The Anti-Economist — From the November 2013 issue

The Future Progressive

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In his classic book On Liberty, the nineteenth-century British philosopher John Stuart Mill urged that man strive to become “a progressive being.” Mill defined progressivism as the cultivation of individuality; to live progressively, he wrote, a man requires personal freedom. But Mill and other liberal philosophers of his era also saw that individual development could not happen without a community. This recognition was the starting point of progressivism as a philosophy of government. As the longtime Oxford professor Alan Ryan puts it, modern liberalism’s aims are to “emancipate individuals from the fear of hunger, unemployment, ill health, and a miserable old age,” and to “help members of modern industrial societies flourish in the way Mill . . . wanted them to.” The progressive maintains that change is a way of life, that society must work to ensure this change is for the better, and that government is the most important means of doing so.

As American policymakers fight over social-spending cuts and the right wing of the Republican Party, intent on defunding and dismantling Obamacare, threatens to shut down the federal government, fiscal doomsaying has become a disguise for an increasingly successful attack on this philosophy. One common feature of the many destructive economic ideas that have flourished in recent years is that they seek to prevent Washington from responding to change. Take for example Grover Norquist’s “Taxpayer Protection Pledge,” which requires its signatories to vote against tax increases regardless of circumstance. Currently 218 of 233 Republicans in the House and thirty-nine of forty-five in the Senate have signed the pledge, which means that nearly half of our federal legislators have actively chosen to limit their own options in responding to the nation’s changing needs. It’s one thing to be ideologically averse to tax hikes, but how can a legislator possibly know in advance that increased revenue will never be genuinely needed?

A similar dynamic was at work in the prelude to the 2013 budget sequestration, which arose from a belief among conservatives that the nation had to cut social spending now in order to address a predicted budget crisis ten years in the future. The Budget Control Act, passed in 2011, set hard caps on government expenditures, beginning this year. Even before these cuts went into effect, it was clear they would be terrible for our fragile economic recovery, but no agreement could be reached to reverse them. The government, privileging long-term deficit control over short-term growth, had decided to tie its own hands, with the result that the deficit is projected to fall from 10 percent of GDP in 2009 to less than 3 percent by 2018, while unemployment will remain high and economic expansion sluggish for the foreseeable future. Perhaps Congress would have done better to respond to an economy in flux.

This brings us to what may be the worst — and, for me, certainly the most disheartening — economic idea of recent years. In 2010, President Obama established the National Commission on Fiscal Responsibility and Reform, headed by former Republican senator Alan Simpson and former Clinton chief of staff Erskine Bowles, to come up with ideas to balance the federal budget. The cornerstone of the Bowles–Simpson plan was its proposal that federal expenditures be permanently capped at 21 percent of GDP. This level is near the average for the past forty years, but as the baby boomers age and medical costs rise, periods of increased spending will be inevitable. We couldn’t stay below the Bowles–Simpson ceiling without drastic cuts to social services. Though neither Obama nor Congress has acted on the idea of the 21 percent cap, the proposal continues to be taken seriously among policymakers. The bipartisan duo returned to Capitol Hill earlier this year with a modified plan that involved even less in the way of new taxes but maintained the principle of spending caps. Their proposal is an attack on progressivism precisely because it refuses to recognize the dynamics of social and economic evolution, of change itself. Economies change, social expectations change, our knowledge about the personal resources people need in order to achieve fulfillment changes.

Neither the federal government nor state governments could have known in 1789, the year the Constitution was ratified, that they would one day finance canals and railroads, build schools and medical-research facilities, subsidize land-grant universities, develop vast municipal water systems, create a network of interstate highways, and provide a public pension system for the elderly and a safety net for the unemployed.

What don’t we know about the future today? We are only beginning to learn how important pre-kindergarten education is to a child’s development, just as we once had to learn that high school is critical. We are beginning to understand the challenges posed by fossil-fuel consumption and climate change, and the substantial government investment these challenges demand. Economists almost to a person support free trade, but they should also support the establishment or expansion of social services to protect workers. It’s no coincidence that Nordic nations, with their world-leading quality of life, tend to have not only the most open economies but also the broadest (and most expensive) safety nets.

Imagine if we had drawn a red line before the Great Depression, when federal spending hovered below 10 percent of GDP. Keeping under such a ceiling today might mean eliminating either defense spending or Social Security entirely, or half of each. Medicare would never have been a thought. Do we forgo more spending on worthy programs merely to meet an arbitrary fiscal objective?

“The first step in winning the future is encouraging American innovation,” President Obama said in his 2011 State of the Union address. He was right. Technological advancement is widely understood to be the main source of economic growth, and common sense confirms this view — think of the water mill, the steam engine, electricity, mass production, and, more recently, television, jets, the supertanker, the Internet, and the smartphone.

Our national reflex is to assume that most technological breakthroughs come from entrepreneurial giants and venture capitalists. We are too ready to accept the distorted antigovernment ideology of such economists as Milton Friedman, who wrote in his book Capitalism and Freedom, “The great advances of civilization, whether in architecture or painting, in science or literature, in industry or agriculture, have never come from centralized government.” When Americans think of innovation they are more apt to focus on Thomas Edison or Henry Ford or Steve Jobs than on public investment in transportation and education. “When government was smaller, innovation was easier,” claimed a January column in The Economist. “Industrialists could introduce new processes or change a product’s design without a man from the ministry claiming some regulation had been broken. . . . [O]fficialdom tends to write far more rules than are necessary for the public good.” Soon after he left his job as Bill Clinton’s Treasury Secretary, Lawrence Summers made a similar assertion about Washington’s role in technology investment. In an interview in which he praised Milton Friedman, Summers said, “There is something about this epoch in history that really puts a premium on incentives, on decentralization, on allowing small economic energy to bubble up rather than a more top-down, more directed approach, that may have been a more fruitful approach in earlier years.”

In fact, the opposite is true: the federal government — not merely through financial grants to private industry but through government research, vision, and risk-taking — has been the prime mover of innovation in America since World War II. Americans have a hard time accepting this fact, and so they tend to react mostly when government support fails. Consider the media uproar over the 2011 bankruptcy of Solyndra, the federally financed solar-panel manufacturer. Never mind that the $535 million the company received in federal loan guarantees paled beside the billion dollars it raised from those infallibly visionary venture capitalists, or that only 1 percent of all renewable-energy projects backed by the Obama Administration since 2010 have gone bankrupt, compared with 40 percent of venture-backed businesses.

In her new book, The Entrepreneurial State, Mariana Mazzucato, an economist at the University of Sussex, documents in plentiful detail the role of the government as an innovation leader. “Not only has government funded the riskiest research, whether applied or basic,” she writes, “but it has indeed often been the source of the most radical, path-breaking types of innovation.” One example is the state’s contribution to what are known as general-purpose technologies (GPTs), which include aviation and space transport, the Internet and telecommunications, and certain types of mass-production systems. One economist Mazzucato cites found that “large-scale and long-term government investment has been the engine behind almost every GPT in the last century.”

While Summers and others point frequently to Silicon Valley as an example of private innovation at its best, empirical research by Mazzucato and others shows that military contracts enabled Silicon Valley firms to sprout and thrive early on; only later did they innovate on their own. For example, Apple has repeatedly capitalized on the findings of government-sponsored programs from around the world. Mazzucato notes that work by two European researchers who shared the 2007 Nobel Prize in Physics led directly to the invention of the iPod. This work was done at government-funded research institutions in France and Germany. Other such breakthroughs have made their way into Apple’s touchscreen displays and voice-recognition program.

Government generally takes the risks private industry won’t — precisely because the funds needed are unusually large and the payoffs highly uncertain. And government investment is often patient; Wall Street funding rarely is. Organizations such as the National Institutes of Health, the Defense Advanced Research Projects Agency (an early contributor to the development of the Internet), and the Small Business Innovation Research Program are indispensable to the advances — in green technology, nanotechnology, biotechnology, and pharmaceuticals, among many others — on which our economy relies. In 2011, the most recent year for which I could find data, government was the funding source of 53 percent of basic research, while business accounted for just 23 percent.

Each year, R&D Magazine ranks the hundred most important innovations of the past year. A recent analysis of their 2011 rankings showed that seventy-seven of those hundred had been funded at least in part by the federal government. The number of major innovations from Fortune 500 companies, meanwhile, had fallen from an average of thirty-six per year in the 1970s to four per year in the 2000s. Those from government labs rose from nine per year to thirty-two per year over the same period. As the Wall Street Journal noted, Summers’s declaration that the government is a “crappy venture capitalist” seems to have been dead wrong.

Under the sway of Bowles–Simpson thinking, we are now spending less than ever on R&D. Budget sequestration is likely to knock more than $50 billion off the nation’s federal R&D spending through 2017. This will cut funds for science and medical research, the Agriculture and Energy Departments, and NASA. In a world where almost everyone agrees on the importance of innovation, dumb ideas are inhibiting innovation’s most prolific source.

I focus on technological innovation to illustrate most clearly the self-destructive path the nation is now walking. A progressive society that competes globally will make new discoveries about human development, but fiscal fears will make social policy and technology alike slower to adapt, not faster. As Mazzucato writes, “We live in an era in which the State is being cut back. Public services are being outsourced, State budgets are being slashed, and fear rather than courage is determining many national strategies.” Only in such an environment could so many in Washington and the mainstream media take seriously the Bowles–Simpson proposal to limit federal spending. They will keep us from investing in America’s future and from maintaining our progressive ideals. These are the very ideals that keep capitalist advance humane.

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