Modernising liberalism

The United States’ declining manufacturing sector has created an increasingly two-tiered economy of low-wage service jobs and high-wage knowledge jobs [EPA]

It has been a great epic and a great dream. What, now, of the future? 

– James Truslow Adams, The Epic of America

In 1931, the historian, James Truslow Adams, published The Epic of America, the first book in American letters to name the American Dream. In the epilogue, Adams defined it as the idea that “life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement”. Like Ralph Waldo Emerson in “Self-Reliance” and Frederick Jackson Turner in “The Significance of the Frontier in American History”, Adams put his finger on an essential aspect of the meritocratic and manic, American character, one that runs through European dreams of the New World, Benjamin Franklin’s Autobiography and the boys’ books of Horatio Alger.

Though published in the depths of the Great Depression, Adams’ American Dream was strikingly postmaterialist. The Dream was not “a dream of merely material plenty, though that has doubtless counted heavily”, he wrote. The Dream was “being able to grow to fullest devel­op­ment as man and woman”. Adams warned that hypermaterialism and status seeking could overshadow the true meaning of America.

And indeed, the dark side of the American Dream has provided rich material for narrators of popular culture, before and after Adams coined the term. In F Scott Fitzgerald’s 1925 masterpiece, the supposedly “great” Jay Gatsby passed himself off as an aristocrat but was actually a bootlegger. Gatsby’s deceit, in service of assuming the wealth and status he needed to win over the materialistic Daisy, ended in a deadly tragedy. In his 1949 Death of a Salesman, Arthur Miller cast America as ageing salesman Willy Loman, who taught his sons that charisma and popularity, not hard work and integrity, would pave the way to greatness. Hunter S Thompson had to drown himself in ether and other intoxicants to tolerate loathsome Las Vegas, the speculative symbol of the American Dream. By the 1970s, much of the Left had come to view the American Dream as a veil for genocide, slavery, and exploitation, as in Howard Zinn’s famous textbook, A People’s History of the United States. Today, to our cosmopolitan ears, the American Dream seems unreal. “It’s called the American dream,” George Carlin quipped, “because you have to be asleep to believe it”. When we use the words “Horatio Alger” in a sentence, it is almost always as prelude to dismissing something as naïve or nostalgic.

And yet to be born an American is still an unalloyed stroke of good fortune in a world of seven billion people, most of whom are poorer than even the poorest Americans. Homeownership, the signature achievement of the American Dream, even after the Great Recession, is nearly 70 per cent. Half of us are invested in the stock market. We suffer not from hunger, but from obesity. The vast majority of us enjoy air conditioning, cable television, internet, cellular telephones and cars. And despite the oft-made claim that the United States is stagnating, nearly every social class remains upwardly mobile.

Even so, most Americans today believe the writing is on the wall. Well before the Great Recession hit in 2008, more than half of Americans told pollsters that they thought the American Dream was unachievable. Since then, the credit and asset bubbles have burst, revealing the last 10 years of growth to have been as phony as Gatsby and occasionally as fraudulent. We consume vastly more than we produce – an arrangement that depends upon the American dollar’s time-limited status as the world’s reserve currency to underwrite our debts.

Our extensive social mobility, which has traditionally distinguished the US from other nations, is declining for working-class men and threatens to decline for other Americans. And while the nation’s political class dithers, waging endless battles over social entitlements, tax cuts and deficits, we continue­­ to neglect the common public goods – infrastructure, education, science and technology – that make possible the prosperity and growth we take for granted.

“The story of American capitalism has always been Hamiltonian, not Jeffersonian.”

All of this is happening at a moment of profound global transformation. The US, once the lone, shining city upon a hill, has been joined in its exalted status by Europe and Japan and soon by China, India and other fast-growing modern nations. If the last decade has made one thing clear, it is that the US is unlikely to maintain its status as “first among equals” in the international order of things over the coming century. In a world where the American Dream has gone global, our post-Cold War status as the world’s only economic and military superpower is as much a burden as it is an asset. In an increasingly integrated and multipolar world, the old postwar liberal and conservative politics offer increasingly little guidance.

Born of America’s mid-20th century economic hegemony, the remedies served up by both Left and Right hold little promise for renewing our future. Liberals offer warmed-over New Deal Keynesianism as the tonic to our present economic malaise, suggesting that the economic policies that saved us during the Great Depression and ushered in two decades of historically unprecedented economic growth in the decades that followed, can once again put the US’ economic house in order. But it was the war, not the New Deal, that ended the Great Depression and it was our enormous manufacturing capacity (together with a huge domestic market and two decades worth of pent-up demand), more than high marginal tax rates and generous social spending, that assured the US’ remarkable record of growth and prosperity in the decades after World War II. Conservatives, meanwhile, fantasise about undoing the New Deal and our modern regulatory state, imagining that we might return to an earlier era of laissez-faire capitalism that never actually existed. The story of American capitalism has always been Hamiltonian, not Jeffersonian.

Neither contemporary conservatism nor contemporary liberalism offers a credible path to the kind of economic dynamism and shared prosperity that characterised what has been called the “American Century”. For Americans of all political persuasions, the fundamental question that US politics must address in the coming decades is: How shall we continue to prosper when the basis for our economic renewal is unclear, our willingness to make shared investments in our collective future is waning, and our place in a post-American world is uncertain?

Unsustainable growth

America’s mid-century economic hegemony was defined by a compact between business and labour, wherein rising private-sector wages and benefits, labour peace, and sustained investment in manufacturing and production drove economic growth that was both robust and equitable. By contrast, the latter decades of the 20th century have been characterised by a compact between business and consumers, wherein outsourcing, global supply chains and economies of scale have brought all manner of cheap consumer goods within reach of even the poorest Americans – even as these forces have also diminished American manufacturing, depressed wages and undermined our long-term competitiveness.

Cheap credit and rising home values forestalled any serious reckoning with the consequences of these developments for several decades, but today, in the wake of the financial crisis, it is not entirely clear where sustained growth and prosperity might come from. The credit and asset bubbles fuelled two decades of consumption-based growth – with finance, retail, home construction and other service sectors reaping an outsized share of the benefits – while manufacturing, agriculture, and many other productive and export-oriented sectors of the economy suffered.

With the exception of finance, which has grown vigorously thanks to the Federal Reserve’s continuing largesse, there is little reason to think that any of the sectors responsible for driving growth over the last two decades will return to their former inflated values or growth rates. Productive sectors, including manufacturing, have languished as the US’ long-standing comparative advantage in science, technology, innovation and productivity has been eroded by competitors who have invested heavily in supporting and expanding their own high-value production capacity and skilled workforce. The postindustrial conceit that the US could sustain growth through services alone, without producing goods, has proven empty.

Faced with the prospect of stagnant growth in an increasingly competitive global economy, America’s polarised political class offers the nation few credible solutions. Indeed, both parties propose, albeit through diametrically opposed remedies, to stimulate domestic consumption at a time when the economic challenge that the US faces is one of production.

Moribund liberalism and moribund conservatism leave us with the worst of both worlds. Conservatives offer knee-jerk opposition to new government spending of all kinds while maintaining a religious faith in the efficiency of the market, even in the face of a financial crisis that originated with the deregulation of the financial sector and accelerated the collapse of much of the US’ productive economy. Liberals attempt to redistribute a shrinking economic pie down the income distribution, stimulate consumer demand with government spending, and replace unionised manufacturing jobs, once the means to economic mobility for America’s working class, with unionised public-sector jobs.

Throughout the postwar era, the defining rationale for the American state was to build the physical, legal, political and economic infrastructure for American modernity. Today, the primary rationale for the continued existence and function of American government has become, literally and figuratively, entitlement. Neither party dares ask middle-class taxpayers to bear any of the costs associated with providing the basic public goods upon which competitive, modern economies increasingly depend. As such, neither offers a serious strategy to deal with the shifting structure of the American economy or the global economic competitiveness challenge.

While liberals reflexively fight to preserve entitlements, raise taxes on the rich and protect social programmes for the poor, it is the prospect of stagnant growth and declining economic competitiveness, not tax cuts and the elimination of social programmes, that presents the most profound challenge to broadly shared prosperity. Nothing represents a greater threat to the preservation of New Deal entitlements, such as Social Security and Medicare, than low levels of economic growth over the long term. And it is hard to imagine any development that might prove more regressive than the possibility of an increasingly low-wage, non-white and poorly-educated cohort of working-age Americans paying for the retirement and health benefits of a boomer generation that is wealthier, healthier and better educated.

Over the last half-century, sustained rates of economic growth and modestly redistributive public policies have been the main drivers of rising social mobility and declining poverty. But today, the sectors of the American economy that historically have driven equitable growth and social mobility have atrophied at the same time that rising social inequality has become increasingly resistant to simple redistributive remedies. The traditional means that liberals have relied on to address inequality directly – a progressive tax code, generous social entitlement programmes and greater investment in schools and healthcare – are no longer up to the job.

A two-tiered economy

“A social contract born of America’s mid-century economic hegemony can’t deal with … our 21st-century world.”

The hollowing out of the American economy, with declining employment in manufacturing and other productive sectors of the economy, has created an increasingly two-tiered economy, with most workers employed either in low-wage service jobs or high-wage knowledge jobs. Today, education, technical knowledge and softer social skills increasingly hold the keys to entry into the high-wage economy. At the same time, workers in the bottom half of the income distribution have the hardest time acquiring those skills and credentials.

In such critical domains as education and health, the primary drivers of outcomes are, in no small measure, independent of the institutions responsible for their provision. Educational outcomes are mostly driven by factors outside the control of schools. The strongest predictors of poor health outcomes are poverty, low socioeconomic status and social isolation, factors that health care providers are unsuited to overcome. As a result, the whole process becomes self-reinforcing. Poverty and low social status beget poor educational and health outcomes, which beget more poverty and low social status.

But despite the rank unfairness of America’s present-day casino economy, those who advocate for redistribution face an uphill battle. Poor Americans are now materially wealthier than much of the middle class was 40 years ago. Poverty in the US has evolved from an absolute, objective, social condition into a relative one. While poverty once meant going without access to clean water, sufficient food and electricity, today it means living with the anxiety that stems from joblessness, poor health and social isolation. As this has occurred, the power of the redistributive liberal agenda has waned. However apocryphal, Ronald Reagan’s tales of welfare queens driving Cadillacs tapped into a deeper set of misgivings among the American public about economic redistribution in a materially affluent society.

Taken together, the decline of manufacturing and other productive sectors of the US economy, the rising-skill premium for knowledge work, the increasing barriers to entry into the knowledge economy for poor and working-class Americans, and the growing public suspicion of redistributive policies all profoundly challenge the old, redistributive liberalism. A social contract born of America’s mid-century economic hegemony can’t deal with the social, political and economic contradictions of our 21st-century world.

Perhaps counterintuitively, these same contradictions simultaneously destabilise contemporary conservatism. Conservatives have long worried that social welfare, entitlements, and nanny-state intrusions would kill the US’ self-reliant and entrepreneurial culture, but socioeconomic stasis and pervasive, entrenched inequality threaten to do the same. The conservative ideal of an ownership society of independent entrepreneurs, small businesses, and salt-of-the-earth, self-reliant employees is unlikely to offer much inspiration to the growing cohort of Americans whose prospects for social mobility appear increasingly dim. Conservatives who believe that initiative, hard work and self-reliance should determine social and economic success in a meritocratic America need to consider the corrosive impact that an increasingly static, two-tiered economy is likely to have upon those values.

The welfare state has indeed undermined the American Dream, but not in the way conservatives have long imagined. We now take the benefits of the welfare state – rising living standards, social mobility, generous health and pension benefits in retirement – for granted. As a consequence, we have ceased to attend to the basic economic preconditions of its continued exis­tence. For many Americans today, the state is only visible when it fails to provide the services to which we have all become accustomed. Voters demand lower taxes and expanded entitlements, and America’s political class dutifully delivers. The central role that government has played in driving economic growth and shared prosperity has largely been ignored and forgotten. In place of grand visions of building a great and prosperous society, American politics today offers us a deadening mixture of entitlement, loss-aversion, status anxiety and nostalgia.

The central conundrum facing a new liberalism is this: America’s great challenges demand a robust role for government at the very moment that much of the public has lost faith in it. If there is to be a future for American liberalism, it will require that we imagine a clear and well-defined role for government that allows the US to meet these new challenges and chart a prosperous and equitable course forward for the 21st century.

Growth by innovation

No rejuvenation of American liberalism will be possible without forthrightly addressing the reasons that Americans have turned away from the state. As long as middle-class voters believe their taxes benefit special interests – whether rent-seeking corporations, banks, unions or any other group deemed undeserving – public scepticism about government and resistance to taxes and public investments, will grow.

A new progressive politics must take liberalism’s commitment to broadly-shared prosperity forward while leaving the old, redistributive agenda behind. The poor become middle-class and the middle-class becomes affluent largely through economic growth, not wealth redistribution. Effective strategies to grow the economic pie may require asking those who have reaped the most from the fruits of modernity to pay more of the costs associated with its extension. But these strategies must be in service of greater opportunity, modernisation and growth for all, not economic redistribution. In the end, we are more likely to address poverty and inequality through expanding social, economic and technological possibilities than through large-scale redistributive strategies.

Growing the pie will require that the US recommit to its historic strengths in science, technology, and innovation, rather than doubling down on demand and consumption. In contrast to conservatives, who deny that government has any role whatsoever in promoting economic growth, and traditional liberals and progressives, who offer lip service to science, education and new technologies while prioritising entitlements, subsidies for mature technologies and trade protections for old industries, new liberals must offer the US a serious and proactive programme to accelerate innovation and economic productivity.

Unfortunately, progressive neo-Keynesians still have not come to terms with the reality that the lion’s share of US economic growth over the last century was driven by innovation-based productivity growth, not consumer demand, while progressive neoliberals, following Robert Solow, the father of Neoclassical Growth Theory, still imagine that technological innovation is “manna from heaven”.

In reality, the entire history of American industrialisation and technological innovation was driven by epic government investments in the development and commercialisation of new technologies. Think of a transformative technology­­ – computers, the internet, pharmaceutical drugs, jet turbines, cellular telephones, nuclear power – and what you will find is a history of government investment in those technologies at a scale that private firms simply cannot replicate.

Adopting an innovation and productivity agenda for America’s economic renewal will require that liberalism re-affirm the historic role played by the state in providing the public goods that drive economic growth. There is no market, no modern economy, and no private sector in any recognisable form without the essential infrastructure – the roads, electrification, potable water, the judiciary, security – that states continue to provide.

While we must embrace an essential and expansive role for the state, we must also seek to bound it. The neoliberal fetishisation of market efficiency has convinced elites and policymakers that the best, most cost-efficient means of providing public goods, whether innovation or healthcare, is to bribe or regulate private firms into providing them. This has turned the congressional appropriations process into an orgy of rent seeking and over-charging by private interests claiming to be providers of public goods.

Marshalling private means to public ends has been justified in the name of economic efficiency, and yet the result has served neither greater productivity nor the public interest. Neoliberal schemes to require or pay private actors to provide public goods through complicated market-making schemes have, time and again, made markets more dependent on government – and made public goods more expensive – than they would have been had they been provided directly by the state. Revitalising liberalism thus requires curbing the redistributive impulses of the Left, the market-making impulses of neoliberals and the expansionist impulses of both.

In order to construct a lasting political consensus for the critical actions the American state must take to ensure prosperity over the coming decades, we must imagine a new role for the American state that is both limited and direct. By limited, we do not necessarily mean limiting the number of things the state does – there are state functions that we may wish to eliminate and functions that we may wish to add or expand – rather, we mean limiting the state to providing only public, not private, goods. As we have increasingly confused public goods with private goods, the size of the American state has grown enormously.

While there will no doubt continue to be situations where it makes sense to use indirect mechanisms, like tax credits or subsidies, to incentivise firms and markets to deliver public goods, we need to move past the a priori assumption­­ that requiring, incentivising or cajoling the private sector to do so is always preferable to providing public goods directly.

A social compact for the limited and direct provision of public goods could appeal to both conservatives and liberals, albeit for different reasons. To conservatives, we would suggest that the more direct provision of public goods will lead to a government that is both more limited, more efficient and less likely to distort markets through subsidies or regulations. To liberals, we would suggest that providing public goods more directly, but in a more limited manner, will better serve liberal social objectives.

“We must talk back both to the Gatsbys, whose financial schemes for growth are phony, and to the Lomans, whose sense of entitlement has turned to resentment.”

This new compact might propose alternative ways to think about critical issues. We might agree, for instance, that basic healthcare – emergency services, vaccines, access to public health clinics and catastrophic and long-term care – are public goods, but that health insurance and the many consumer amenities that come along with it – choosing one’s doctor, access to unproven tests and treatments, treatment of non-essential illnesses – are not. We might decide that preserving a basic public entitlement to a minimum income in retirement is a public good, but subsidising 401(k)’s is not. And we might agree, as some liberals and conservatives already do, that subsidising innovation to achieve cheap alternatives to fossil energy is a public good, but subsidising existing energy production is not.

Contrary to the notion that public services should be reserved for those most in need, we argue here for limited universalism as a first principle. Limited universalism is fair in a postmaterialist society – one in which everyone has already largely met their basic material needs. It establishes a floor for individuals to build upon (if they choose to do so). Where the Right proposes to privatise entitlements like Medicare and Social Security, we propose limiting them to cover only those goods that are demonstrably public, rather than private. Such a social contract affirms the liberal principle of a universal safety net while affirming the conservative commitment to limited government and greater individual choice.

Revitalising liberalism will require that we help the public discern between the real choices it must make and the false ones. Where today Americans are offered the choice between the privatisation of entitlements or their maintenance, a new liberalism would limit entitlement programmes to the provision of services that are demonstrably public goods. Where Americans are offered the choice between stimulating the present day casino economy or redistributing it, a new liberalism would offer a credible strategy to grow the productive sectors of the American economy. And where Americans are currently offered a choice between unfettered, laissez-faire capitalism or neoliberal market-making, a new liberalism would offer credible, public institutions that can provide public goods directly and efficiently.

None of this will come easily or quickly and will, to be sure, be challenged by powerful ideological biases, institutions, and financial arrangements. Many on the left will insist that there is nothing wrong with current entitlement arrangements that higher taxes on the rich cannot fix, and will dismiss the notion that our entitlement society threatens the American Dream. Many on the right will see any new role for the state as compromising their long-standing effort to bankrupt the welfare state, despite that strategy’s manifest failure.

For a new liberalism to be relevant in this changing post-American world, we must build upon what has always been special about the US: our productive spirit, our wealth, and our capacity to reinvent ourselves. We must talk back both to the Gatsbys, whose financial schemes for growth are phony, and to the Lomans, whose sense of entitlement has turned to resentment. We must reject nostalgia for the New Deal and the class-based politics of a nation that was far younger and poorer than the modern colossus in which we live today. And against today’s politics of entitlement, we should affirm our gratitude for the investments made by those who came before us, and renew our commitment to invest in the US still to come.

Michael Shellenberger and Ted Nordhaus are executive editors of the Breakthrough Journal and co-founders of the Breakthrough Institute.

A version of this article was originally published in Breakthrough Journal.