Over the past decade and half, two pivotal developments have come together to create the conditions for what could be a new golden era of faster economic growth and rising prosperity. One development involves the technological advancements and other changes associated with the new economy, which have substantially increased U.S. and world productivity growth. The bursting of the tech bubble in 2000 may have put an end to the hype surrounding the new economy. But it did not undo the three productivity-enhancing revolutions of the new economy — the information technology revolution, the revolution in business and finance, and the efficiency revolution in materials and energy — that continue to deliver productivity growth well above that of the 1973-95 period. Indeed, the greatest productivity gains from these revolutions may yet lie ahead, as workers and firms fully gain competence in the use of these new technologies, and as more efficient business practices become more widely spread.
The other pivotal development relates to the integration of China, India, and the former Soviet Union into the world economy. The inclusion of these three populous regions into the global economy has created what economists call positive supply- side shocks, resulting in surpluses in labor, capital, and productive capacity. The most obvious impact of China, India, and the former Soviet Union has been on the world’s labor market. Their entry into the world economy has in effect doubled the global labor force in the course of a decade, raising the return on capital and dampening wages and inflation. Capital has also become plentiful because of the high-savings propensities of China and other Asian economies. In fact, these high-saving societies of Asia are producing more savings than the world can absorb. This glut of world savings, together with the increasing globalization of financial markets, has predictably driven down the cost of capital and has helped keep interest rates low worldwide. Together, the productivity-enhancing revolutions associated with the new economy and the positive supply-side shocks brought about by the integration of China, India, and the former Soviet Union into the world economy have created what is called here the new abundant economy. The new abundant economy contrasts sharply with the supply-side constrained economy of the 1973-95 period, which diminished our economic growth expectations and radically altered the prevailing policy framework, ushering in an era of supply-side policy measures aimed at taming inflation, cutting taxes, curbing government spending, and deregulating markets. By contrast, the new abundant economy has created the conditions for more rapid economic growth and rising living standards without greater price and wage inflation, making possible once again a full-employment economy that delivers great prosperity to the overwhelming majority of Americans.
But as we have seen with the tech bubble of the late 1990s and with widening income and wealth inequality, the new abundant economy can bring with it a new set of challenges, for which many of the supply-side policies of the 1980s and 1990s are inappropriate. In a world of rapidly rising productivity growth and excess labor and capital, asset bubbles and deflation become greater worries than inflation; maintaining demand and wage income becomes a more serious concern than stimulating supply; funding public investment becomes more important than lowering the cost of capital for private investment; and ensuring the future strength of one’s productive economy becomes a greater priority than breaking down more trade barriers. If not properly managed, these problems can be as serious as those from which the U.S. and world economies suffered from the mid-1970s to the mid-1990s. In fact, the U.S. and world economies have significantly underperformed their potential over the past decade in part because governments have pursued the wrong policies and have had the wrong growth agenda. In spite of rapid productivity growth and abundant labor and capital, U.S. and world economic growth over the past ten years is less than it was in the 1950s and 1960s and is only on par with the economically troubled 1970s. Moreover, a more possible serious challenge lies ahead because the current pattern of economic growth — growth that is overly dependent upon personal consumption in the United States fueled by a housing boom and debt creation — is not sustainable.
This report shows how our economic thinking must change to meet the challenges associated with the otherwise favorable economic conditions of this new era. U.S. policymakers face both a macroeconomic challenge related to putting the U.S. and world economies on a more optimal growth path and a microeconomic challenge of strengthening America’s productive economy. With regard to the first challenge, the report argues that the biggest near-term constraints on economic growth are not America’s budget and current account deficits, as conventional wisdom holds. Rather, the constraints involve the lingering hangover from the tech and housing bubbles, which threatens both investment and consumption, and inadequate world demand, caused by suppressed consumption abroad and depressed wage growth at home.
The report therefore calls for a public-investment-led transition strategy in the United States to stimulate both investment and demand, and a global Keynesian program abroad to increase consumption in newly industrialized countries like China, as the best way to avert the next recession and put the U.S. economy on a more sustainable path to realizing its full growth potential. The report also lays out an agenda for strengthening America’s productive economy and ensuring future prosperity. The U.S. economy has many inherent strengths, but it also has some potentially debilitating weaknesses that could compromise future economic growth. The report recommends a five-part program entailing:
- increased investment in both America’s knowledge capital and its physical infrastructure;
- a program to accelerate new energy development and greater energy efficiency;
- a strategy for on-shoring more jobs and investment in America’s tradable goods sector;
- policies to promote an efficiency revolution in health care and education; and
- a wage and asset-based incomes policy to ensure that more Americans share the fruits of the new abundant economy.
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