America's challenge: growth that works for all

Wall Street Journal

Reviewing Henry Kissinger's latest book, "World Order," former Secretary of State Hillary Clinton writes that "America, at its best, is a problem-solving nation." This is true, especially when the problems we solve are the most important ones we face.

Over the next decade, there is one overriding challenge: recreating an economy in which growth works for everyone, not just a favoured few. If we solve that problem, we can sustain a generous social order at home and our role as the guarantor of peace and security abroad. If we fail, much that we have taken for granted since the end of World War II will be at risk.

Recent reports underscore the extent of the challenge. Although the August jobs report showed unemployment ticking down to 6.1 per cent, long-term trends continued to point in the wrong direction. The employment-to-population ratio is lower than it was at the official end of the Great Recession in mid-2009. The labor-force participation rate dropped to 62.8 per cent, the lowest since the late 1970s.

The aging of the population accounts for some of this decline, but it cannot explain why participation among prime-age workers between 25 and 54 stands at only 81 per cent, more than 2 points below its level in 2007 before the recession. A forthcoming article by my Brookings colleague Martin Baily, a former chairman of the Council of Economic Advisers, shows that demography explains only half the decline, and that unless we can bring the others back into the labor force, the potential output of the economy will take a permanent hit.

The best-off Americans continue to command the largest share of the economy's modest growth. A September report from the Federal Reserve board, not hitherto regarded as an outpost of the Occupy movement, showed that from 2010 to 2013 median family income corrected for inflation declined by 5 per cent, even as average family income rose by 4 per cent.

Only families at the very top of the income distribution saw gains during this period. Family incomes between the 40th and 90th percentiles stagnated, while families at the bottom experienced substantial declines. Families headed by college graduates barely stayed even during this period, while those headed by less-educated individuals fell by about 10 per cent.

As a recent report from Rutgers University's Heldrich Center shows, these trends are reshaping the public's understanding of the US economy. In November 2009, 49 per cent of Americans thought that the Great Recession had permanently altered the economy. Today, 71 per cent think so.

Majorities now believe that the ability of young people to afford college will never return to the way it was, that the elderly will have to delay retirement and find part-time employment after retirement, and that workers will never again feel as secure in their jobs as they once did. Twenty-four percent believe that it will take another six to 10 years for the economy to recover; an additional 36 per cent think it will never fully recover.

At the peak of the Clinton-era expansion in 1999, 56 per cent of Americans believed that job opportunities would be better for the next generation than for their own. As recently as November 2009, 40 per cent still thought so. Today, that figure stands at 16 per cent.

None of this means that Americans have given up: 58 per cent still believe that individuals who want to get ahead can do so if they are willing to work hard, a belief shared by 65 per cent of young adults age 18 to 34. And despite a dramatic drop in confidence that government can make a difference, Americans have strong views about the economic course policy makers should pursue.

Surveys of 3,000 Americans conducted between January and March of 2014 by the Global Strategy Group found that 78 per cent thought that it was important for Congress to promote an agenda of economic growth that would benefit all Americans. Support for policies that help the middle class and bolster equal opportunity for everyone were also highly rated. Strategies to spread wealth more evenly and reduce income inequality received the least support; 53 per cent believe that fostering economic growth is "extremely important," compared with only 30 per cent who take that view about narrowing income inequality.

The Global Strategy Group even found a substantial level of agreement about the way to promote growth. A majority of all Americans endorsed policies to make college more affordable, modernise our infrastructure, provide additional job training for workers, invest more in basic research, technological development and K-12 education, and reduce outsourcing by American companies. They favor policies that would raise wages and increase fairness -- if those policies boost growth.

These views have political consequences. By 59 per cent to 37 per cent, Global Strategy Group found that Americans prefer a candidate who focuses on economic growth to one who emphasizes economic fairness. By a remarkable margin of 64 percentage points (80 per cent to 16 per cent), they opt for a candidate who focuses on more economic growth to one who emphasises less income inequality.

Economic growth that benefits everyone is the most important challenge we face, and the American people know it. Will our leaders respond?

This article was originally published in the Wall Street Journal. Reproduced with permission.