Wednesday, March 2, 2016

Cohen and DeLong, Concrete Economics

Stephen S. Cohen and J. Bradford DeLong have written an engrossing, sweeping history of the American economy as seen through the lens of a single hypothesis: that “in successful economies, economic policy has been pragmatic, not ideological. It has been concrete, not abstract.” And it has been the product of intelligent design, implemented by government and “brought to life, expanded, and transformed in unforeseeable ways by entrepreneurial activity and energy.”

Concrete Economics: How the Government Reshapes the Economy through Entrepreneurs (Harvard Business Review Press, 2016) traces the determinants of what was a vibrant American economy—until the latest redesign, beginning in the 1980s. “Yes, there was an ‘invisible hand’ and enormous entrepreneurial innovation and energy. But the invisible hand was repeatedly lifted at the elbow by government and re-placed in a new position from where it could go on to perform its magic.”

According to widely accepted folk wisdom about American economic history, “America is and has always been Jeffersonian. It is and has been a small-government laissez-faire country, exalting its pioneers, its entrepreneurs, and its small businesses, and deeply distrustful of any sort of ‘interference’ by the government in the economy.”

This folk wisdom is wrong, the authors argue. Starting with Alexander Hamilton, the brilliant early architect of the American economy, the government adopted policies to promote industry, commerce, and banking. In administration after administration, the government embraced a high-tariff policy to distort markets in America’s favor, to protect its infant industries. It later took the lead in creating the transcontinental railroads and “even engaged in social design on a big scale” when it “sold off millions of acres” to homesteaders. During Teddy Roosevelt’s administration it made some pragmatic corrections to the economy, busting trusts and establishing the income tax “to address the outrageous concentration of wealth of the first Gilded Age.” The New Deal engaged in pragmatic experimentalism to get the economy back on track. Eisenhower preserved the New Deal, launched huge housing and highway programs, financed the large-scale development of research universities, and supported the development of new technologies. “This was a big-time exercise in hands-on direction, in deliberate winner-picking, and it was a very big winner for the United States.”

“And,” the authors continue, “American government did not accept ideological handcuffs. When push came to economic shove, the US government even deliberately devalued the dollar in the interest of national economic prosperity. It did so more than once, each party taking a crack: under FDR, under Nixon, and under Reagan. America used all the tools: infrastructure development, tariff protection, direct picking and promoting of winners, exchange rate devaluation, and, during the first Reagan administration, a return to selective protectionism through naked import quotas in the form of ‘voluntary’ export restraints.”

By the 1980s, however, as the U.S. tried to shift its economy into ever-higher-value activities, ostensibly pursuing the same strategy as Eisenhower and his successors (where “government tolerated a slow shift out of garments, toys, luggage, shoes, and luxury goods and vigorously moved to shift into advanced technologies—commercial aviation, semiconductors, and computers”), the shift was misguided. The direction was selected not pragmatically but ideologically, and presented not concretely but abstractly. The economy turned toward the processing of real estate transactions, the processing of health-care insurance claims, and especially into finance. These new industries “produced nothing (or exceedingly little) of value, serving at the end mostly to redistribute income to the top.”

It’s high time for another redesign, the authors contend, which is a policy task as well as a task for economists. The authors “do not propose the content of such a redesign, complete with dubious numerical targets. That is not how it happened in the successful American past.” But they do suggest one change: to “push thinking and talking and proposing about what we should do about our economy into concrete terms. Insist that proposed shifts be couched so as to be image-able, as in, ‘This is the kind of thing we will get.’”

No comments:

Post a Comment