Procrastinating on March 31, 2016

Pragmatism or Perdition

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J. Bradford DeLong: Pragmatism or Perdition: BERKELEY – Almost every single observer who looks of the progress of the US economy over the past 40 years comes away severely disappointed.

The US today spends roughly 4% of GDP more on health sector administration and 2% more on overtreatment than it used to. The U.S. gets nothing of real value for these immense expenditures. Other North Atlantic economies do fine–do substantially better, in fact–in providing health to their citizens without these overhangs.

The US today spends 8% of GDP on finance. That is twice as much as 40 years ago. Once again, the U.S. gets nothing for it–gets, in fact less than nothing, because the lion's share of responsibility for the 10% growth shortfall of the past decade rests on the shoulders of the hypertrophied dysfunctional finance system. It is not as though anybody claims that the plutocrats of high finance and of our corporations are doing a materially better job at running their organizations and allocating capital by enough to justify their now even-more outsized compensation packages. It is not as though we can see the impact of paying more to financiers in the tracks of faster economic growth. Rather the reverse.

Financial plutocrats are only one-third of the extreme-inequality story. The US today devotes 10% more of GDP then it did a generation ago to incentivizing its rich, while starving public investment in physical and human capital by roughly 4% of GDP relative to wear a generation ago we would have reasonably thought we would be today. But the extra incentive visitation of the rich has not produced faster growth, no matter how one tries to torture the baselines and the benchmarks to show that it has.

From the perspective of the typical American today, nearly 1/3 of America's productive potential has been either thrown away as a result of the damage done by the financial crisis-driven episode we should soon start calling “the Longer Depression”, or has converted into a form of spending that may show up in GDP numbers but add nothing or less than nothing to society's real wealth. It is difficult to see the past 40 years as anything other than a profound failure of economic growth relative to reasonable benchmarks, and, at a deeper level, as a profound failure of the institutions of government that have shaped The pattern of growth.

This should come as a surprise to everyone, for up until 1980 or so to centuries of history had demonstrated that US economic growth guiding institutions were world-class. The big governmental decisions–whether the Hamiltonian bet on industry and finance, wasteful and corrupt provision and subsidization of infrastructure to spam a continent, a world-class push into education, The Eisenhower era love of highways, cars, and suburbs–worked, more often than not. They pushed the economy at an accelerated pace into what were thought to be the industries of the future. And, more often than not, they were the industries of the future.

But over the last 40 years ago the results of the pushing have been disappointing. Backing off of education and public infrastructure and manufacturing to focus on finance and healthcare administration and elite wealth have not produced a richer society, although they have produced a richer elite.

So what went wrong? People on the left, reasonably credibly, blame the dominance of right wing ideology: that the free market is always right and needs to be made freer, and that those it rewards are always righteous. People on the right, less credibly, blame the survival and even expansion of a social-insurance system–Medicare, Medicaid, Social Security, the Earned Income Tax Credit, Unemployment Insurance, Disability Insurance, etc.–that has turned America into a nation of takers.

My coauthor Steve Cohen and I prefer to back up to an earlier stage. We prefer to blame not particular ideologies, but rather the dominance of a mindset in which ideology is our guide. Ideologies are by their nature oversimplified maps to reassure those who seek certainty as they recoil from the complexity of the real world. Their real-world purpose is to provide certainty rather than understanding: they grow–go viral–not so much when they suggest policies that turn out in retrospect to work, but rather when they help people feel reassured and mentally happy.

We have written a little book, Concrete Economics: The Hamilton Approach to Economic Growth and Policy, coming out this month from Harvard Business Review Press. We try to remind Americans and others that there is a better alternative than the ideological approach. There is the pragmatic approach: what looks likely to work, here and now, starting from where we are, whether or not it fits some grand theory. Call it the Hamiltonian approach, because it was definitely Alexander Hamilton's–but also Eisenhower's, the two Roosevelts', Lincoln's and his successors', and even (when they were in power) the Madison who pushed the Second Bank of the United States and the Jefferson who grabbed executive power to undertake the Louisiana Purchase.

People will doubtless like reading our Concrete Economics less than watching the musical “Hamilton”. And, truth to tell, Lin-Manuel Miranda and company are probably more educational too.

But we do think our point about pragmatism in policy is very important.