The unusual and winding road of the 2016 presidential campaign has exposed two fault lines in American economic policy and the nation’s ability to confront long-term economic challenges. The first fault line centers on whether poor Americans actually benefit from economic growth, calling into question the political viability of pro-growth policies. The second fault line centers on policy responses to perceptions that growth’s dividends are shared unevenly — a debate over whether those left at the margins need ‘protection’ or ‘empowerment.’
These fault lines give voice both to the populist rhetoric of Donald Trump and the statist arguments of former U.S. Secretary of State Hillary Clinton. But they fail to give voters ideas either on raising growth or engaging more people in its benefits. And that lack of reasoned argument risks setting the country on a path that diminishes both the opportunity of growth and our ability to meet long-term economic challenges.
First, heated campaign rhetoric aside, growth matters for everyone, and it matters a lot. The Obama administration’s Council of Economic Advisers posed and answered a big question in this regard: which change would do more to boost the incomes of America’s middle class — a restoration of faster growth or a return to a less unequal distribution of income?
Overwhelmingly, the answer is: growth. If total factor productivity growth continued at its brisk pace witnessed between 1948 and 1973 but inequality rose as it actually did — the median household income would be more than $30,000 higher today. By contrast, with the actual slower productivity growth after 1973, but with inequality remaining at 1973 levels, the typical household’s income would have risen by only $9,000.00.
So how do we square the clear benefits of economic growth with the populist and statist rhetoric against it?
The answer lies in two policy approaches that have been offered to build broader public support for pro-growth policies. The first treats those whose participation in the benefits of growth is incomplete as ‘unprotected’ — needing compensation in some form to make them whole. The second treats those individuals as ‘unempowered’ — needing support for work and aspirations. The former is as popular as it is destructive for individuals it seeks to protect. The latter is much more constructive, but poorly explained to the public.
The outcome of the battle is a populist upsurge for compensation, while an idea-rich debate over empowerment languishes. It doesn’t have to be this way.
First, let’s take a look at the problem. The desire to protect workers advances neither individual opportunity nor growth. By offering tax credits or health insurance subsidies outside of work, individuals are discouraged from advancing at their jobs or working all together. It also gives individuals less incentive to work to earn more. Alternatively, closing markets reduces opportunities for individuals to work. This lack of attention to work deprives individuals of the ability to earn more and to feel benefits of earned success. At the same time, the economy loses benefits of greater work engagement by many Americans.
An alternative emphasizes empowerment. The idea is not new: Abraham Lincoln’s economic agenda of education (land grant colleges), opportunity (Homestead Act), and work (transcontinental railroad) — to say nothing of emancipation — was built on empowerment. Later, American focus on primary, secondary, and college education is another example. The Earned Income Tax Credit pushed forward the idea of rewarding work.
Today’s agenda to empower workers needs three pillars. First, the tax system can further reward work by expanding the Earned Income Tax Credit — particularly for childless workers for whom the program’s benefits are not very generous — and reframing provisions of the Affordable Care Act that diminish incentives to work and reduce wages. Second, rewarding work must be matched by help to make all able individuals ready for work — education reform to be sure, but also support for vocational education and training and Personal Reemployment. Accounts to give individual training support for those whose working lives are buffeted by competition and trade. Finally, policy support for growth is needed to ensure more opportunities for engagement. Fundamental tax reform and regulatory reform can raise productivity, business investment, and opportunity. A public-private commitment to long-term infrastructure investment can also generate both investment and work opportunities.
Clinton and Trump are vying in a contest to persuade voters to reject growth and empowerment in favor of protection. An empowerment agenda must connect the dots from policies (as in Speaker Paul Ryan’s Agenda Project) to both individual aspirations and growth’s possibilities.
The stakes in the 2016 debate are high both for the near term and for long-run challenges facing the nation. In the near term, the directions taken by Clinton and Trump weaken growth and individuals’ perceptions of its benefits. Overcoming these challenges to growth is important. In the longer term, fiscal reform of the tax code and the nation’s social insurance programs is essential for keeping tax rates on productive activities low and maintaining the nation’s investment in public goods, including defense. A protection agenda puts the United States on a path toward a costly welfare state, with weakened attachment to work and economic growth.
The moment for voters to turn from populist and statist rhetoric to a debate over ideas — and their consequences — is now.
This op-ed appeared in Fortune on April 19, 2016