Global Middle Class Initiative: Latest Publications

The American-German Divide

Economic Growth — Wed, 08 Jul 2009 10:01:00 -0400

German Chancellor Angela Merkel has just completed her first official visit to Washington since President Barack Obama took up office. At home Mrs. Merkel has only a few months left to go until an upcoming general election will determine her own political future. This was surely one more reason to send a message of harmony with President Obama back home, as the new U.S. president, much in contrast to his predecessor, enjoys great popularity among German voters. Elections aside, such harmonious gestures can hardly deflect

Jobs Solutions for Our Jobless Recovery

Economic Growth — Tue, 19 May 2009 10:40:00 -0400

This speech was delivered at The New School on May 19, 2009.

Views on the U.S. economy

Democratizing Capital

Ron Tang — Thu, 20 Mar 2008 05:53:00 -0400

Below is a longer version of the article published in The Nation. For the version appearing in The Nation, please click here.

Historical analogies are never exact. Yet many of the choices we have before us today are similar to ones that an earlier generation of progressives faced as the 1932 election approached. As we do today, the progressives of the 20th century confronted a society beset by a huge gap between classes and an economy laid flat by the bursting of the speculative excesses of the previous decade. To be sure, our economy is nowhere near Depression levels of collapse. But the choices New Deal progressives eventually made over the course of their generation is worth revisiting because they provide us some sound first principles about the way to think about the economy and government today. Indeed, many of these principles are even more appropriate for today’s world.

A High-Wage Economy with a Broad Base of Middle Class Jobs

The first lesson to be learned from this earlier era is that a large middle class rests first and foremost on a productive economy that produces a broad base of jobs that pay middle-class wages. The New Dealers of the 20th century were not opposed to “rigging” the labor and financial markets to achieve this result, as evidenced by the measures they championed to protect working people and to make the financial markets work for them and their communities. In this regard, New Deal progressives believed, that the economy should exist to serve society, not the other way around, and that the government had a duty to shape the economy to meet society’s middle class aspirations. A high-wage, middle class society in turn would be good for the economy: living wages would not only ensure adequate demand for the economy, but in so doing spur new investment and productivity growth, creating an ever larger virtuous circle of rising living standards.

The belief of New Deal progressives in an economy that could create good middle class jobs stemmed in part from their sensitivity to the downside of a large social welfare state. Although Franklin Roosevelt and other progressives who followed him saw the need for universal social insurance programs, they did not like government handouts because they understood that Americans don’t want a welfare check, even if it comes in the forms of tax credits, or to be dependent on the government for their basic livelihood. They want to be middle class with a home, a good education, a good job, and money in the bank. The leading New Deal politicians and thinkers therefore resisted social welfare subsidies to individuals on the grounds that this created an unhealthy dependence on the state.

Moreover, even though they favored progressive taxation with top tax rates as high as 90 percent, New Dealers were skeptical of a society dependent upon the permanent redistribution of income. The New Deal was thus less about the redistribution of income and more about the redistribution of the capacity for economic growth and wealth creation. The principal goal of many New Deal programs was not to relieve the conditions of poverty -- although they did often do so -- but to build physical and human capital that would allow people to escape permanently from poverty.

Thus, over time they created a more equal society by emphasizing government programs that expanded education, spread property ownership, invested in America’s common physical and knowledge capital, and seeded the industries of the future that would create more middle class jobs. The New Deal thus sought to shape a high-growth, high-wage, and low subsidy society. It was not perfect in large part because it preceded the civil rights revolution and thus left out millions of African-Americans. But it did build the largest and most secure middle class America has ever known.

Today, we see the consequences of a much different way of thinking about the economy and society. Over the last two decades, we have been told, in effect, that globalization is an immutable force and that domestic society must bend to its demands, not vice versa. The best strategy, therefore, was not to shape globalization and technological change to work for our middle class ideals but to embrace the agenda of free trade, financial deregulation, and less progressive taxation that globalization required in order to maximize wealth and then to compensate the losers. But as it turned out, no amount of new social welfare measures could compensate for the loss of millions of good paying manufacturing jobs and no amount of education could make up for the fact that 7 out of 10 of the fastest growing job categories involve low-skill jobs that pay below the median wage. Thus, without any real debate, America’s political elites have chosen for us a highly stratified, low-wage society with great costs to our middle class way of life and to our productive economy.

Using Public Investment to Lay the Foundation of a Middle Class Economy

If the first principle calls for a high-wage economy with a broad base of middle class jobs, then the second principle relates to how to achieve a high-wage economy and at the same time more widely distribute the capital and skills for wealth creation. Many policies and programs went into creating the New Deal high-wage economy from supportive labor laws to full-employment policies. But the principal policy tool this earlier generation used was massive public investment and public building. The public investment programs they pursued not only created many new middle class jobs but laid the foundation for a more productive economy, which in turn produced even more good middle class jobs. Programs like the Tennessee Valley Authority in the 1930s and 40s were followed by even more extensive public investment programs in the post-war years. From 1950 to 1970, the government spent more than 3 percent of GDP on public infrastructure alone. It built everything from public highways to public schools, to public power systems and public parks. It spent nearly an equal sum on other public investment -- on education, training, and research and development, including major government research projects that led to the space age and the computer revolution.

Throughout the New Deal era, public investment was America’s way of industrial policy. It helped build our modern agriculture sector, our aerospace industry, and gave us our initial advantage over other countries in the computer and internet age. It was understood that public investment paid for itself many times over. The investment in the GI Bill alone generated returns of up to seven dollars for every dollar invested. And because it generated returns to the economy and society, New Dealers in the post-war period were not afraid to raise taxes or to borrow if needed in order to ensure adequate levels of public investment. And borrow they did even though the national debt was a much larger percentage of GDP than it is now.

Over the past two decades, however, we have made a much different choice. As concerns over the budget deficit have grown, and as tax-cutting mania has taken hold, we have cut back spending on public investment. Since 1980, we have devoted less then 2 percent of GDP on public infrastructure, and have allowed federal spending on basic research and development to decline as a percentage of GDP as well. As a result, a backlog of pubic investment spending needs -- clogged roads and ports, collapsing bridges and levies, uneven broadband access, an antiquated air traffic system, an undersized energy infrastructure -- has begun to cut into our economic growth and undermine our efficiency.

Decentralize Power and Capital

A third principle of middle-class America that the New Deal offers us relates to the dangers of the concentration of power and capital. Earlier progressive reformers distrusted great concentrations of wealth and power. Not only did such concentrations threaten democracy but they also warped the economy and distorted consumption and investment. Government therefore must be a strong countervailing force to big business and oligarchic power, and government itself must be organized in a way that it could not be captured by one economic group at the expense of another or the general public.

The New Dealers were particularly concerned about the power of Wall Street and the financial community. They feared a national credit system that was dependent on Wall Street bankers, whose interests were not always aligned with the real economy needs of homeowners, farmers, and small and medium-size producers. They therefore sought to democratize capital by creating a myriad of credit institutions that would ensure that all regions and sectors of the economy had access to capital. They created a variety of federally subsidized credit programs to enable individuals to construct homes and start new businesses and to allow states and municipalities to build schools and to modernize their infrastructure. It was here that the New Deal was most creative -- combining a strong federal state with the local and regional decentralization of capital and the local and regional control of these programs and institutions.

As with other first principles of a middle-class America, we have seen a reversal of American priorities over the last two decades, as America’s big financial institutions have again asserted their influence over the economy and economic policy. The new power of Wall Street has been evident in its successful push for financial liberalization and de-regulation, in the emphasis accorded the budget deficit and concerns about inflation as opposed to full employment, and until recently in Washington’s preference for a strong dollar, which favors financiers over real producers. This triumph of Wall Street over Main Street has been responsible in part for the hollowing out of America’s tradable good sector and for the asset bubbles that have wreaked havoc with the economy. Indeed, one of the first things the New Deal would have us do is to re-regulate the financial system and to put the interests of the productive economy over that of Wall Street.

In all these respects, whether it be high wages, public investment, or the de-centralization of financial power, the New Deal succeeded because it changed the way the economy worked, and it did so by marrying progressive reforms with Americans’ preference for independence whether from government subsidy or big business paternalism. And this is and should be the real enduring lesson of the New Deal.

Undebated Challenges

Cecille Isidro — Mon, 19 Nov 2007 16:35:00 -0500

The most damaging part of the Bush foreign policy legacy is not the precipitous decline in American power and influence brought about by the disastrous Iraq occupation. It is the way the Administration’s "war on terror" and its neoimperial project in the Middle East have distorted our vision of the world.

They magnify out of all proportion what should at worst be minor threats to our national security and ignore much larger developments, such as the extraordinary economic rise of China and India, which are having a much more profound effect on the American way of life.

Just how distorted our vision of the world has become has been on constant display during the primary campaign leading up to the 2008 elections. The major candidates from both parties have followed a foreign policy narrative dominated by Iraq, Iran and Islamic extremism. Promising to see the Iraq War through to a successful conclusion, the Republicans want to extend Bush’s policies into a generational war against Islamic extremism, which they see as a new totalitarian threat. Democratic candidates have committed themselves to getting out of Iraq -- or at least vastly reducing America’s presence there -- and to fighting a smarter war against terrorism while restoring America’s global leadership. But they, too, seem intent on proving their toughness, even to the point of pursuing many of the same goals that led to the loss of America’s standing in the first place.

Neither party seems ready to deal with a radically changed world that in many ways moved on as we got sucked ever more deeply into Bush’s Iraq catastrophe. In this sense, the 2008 elections pose a larger challenge: to advance American goals and interests in this new world, it will not be enough merely to repudiate the worst features of Bush’s militarism. It will be necessary to rethink American priorities and the very meaning of what American foreign policy is about.

The Republican Narrative

It is clear that this rethinking will not come from the leading Republican candidates. The GOP narrative of a long war against Islamic extremism is purposely backward-looking, modeled on the earlier struggle against Soviet Communism during the cold war. Yet as Juan Cole suggests, the idea that Islamic extremism poses a threat commensurate with Soviet Communism is patently absurd. Six years after 9/11, it is clear that Al Qaeda does not have the organizational capacity or resources to pose a systematic danger to American lives or interests, and that common-sense counterterrorist measures -- better intelligence, more effective border control and internationally coordinated police work -- can dramatically reduce the risk of terrorist attack. It is also clear that Al Qaeda does not have the popular appeal in Muslim societies to constitute a threat to any significant government, despite the boost that Bush Administration policies may have given to Al Qaeda recruitment.

When leading Republican candidates talk about the Islamic threat, they do not just mean Al Qaeda. They also mean religious-based popular movements like Hezbollah as well as the clerical leadership of Iran. But it is here that the Republican narrative turns from the absurd to the tragic, greatly expanding the number of America’s enemies and ignoring the fact that Iran and its Shiite allies are bitterly opposed to Al Qaeda and could be useful partners in the fight to eliminate extremism. Whether Republicans conflate the two out of ignorance or because they believe that Islamic radicalism of any stripe poses a threat to US interests, or merely because they want to play on the public’s fears, it makes for bad policy, as the Bush Administration’s failed Middle East strategy demonstrates.

Like know-nothing nineteenth-century imperialists, the leading Republican candidates warn that Islamic radicals want to push the United States out of the Middle East. They have forgotten that in the twenty-first century a military presence abroad is no longer a reliable way to secure a great power’s interests and may only create the very threat it seeks to avoid. It is not a coincidence that the greatest amount of Islamic terrorism stems from resistance to foreign military occupation or that the governments that feel most vulnerable to Islamic jihadism are those that have had a close association with the United States, or on whose soil the United States has left the heaviest footprint. Indeed, the tragedy of the Republican position is that it would suck us even more deeply into a "clash of civilizations" with a fringe Islamic movement while isolating us from other parts of the world that are just as or more important to American interests.

The Democratic Narrative

The leading Democratic candidates understand many of the shortcomings of the Bush Administration’s approach to the world. They understand, for example, that America’s moral standing has been gravely damaged by Abu Ghraib, Guantánamo and by the Administration’s disregard for international law, as Oona Hathaway points out. Yet in many key respects they are trapped in the same post-9/11 view of the world.

The Democratic candidates say they want to fight a smarter war against terrorism, but in the end they are adopting policies that seem more designed to prove their toughness than prevent terrorist attacks. This is evident, as

William Hartung notes, in their calls for increasing the size of US ground forces and for retaining a military presence in Iraq and neighboring Arab countries, as well as in Afghanistan. Such a visible US presence would serve no useful military mission, but it would give Al Qaeda an ongoing cause to keep its movement alive.

The Democratic commitment to restoring America’s global leadership also raises questions. For one thing, it will be difficult to reclaim moral leadership as long as America is bogged down in increasingly unpopular counterinsurgency wars in Iraq and Afghanistan. For even the most enlightened counterinsurgency warfare will inevitably entail civilian casualties, which engender nationalist resistance.

This is not to mention the financial cost of ongoing wars in Iraq and Afghanistan (estimated to be well more than $1 trillion over the next decade), which would foreclose other foreign policy initiatives as well as new social investments at home.

As important, the Democrats seem to assume that the world so wants and needs American leadership that it is there for the taking. But as Anatol Lieven suggests, the overarching question facing American foreign policy is not how to restore leadership but how to adjust to an increasingly multipolar world that may be less open to any one power’s primacy.

Russia, China, India, South Korea, a host of South American countries and even the pro-American powers belonging to the European Union have all grown accustomed to a world in which the United States has been preoccupied with Iraq and in which they have had more freedom to shape the politics and economies of their regions. Much of the world has done just fine without active American leadership during this time and thus may not be as receptive to a reassertion of US leadership, as most of the Democratic candidates seem to suggest.

Indeed, the leading Democratic candidates have failed to grasp one of the central lessons of the Bush era: the world does not need strong US leadership so much as it needs constructive US participation as a great power. On global climate change, on AIDS in Africa, on engaging North Korea, to mention just a few issues, other powers and new coalitions of transnational NGOs and intergovernmental agencies -- as well as long-established ones such as the United Nations -- got there just as quickly as and in some cases before the United States, and they now have an ownership stake in these issues and well-developed views about how they should be solved. They would welcome the United States to the fold, but they would not cede all leadership to Washington.

A Progressive Narrative

For the leading Democratic candidates and their advisers, toughness and global leadership have become ends in themselves. But in today’s world these ends do not automatically equal a better world for American interests or make possible a more decent liberal society at home. That requires a strategic vision of how to work with others to build a world order that accommodates the voices of an increasingly pluralistic group of nations yet serves America’s core interests and values.

Today’s presidential candidates could do worse than look to the Rooseveltian vision that emerged in the latter days of World War II for inspiration. That original vision entailed working to preserve peace by sharing power in international institutions; the promotion of the universality of human rights and self-determination; and the spread of middle-class prosperity through Keynesian economics and the managed expansion of global commerce. (To this narrative, of course, one now must add global climate change and the stewardship of the planet’s ecology.) This vision of world order was ever mindful of the intimate link between America’s international policies and its goal of socioeconomic progress at home. Maintaining peace among the great powers and avoiding unnecessary wars, it was correctly believed, would allow us to keep our national security costs low, freeing resources to expand our social contract through greater social spending and public investment. Promoting middle-class prosperity abroad would reinforce prosperity at home while helping secure a lasting peace internationally.

If this remains the most promising progressive foreign policy narrative, then the most significant development of the past decade is not the appearance of radical Islamic fringe groups in the Middle East but the extraordinary economic rise of China and India and the integration of more than 2 billion people into the world economy. This development, together with the ongoing integration of the world’s markets for goods, services and capital and the global political awakening made possible by satellite TV and the Internet, touches upon virtually every aspect of a progressive world vision and America’s domestic society, influencing everything from the price of oil and food, to human rights and governance in Latin America and Africa, to the wages and living standards of American workers.

Yet these developments have commanded little attention in the foreign policy debate of this electoral season, except for a few alarmist concerns about the threat they pose to American primacy. But to Rooseveltian progressives, they define the two overarching challenges of foreign policy in the early twenty-first century. One challenge relates to the classic strategic dilemma of how to amend the international system to accommodate the interests of new rising powers without sacrificing progressive values or undermining socioeconomic progress at home. The other challenge involves how to extend the system of national governance and regulation around the world, creating an effective system of international governance without compromising popular sovereignty at home. In the early twentieth century, the leading powers failed this test, and the result was two devastating world wars and a world depression.

The good news is that none of the emerging powers seek to challenge the United States directly or have hegemonic ambitions of their own -- at least not now. But they do want a greater voice in world affairs and more influence in shaping their regional environments. Rather than seeing this desire as an obstacle to American leadership, candidates in the progressive tradition should welcome it as a way to share the burden of keeping order and to reduce the need for projecting military power in the world. They should support the building of what Roosevelt called a community of power, even though in some cases this will require the United States to give up its maximalist demands and accept compromises that seem to fall short of progressive standards. Whether we like it or not China, India and Russia will influence what happens with Iran and North Korea, so better to involve them in a solution than to ignore their interests.

Refashioning today’s international institutions -- especially but not only the United Nations -- to give these emerging powers a larger voice will of course take time. But in the short term, the next administration could pursue the development of regional concerts of power and new arms control measures to prevent destructive geopolitical competition and costly arms races. The successful negotiation, under the six-power framework talks, of a deal to cap North Korea’s nuclear weapons program illustrates the promise of such regional concerts.

The United States was able to reduce any future threat to American national security without having to expend military power or make major concessions. The successful six-power talks provide a framework for an ongoing regional concert to manage the eventual reunification of Korea and to avoid destructive rivalries among China, South Korea, Japan and Russia and to cap future military spending.

The withdrawal of American forces from Iraq would provide another opportunity to internationalize American policy and draw other powers into the management of regional stability, thus reducing the American burden.

Establishing the framework of a more inclusive regional security architecture -- one that would both accommodate Iran’s legitimate interests and stem its destabilizing tendencies -- would, as Trita Parsi suggests, allow the United States to lower America’s military profile in the Persian Gulf without sacrificing vital American interests.

The most likely cause of future conflict among great powers lies in competition over oil and other strategic resources. China’s and India’s rapid economic growth has dramatically increased the demand for strategic commodities, and great powers whose economic growth depends on the import of such materials tend to develop geopolitical strategies to ensure their access to these resources. Accordingly, China has adopted a new diplomatic activism in Africa and Latin America, making long-term supply agreements that lock up access to world commodities and challenge the fragile international consensus of not rewarding countries for human rights abuses.

Some argue that the United States needs to respond with its own geopolitical strategy to maintain control of the world’s oil and strategic commodity markets by reinforcing its military position in the Gulf and expanding it to parts of Africa. A better approach would be for the United States to reduce the importance of these resources by helping to lead a worldwide effort, including cooperative ventures with China, aimed at harnessing the resource efficiency revolution and developing clean-energy alternatives.

Together with championing new arms control measures to prevent the further expansion of China’s naval and space deployments, this would make more sense.

The more immediate and more serious challenge relates to the unusual merger of American corporate capitalism with China’s authoritarian political system. To some governments in the developing world, this has created an attractive option -- authoritarian capitalism -- what some have dubbed the "Beijing consensus." Emerging in the wake of the failure of the neoliberal Washington consensus, the seeming success of the Chinese model poses a threat to the advancement of human rights, as authoritarian governments seek to justify repression by pointing to China’s success or seek to expand commercial ties with China in the hope of shielding themselves from Western pressure.

It also poses a threat to the middle-class social contracts of developed economies, which have been a cornerstone of the capitalist peace for the past sixty years, and to the development of similar middle-class contracts in other emerging economies, which will be important to future peace and prosperity. The entry of China and India (and the former USSR) into the global economy has had the effect of more than doubling the world’s potential labor force. This has put downward pressure on wages in both the developed and developing worlds -- eroding the middle classes in the advanced industrialized countries and slowing the growth of the middle class in developing economies.

Because of the size of China and India, their rapid integration into the world economy has also had the effect of crowding out economic opportunities for other developing countries, as reflected by the fact that China has attracted the lion’s share of the world’s direct investment.

China’s economic success has to some degree come at the expense of jobs and economic growth in Mexico and Central America, which in turn has resulted in more immigration of low-wage laborers to the United States.

This pattern of economic integration has resulted in growing disparities of wealth and income in both the United States and the emerging powers. Already one sees the effects -- in the growing disquiet in parts of the American heartland, in the rise of religious radicalism in the Middle East and in the populist backlash in Latin America. Should economic growth and job creation falter in China and India, we will see growing instability there as well, perhaps in the form of resurgent nationalism.

That is why the next administration must put jobs and middle-class prosperity at the center of American foreign policy, as Afshin Molavi suggests. And that is why it will have to find a way to encourage change in China away from authoritarian capitalism to a system that allows Chinese workers to enjoy much more rapid improvement in their living standard. That means replacing the widely discredited Washington consensus with what might be called a Rooseveltian consensus, which would aim to raise wages and living standards as well as create robust safety nets in these increasingly productive economies. Indeed, the most important foreign policy initiative the next administration could take would be to use its trading relationship with China to encourage it to develop a comprehensive social welfare system, allowing Chinese workers to save less and consume more. Such an initiative is not just necessary to reduce the US trade imbalance but to save the world economy, which is beginning to choke on excessive Chinese savings.

The success of a progressive foreign policy depends on establishing the right priorities. These include capping military expenditures in East Asia, turning America’s withdrawal from Iraq into a new regional security order in the Persian Gulf, promoting a worldwide resource-efficiency revolution, elevating human rights to their proper place in international diplomacy and emphasizing a new Rooseveltian growth consensus. All these goals reinforce one another. And they would enable the United States to prosper, even as its power relative to that of other nations recedes.

A Goldilocks World Economy?

Cecille Isidro — Wed, 31 Jan 2007 09:22:00 -0500

Over the past decade and half, two developments in the world economy have come together to create conditions for what could be a new era of faster economic growth and rising prosperity. One development involves the integration of China, India and the former Soviet Union into the global 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-saving propensities of China and other Asian economies. In fact, Asia is 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.

The other development relates to the technological advancements and other changes associated with the new economy, which have substantially increased U.S. and world productivity growth. American productivity growth has risen to the pre-1973 levels that were responsible for the rapid improvements in American living standards, jumping from an average of 1.53 percent for the period 1973-95, to 2.6 percent in the period from 1996 to 2005. World productivity has shown a similarly impressive increase. This productivity acceleration is the product of three over-lapping revolutions: a technological revolution in data processing and communications; a related revolution in the production and distribution model made possible by globalization and these new techonologies; and an efficiency revolution in materials and energy.

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