Calvin Coolidge once said, “the chief business of the American people is business. [We] are profoundly concerned with producing, buying, selling, investing, and prospering in the world.”
Coolidge may have been wrong about many things, but he was right about that. The most important way to help working Americans is to ensure that enterprises are most productive. Healthy enterprises are the prerequisites for production, which in turn is the prerequisite for consumption, growth, and prosperity.
America’s enterprises — which include every for-profit, nonprofit, and government entity from sole-proprietor dog-walking businesses to the country’s largest employer, Walmart — together produce $57 billion in goods and services a day. That might sound impressive, but at that level the median U.S. household is consuming just $187 worth of output a day (including public services).
I will go out on a limb and suggest things would be a lot better if the median household were consuming two to three times that much. Some simple-living advocates in Portlandia might protest, but most other liberals should get onboard, because it would improve living standards for workers. Meanwhile, conservatives should rejoice because it would mean robust economic growth.
But there are good ways and bad ways to go about spurring production. Let’s start with the bad ways. First, contrary to the refrain of open borderists we shouldn’t try to do it by opening the borders. Yes, immigration raises GDP; how could it not, since it adds more workers? But unless it is focused on high-skilled STEM workers, immigration doesn’t raise per-capita income. On a related note, we shouldn’t try to do it by adding more work hours — for example, by providing incentives for parents to work more. That would raise per-household income, but it would come at an unpalatable cost (more work time, less family time).
Second, we shouldn’t do it by helping investors. Investors have a simple role: to help enterprises succeed. But over the last 40 years, helping investors has become an end in itself, based on the supply-side economics view that healthy investors mean healthy enterprises. But the top 25 hedge fund managers personally earned more than $32 billion in 2020, for what? Essentially, for playing a casino better than everyone else. They produced… nothing. Without their activity, the economy would have been the same size, firms would have had the same amount of capital, and if their earnings were allocated equally to all U.S. households, then median daily income would have increased by about 70 cents a day.
This points to the limitations of trying to boost median incomes principally through redistribution: Even if Congress were to impose a draconian tax on the top 5 percent of households to take 100 percent of their earnings that exceed the national median income, and then distribute those revenues to the other 95 percent of households, it would only increase their income by $52 a day, or about one-quarter of current consumption.
So, putting aside the immediate need for a COVID-19 response, if Congress and the Biden administration want to help American households economically over the long term, then enterprises need to be producing more. That doesn’t mean expanding production facilities, per se; it means producing more with the same resources — i.e., higher productivity.
So, what are the best ways to do that? First, policymakers need to embrace automation and reject Luddism. Almost every article or speech on technology-drive automation now decries it as a plot to boost profits by killing jobs. Wrong. Automation has no net effect on the number of jobs, or even, in the moderate run, on profits. If it did, given the vast amount of automation over the last century, we’d all be on the dole and profits would be more like 80 percent of GDP, rather than the current 8 percent. Today, we need vastly more automation in sectors like health care, education, manufacturing, agriculture, retail and others. One way to achieve that is for Congress to put in place an investment tax credit for new machinery, equipment and software.
Second, innovation will play a key role in developing the tools and techniques enterprises can use to automate more. Yet there is minimal federal support for R&D that is focused on productivity. Congress should increase the federal budget for research and target those increases to key technology areas such as artificial intelligence, robotics, new materials, and additive production (e.g., 3D printing).
Third, when policymakers are looking for major reform opportunities, they should focus on bringing down costs, not just prices. Bringing down prices (either before or after subsidies) only redistributes income, since consumers get more and producers (including their workers) get less. Bringing down costs, on the other hand, increases output, because the resources that are saved can go into producing something else households value, and it will lead to sustainable price reductions. Health care, higher education, housing, real estate, government services and other related industries all need cost-focused policy reforms.
Fourth, we also should reform our education system to put more emphasis on giving workers the skills they need to most effectively contribute to enterprises. By and large, U.S. high schools still teach the same curriculum they were teaching 75 years ago. And too many colleges still teach subjects that the tenured faculty might like — think French literature — but that do little to prepare students for real work in enterprises.
Finally, governments at all levels — federal, state and local — need to embrace innovation-based disruption and not give in to forces of resistance. For example, sidewalk delivery robots will lower costs of retail delivery services. Yet some cities, like San Francisco of all places, have banned them. In other cases, industries ranging from real estate to banking to optometry have enlisted government to protect them from having to compete with more cost-efficient providers that use new technology and better organizational processes. Government needs to be on the side of consumers here, not protecting higher-cost laggard enterprises.
Finally, while enterprises are the key, despite the longstanding groupthink that small business is somehow better or more virtuous than big, the reality is that large enterprises are more productive and pay their workers more, on average. At minimum, both political parties should embrace size neutrality when it comes to economic policy.
We shouldn’t go back to Coolidge-era economic policies — which were marked with by a rejection of most roles for government — but we should rediscover the idea that “the chief business of the American people is business” by putting enterprise health at the center of U.S. economic policies.
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