Steps toward the “Good Economy”

November 25, 2014 • Cato Online Forum
By Bowman Cutter

This short essay is a derivative of a much longer piece I am writing with two colleagues, Robert Litan and Dane Stangler. In that essay we are attempting to define what we have called “the good economy”. We mean by this “an economy that works” — a sustainably growing economy that provides the Americans who will come of age over the next 30 years or who are already working with the genuine possibility of a middle class life; an economy that provides Americans once again with a solid shot at upward mobility; an economy that begins to restore a broader degree of equity to working Americans.

The premise we begin with is that while we believe that this “good economy” can evolve from today’s relatively mediocre starting point, it will be very different from today’s economy or from the economy of the 1950’s, which is often referred to as the previous golden age. And getting from here to there is not a matter of a few simple fixes.

In the absence of significant change, we are on a low‐​growth track driven by declining business formation and investment, unprepared workers, eroding infrastructure, and worsening governance particularly at the federal level.

There is much more to be said about the cul‐​de‐​sac we are caught in, particularly with respect to the kinds of institutions required by what I’ve called in another context “the next American economy.” However here I focus on two main issues and wave Brink’s magic wand twice.

Problem 1: The Wrong Economy — Declining Business Innovation and Formation

The rate of business formation has been falling for 20 years, and nobody knows why.

It may be that Robert Gordon and the techno‐​pessimists are right. We have reached the technological frontier, entrepreneurial energy has successfully exploited all real opportunities, and there is little more fruit to be harvested.

But I don’t believe it.

I assert that it is more likely we have reached a different frontier — our capacity to harvest the benefits of the several major technological revolutions occurring around us. That capacity depends on new businesses and their creation depends on structures, governance, incentives, and costs.

Because of the decline in business formation, our economy is now composed of older, larger companies. And old, big companies do not start new businesses, innovate in profound disruptive ways, or create jobs. Moreover as business and government have grown in parallel, they have together evolved a rent‐​seeking crony capitalism with a strong incumbency bias.

If we had a good “ease of being an entrepreneur” index, we would see clearly what seems intuitively obvious: entrepreneurs today face more opaque government, more complicated and time consuming rules and regulatory processes, and more difficult access to capital. As a result their costs of capital — implicit and explicit — are probably considerably higher than they have been in previous decades. And business formation is lower.

Magic Wand 1

Bring about a long term increase in the rate of business formation in the United States and (small sub‐​wave of the wand) establish an “ease of being an entrepreneur” index and track it in the annual report of the CEA.

Re‐​establishing a higher business formation rate will require a thorough understanding and reduction of the impact of regulation on small business costs; a dramatic simplification of government; an equal simplification of corporate taxation; and an honest accounting of the effect of the Washington lobbying industry on incumbency bias.

And now to political economics. Neither major party has the slightest interest in pursing this course. In our current circumstances, to believe anything of significance will occur at the federal level is, as a boss of mine once said, to have the capacity to believe 37 impossible things before breakfast. But is there a possibility of emulating the Chinese Communist Party and giving cities — which do still work — the right to create “Next American Economy” zones within which the changes required to rebuild business creation could be pursued?

Problem 2: An Unprepared Labor Force

Our educational system is designed to prepare Americans for success in the industrial economy we used to have. It does not prepare Americans for the economy that is evolving now.

More specifically: (1) the current educational system does not prepare Americans from an early age for the entrepreneurial and innovative economy that will have to be our next core; (2) the system whiffs completely in terms of providing the postsecondary and lifelong learning the next economy will need; and (3) the system is nowhere near good enough in teaching the basics of science, mathematics, literacy, and computer coding.

Magic Wand 2

Give the “high school movement” so well described by Larry Katz and Claudia Goldin in The Race Between Education and Technology a 21st century rebirth.

This new educational revolution would focus principally on two areas: early childhood education and postsecondary lifelong learning. Creating the new educational revolution will require contending successfully with mutually exclusive and mutually hostile ideologies of the American left and right. On the one hand, more federal expenditures will be necessary. On the other hand, expenditures will only be productive if they (1) are driven by individual choice, and not by centralized decree from Washington; (2) are part of intensely local solutions; and (3) are provided largely through private and public entrepreneurs.

To restate my frustration with Brink’s constraints, these two changes are not enough to usher in the Next American Economy. But they do address two critical elements of that economy: First, the only plausible structure of our economy that could lead to high growth; and second, the quality and nature of the preparation Americans receive for participating in that economy.

The opinions expressed here are solely those of the author and do not necessarily reflect the views of the Cato Institute. This essay was prepared as part of a special Cato online forum on reviving economic growth.

About the Author
Bowman Cutter is a Senior Fellow and Director of the Next American Economy Project at the Roosevelt Institute.