Back to Basics: A Pro-Growth Public Investment Strategy

Policy Paper
Nov. 29, 2007

For more than a decade, rising asset prices have driven the economy, benefiting the wealthy but doing relatively little to improve either the economic status of the majority of Americans or the country’s overall competitiveness. Rising stock and housing prices created staggering short-term increases in wealth for some, but did little to bolster the nation’s preeminence in technology, industry, or agriculture.

In order to retool the economy and generate balanced, robust job growth, the government should focus on rebuilding and enhancing the nation’s energy, transportation, and communications infrastructure. Judicious investment in renewing and creating critical public goods will provide opportunities to all income classes and help ensure that employment keeps pace with population growth. We refer to this approach as “back to basics,” are turn to the sort of sensible public agenda that strengthened the economy and promoted societal well-being in the past.

In contrast, over the past 20 years, while returns to capital and the incomes of those in certain elite occupations grew rapidly, wages for lower-income and middle-class workers stagnated. To be sure, most families spend much less on food than they did in 1960, and the number of people earning over $100,000 a year has risen by over 13 percent since 1979. Yet, it has become increasingly difficult for families with two incomes to maintain a “middle-class lifestyle,” and single-earner households find it hard to keep pace with the rising costs of education, housing, and health insurance.

Almost all of the recent gains in wealth have been achieved by the relatively small number of Americans with incomes more than seven times the poverty level. In the meantime, middle-tier educated and skilled workers have been losing ground. This striking disparity is evident in income and wealth data, which show that the top 1 percent of U.S. house holds now accounts for as much of the nation’s total wealth as it did in 1913, when monopolistic business practices were the order of the day. The net worth of the top 1 percent is now greater than that of the bottom 90 percent of the nation’s households combined.6 Nearly three-quarters of all income gains from 1979 to 2000 were realized by the top 20 percent of taxpayers.

In view of these trends, it is not surprising that Americans are increasingly pessimistic about the prospects for upward mobility. For the first time in our nation’s history, two thirds of all Americans think life will not be better for their children.

A large measure of this national unease is related to our failure to invest in and maintain critical infrastructure. In the past, the belief that it was possible to better one’s economic condition by working hard was reinforced by the public and private investment in transportation systems, scientific research, and technological development that fueled economic advancement. At present, however, Americans see government as being incapable of providing up-to-date transportation systems, reliable water supplies, or even basic education. The Katrina disaster, which led to the near-destruction of New Orleans and was largely caused by local, state, and federal failures to build and repair infrastructure, crystallized these concerns.

Click here to read the full report.