. Such policies would not only maximize the benefits of innovation but also spur further innovation that is most likely to occur in conjunction with production (Andy Grove of Intel has persuasively made this case). Galston is silent on this issue.

The innovations of the past have been greatly spurred by federal expenditures in science, defense, health, and higher education. Consequently, our budget blueprint maintains and expands such public investments while achieving fiscal sustainability in the medium- and long-term. In contrast, the budget plans of the Obama Administration and the Bowles-Simpson deficit commission savagely cut domestic discretionary spending (where such expenditures are located) to far below the historical average, from 3.3 percent to 2 percent of GDP, which implies a substantial shrinkage of public investment (currently 1.8 percent of GDP)—a disappointing proposal at odds with White House rhetoric.

A host of other progressive priorities also double as pro-growth ideas. Policies to help the states weather the budget consequences of this recession are, in fact, essential to bolstering our twenty-first century economy. Higher education is crucial for future innovation—not to mention upward mobility—and the cutbacks on that front can only impede growth. Providing universal health care and a strong safety net are also pro-innovation policies, as the neoliberal Hamilton Project has argued for years. For instance, the United States has lower self-employment than Europe, and one explanation is the difficulty that individuals and small businesses have finding affordable health care. Regulations, such as cap-and-trade, are also essential for innovation. As Galston recognizes, energy alternatives will not emerge without incorporating the full costs of carbon use.

Last, the progressive focus on the employment picture—as opposed to the fashionable fixation on deficits and the debt—is undoubtedly a pro-innovation and pro-growth stance. Progressives have strongly supported efforts to address the persistently high unemployment we face and will likely suffer for years to come. This requires more spending and higher deficits in the near term; any immediate spending cuts or tax increases will dampen the recovery. Moreover, generating jobs is essential to getting our fiscal house in order, as it is impossible to balance the budget or stabilize the debt-to-GDP ratio with high levels of unemployment. Focusing on employment, in turn, is pro-innovation since new innovations accompany the investments that are made to satisfy rising demand. Creating new jobs prevents the scarring of a generation of young people, both those in school and those entering the labor market, who suffer a lifetime of lower earnings from not properly starting off their careers. As Paul Krugman has rightly noted, it’s a lot harder to generate higher long-term rates of growth than it is to move the economy back to its productive potential. Getting back to full employment creates the conditions for long-term growth.

This all leads to one question: What makes Galston pro-growth? He really does not say except to note that he is for open trading regimes, a more efficient tax code, restructured entitlements, and attention to our misguided fiscal course. And, of course, he favors innovation.

All of Galston’s pro-growth policies are aimed at improving efficiency—maximizing the output for given inputs at full employment. But as Nobel laureate James Tobin noted many years ago, getting more growth out of the capacity we have—minimizing recessions and strengthening recoveries, thereby reducing lost output—produces more growth and higher output than do efficiency efforts. In this light, fighting for full employment should be the priority for those who are “pro-growth.”

So, where has Galston been on producing growth during the Great Recession? Galston’s recent writings—in particular, an essay in mid-2010 titled “The Case Against Keynes (With Some Questions for Krugman, Too)”—have called into question whether job creation should dominate our concerns rather than deficit reduction. Galston does recommend some additional moderate stimulus along with a long-term deficit plan. However, at a time when a clear voice for strengthening job creation is needed, Galston’s voice has been, at best, muddled.

It is encouraging that coupling innovation and shared prosperity seems to be emerging as a consensus position among progressives of all stripes. Unfortunately, it is still difficult to imagine a robust center-left economic agenda on innovation springing forth anytime soon. Simply put, progressives and entrepreneurship advocates are still bitterly divided over fundamental issues—not least of which is jobs. Today, centrists and neoliberals preach deficit caution over employment, essentially telling the millions of jobless, “Just tough it out.” And there is still that missing piece on how to translate growth into rising living standards for all. Such aversion to dealing directly and forcefully with distributional issues and the jobs crisis not only prolongs this terrible economic rut, but also postpones the emergence of a progressive entrepreneurship coalition.

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Lawrence Mishel is President of the Economic Policy Institute and is the co-author of The State of Working America. Mishel's research focuses on labor market trends and education.

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