Opportunities and challenges in this economic crisis

The Big Fix by David Leonhardt, appearing in Sunday’s New York Times Magazine, is the most challenging and enlightening article I have read in a long time. Warning: at more than 7,500 words, you need to eat your Wheaties first. Because I’m a glutton for punishment, I’m going to break it apart and share it with you.

I. Whither Growth?

The first section assesses the current crisis, puts it in historical context, and summarizes the current thinking. Leonhardt says the big lesson from the past is, if you’re going to really go at the problem, get going and don’t let up. He quotes the new Treasury secretary, Timothy Geithner, “The mistake the United States made during the Depression and the Japanese made during the ’90s was too much start-stop in their policies.” The U.S. reference is to Franklin Roosevelt attempting to return to balanced budgets in the midst of the New Deal and the subsequent decline.

Favorite paragraph:

Once governments finally decide to use the enormous resources at their disposal, they have typically been able to shock an economy back to life. They can put to work the people, money and equipment sitting idle, until the private sector is willing to begin using them again. [...] What will happen once the paddles have been applied and the economy’s heart starts beating again? How should the new American economy be remade?

The section takes an in-depth look at the importance of growth rates as the single-most important predictor of the resolution of the current situation. “Slow growth makes almost all problems worse. Fast growth helps solve them.”

Growth provides taxes which pay debts. Will our economy grow fast enough as a result of the money that will be spent to generate the cash to pay off the debts that will accumulate? “Over the coming 25 years, if growth could be lifted by just one-tenth of a percentage point a year, the extra tax revenue would completely pay for an $800 billion stimulus package.”

II. The Upside of a Downturn

This section reviews the political tendency to use a crisis to tackle a host of other issues. Obama’s Chief of Staff, Rahm Emanuel, is quoted, “You never want a serious crisis to go to waste.”

The enlightening nugget here is about economist Mancur Olson, author of The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities.

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In Olson’s telling, successful countries give rise to interest groups that accumulate more and more influence over time. Eventually, the groups become powerful enough to win government favors, in the form of new laws or friendly regulators. These favors allow the groups to benefit at the expense of everyone else; not only do they end up with a larger piece of the economy’s pie, but they do so in a way that keeps the pie from growing as much as it otherwise would. Trade barriers and tariffs are the classic example. They help the domestic manufacturer of a product at the expense of millions of consumers, who must pay high prices and choose from a limited selection of goods.

Who are the interest groups of note in America?

Home builders and real estate agents pushed for housing subsidies, which made many of them rich but made the real estate bubble possible. Doctors, drug makers and other medical companies persuaded the federal government to pay for expensive treatments that have scant evidence of being effective. Those treatments are the primary reason this country spends so much more than any other on medicine. In these cases, and in others, interest groups successfully lobbied for actions that benefited them and hurt the larger economy.

And, of course, Wall Street.

Before the stock market crashed last year, finance companies earned 27 percent of the nation’s corporate profits, up from about 15 percent in the 1970s and ’80s. These profits bought political influence. Congress taxed the income of hedge-fund managers at a lower rate than most everyone else’s. Regulators didn’t ask too many hard questions and then often moved on to a Wall Street job of their own.

Bottom line: this crisis gives us an opportunity—and the political muscle—to make the hard choices and pass the tough measures to reverse the influence of these groups in an effort to restore equilibrium. Will it be done?

III. The Investment Gap

We’ve spent too much and saved too little. Not just individuals, also the health care industry. Where other countries have invested in infrastructure to digitize medical records, we’ve spent (“more on health care, per person, than any other country”) on costly, questionably effective treatments.

Transportation:

A trip from Boston to Washington, on the fastest train in this country, takes six-and-a-half hours. A trip from Paris to Marseilles, roughly the same distance, takes three hours — a result of the French government’s commitment to infrastructure.

Technology: A smaller percentage of U.S. households have broadband than “Canada, Japan, Britain, South Korea and about a dozen other countries.”

Where these kinds of upgrades bring quick financial returns, we undertake them. Otherwise, we do not. Our private sector has invested less than the ideal amount on research and infrastructure, so this leaves an opening for the government to play a role. Consider the Intranet, developed by the Defense Department, which has so markedly influenced our economy—not to mention our society.

The late ’90s Internet boom was the only sustained period in the last 35 years when the economy grew at 4 percent a year. It was also the only time in the past 35 years when the incomes of the poor and the middle class rose at a healthy pace. Growth doesn’t ensure rising living standards for everyone, but it sure helps.

The G.I. Bill “created a generation of college graduates,” and the Dwight D. Eisenhower Interstate System provides the means for citizens to travel to work, for goods to traverse the country, and for Americans to explore their country.

Other countries, to be sure, have different philosophies about how much government involvement is appropriate in economic growth. European countries have lately grown less rapidly than the U.S., though their governments tend to be more hands-on. But one significant advantage for the government is its ability to borrow at such a low rate.

Favorite paragraph:

“This recession is a critical economic problem — it is a crisis,” [Obama economic adviser Lawrence] Summers told me recently. “But a moment when there are millions of people who are unemployed, when the federal government can borrow money over the long term at under 3 percent and when we face long-run fiscal problems is also a moment of great opportunity to make investments in the future of the country that have lagged for a long time.”

He then told a story that John F. Kennedy liked to tell, about an early-20th-century French marshal named Hubert Lyautey. “The guy says to his gardener, ‘Could you plant a tree?’” Summers said. “The gardener says, ‘Come on, it’s going to take 50 years before you see anything out of that tree.’ The guy says, ‘It’s going to take 50 years? Really? Then plant it this morning.’”

IV. Stimulus VS. Transformation

So let’s build an investment economy. Simple, right? Well, the challenge is that for the stimulus to be effective, it must spend money now, quickly. And in order to transform the way we live, it must carefully craft spending policies that change the fundamentals of entrenched industries.

We’ve made energy consumption a relatively affordable affair.

Dirty-energy sources — oil, gas and coal — are cheap. That’s why we have become so dependent on them.

This green-job-based economy of the future sounds like a panacea. By creating green jobs, we tackle the jobs issue at the same time as environmental issues. The subsidies provided for alternative-energy-producing sources will narrow the gap between dirty energy and clean energy. But while we’re providing green jobs and making alternative energy more affordable and, thus, more widely used, won’t that eliminate the dirty-energy jobs we already have?

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For starters, of the $700 billion we spend each year on energy, more than half stays inside this country. It goes to coal companies or utilities here, not to Iran or Russia. If we begin to use less electricity, those utilities will cut jobs. Just as important, the current, relatively low price of energy allows other companies — manufacturers, retailers, even white-collar enterprises — to sell all sorts of things at a profit. Raising that cost would raise the cost of almost everything that businesses do. Some projects that would have been profitable to Boeing, Kroger or Microsoft in the current economy no longer will be. Jobs that would otherwise have been created won’t be. As Rob Stavins, a leading environmental economist, says, “Green jobs will, to some degree, displace other jobs.” Just think about what happened when gas prices began soaring last spring: sales of some hybrids increased, but vehicle sales fell overall.

The conclusion of this section is that the kind of thinking above is why we’re not already at our green-energy goal. We must invest in alternative energy, despite the short-term costs, because we simply have no other choice. “A cap-and-trade program will create incentives for the private sector to invest in alternative energy, which will lead to innovations and lower prices.”

There are other benefits, too, of course, such as “a handsome return in the form of icecaps that don’t melt and droughts that don’t happen — events with costs of their own.”

V. Curing Inefficiencies

Health care is bloated and sick. How do we keep it from becoming morbidly obese? While economic growth is good, more increases in health care spending is bad.

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You can see that by looking at various costs as a share of one year of economic output — that is, gross domestic product. Surprisingly, the debt that the federal government has already accumulated doesn’t present much of a problem. It is equal to about $6 trillion, or 40 percent of G.D.P., a level that is slightly lower than the average of the past six decades. The bailout, the stimulus and the rest of the deficits over the next two years will probably add about 15 percent of G.D.P. to the debt. That will take debt to almost 60 percent, which is above its long-term average but well below the levels of the 1950s. But the unfinanced parts of Medicare, the spending that the government has promised over and above the taxes it will collect in the coming decades requires another decimal place. They are equal to more than 200 percent of current G.D.P.

Peter Orszag, “one of the country’s leading experts on the looming budget mess that is health care” and a former director of the Congressional Budget Office, is President Obama’s budget director. He has a straightforward way of explaining the health care predicament.

It’s not primarily that we’re going to have more 85-year-olds. It’s primarily that each 85-year-old in the future will cost us a lot more than they cost us today.

Orszag has praised the findings of Mitchell Seltzer, who has studied the treatment habits of doctors across the country. He’s found that health-related trends are fairly consistent from region to region, but the approach to treatment varies widely. Doctors in some areas spend significantly more in their treatments than more conservative doctors. They claim their patients are sicker, but Seltzer’s surveys have determined this isn’t so.

Doctors who spent more — on extra tests or high-tech treatments, for instance — didn’t get better results than their more conservative colleagues. In many cases, patients of the aggressive doctors stay sicker longer and die sooner because of the risks that come with invasive care.

Here’s the key: “Medicare will have to stop reimbursing some expensive treatments that don’t do much good.” Doctors will object, and so will the wealthy and connected health care lobby. Can the current crisis be leveraged effectively to forge the will to proceed in the face of this interest group?

VI. Graduates Equal Growth

All of this amounts to nothing, however, unless we can increase our graduation rate. This is not just about getting high schoolers successfully out of high school and/or into college. How do we get college students efficiently through college?

I remember this issue from my time at Youngstown State University. Coming into YSU from a private high school, as I had done, it was drilled into me that college was a four-year affair. I needed to balance my credit load so that at the end of four years I was ready to move on to the next level, be that a job or graduate school. However, I encountered plenty of students who were on six-, eight-, or ten-year plans.

Part of this may be the reality of a commuter school. Many students work. Some have children. These commitments compete for time and energy, making the four-year plan an impossibility. But without a concrete, accepted time frame for completing one’s education, the psychology of graduation is amorphous and uncertain.

The spread of education not only increases the number of eligible workers among the population, it evens out the distribution of wealth across the citizenry. “Inequality fell rapidly in the middle decades of the 20th century,” thanks to the GI Bill and the general spread of mass education thanks to the number of high schools built in the early part of the last century.

The decline from the late 1960s onward resulted in a marked slowing in the numbers of degreed Americans.

Between the early 1950s and early ’80s, the share of young adults receiving a bachelor’s degree jumped to 24 percent, from 7 percent. In the 30 years since, the share has only risen to 32 percent. Nearly all of the recent gains have come among women. For the first time on record, young men in the last couple of decades haven’t been much more educated than their fathers were.

The author profiles Shepherd University in West Virginia, who graduates about 35 percent of its middle-class students from the Shenandoah Valley. The state scholarship program there, Promise, was borrowed from other institutions, but with a significant change. Other schools encouraged smaller course loads by requiring a minimum grade-point average. Students would stay for a few years and then drop out.

West Virginia decided to offer free tuition at its public colleges for students who took enough courses to graduate in four years. The on-time graduation rate has risen almost seven percent.

But nearly everyone I interviewed in West Virginia — the students, the president of Shepherd and other education officials — worried that financing would be reduced soon. The program is expensive, and state revenue is declining.

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Last year, the Gates Foundation hired an economist named Thomas Kane to oversee a big new push to prepare students for college. Kane is one of the researchers whose work shows that teachers may matter more than anything else. Good teachers tend to receive high marks from parents, colleagues and principals, and they tend to teach their students much more than average teachers. Bad teachers tend to do poorly on all these metrics. The differences are usually apparent after just a couple of years on the job. Yet in a typical school system, both groups receive tenure.

VII. A Matter of Norms

Economics matter, but so do intangibles. One of these is how we perceive normalcy. The Promise students in West Virginia have begun to see a four-year degree like I did: as the norm. The doctors in different areas of the country who offer their patients differing treatments are just operating under practices they and their colleagues perceive as the norm. There is an entrenched culture built by many past policies and affecting millions of individual decisions. The signals from the new policies created by the new administration will both be influenced by existing habits and will influence coming generations.

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The norms of the last two decades or so — consume before invest; worry about the short term, not the long term — have been more than just a reflection of the economy. They have also affected the economy. Chief executives have fought for paychecks that their predecessors would have considered obscenely large. Technocrats inside Washington’s regulatory agencies, after listening to their bosses talk endlessly about the dangers of overregulation, made quite sure that they weren’t regulating too much. Financial engineering became a more appealing career track than actual engineering or science. In one of the small gems in their book, Goldin and Katz write that towns and cities with a large elderly population once devoted a higher-than-average share of their taxes to schools. Apparently, age made them see the benefits of education. In recent decades, though, the relationship switched. Older towns spent less than average on schools. You can imagine voters in these places asking themselves, “What’s in it for me?”

When the economy begins to grow again, whom will that growth benefit? In the last decade, it has increasingly benefited those at the top. During the middle of the last century, “middle-class incomes soared.” What’s next?

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