America’s Economy: Stagnation and Inequality, A Bad Mix There is no significant innovation while income disparities are reaching Latin American levels. Politicians have no new ideas

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WASHINGTON – Capitalism is still by far the best economic system we know. But it is not as good as we would like it to be. Here in America we are in the middle of what Tyler Cowen appropriately named “The Great Stagnation”.

No innovation

Indeed, beyond the still vibrant IT sector, we seem to have lost the ability to innovate. There are no ground breaking inventions, no real “game changers” in power generation, civil aviation, biotech, agribusiness, and so on, that open up entire new sectors.

Stagnation also means little or no productivity growth, and that means thin margins for many industries. And technological changes, to the extent that they exist, usually have a negative effect on mundane functions, (and that means jobs), that can be easily replaced by automation.

Little growth, low wages

Yes, the economy grows; but just a little. There are good news on employment. We have just added almost 300,000 jobs in April. But they are mostly low paying jobs. There are millions of Americans who would love to trade their current part-time jobs with full-time employment. The middle class is barely treading water. Millions of Americans are actually doing worse now than 10 or 20 years ago.

Growing inequality

At the same time, whatever new wealth is produced, it ends up in the hands of fewer and fewer people. So, here we have it. Very little economic growth and growing socio-economic disparities.

The US is becoming a bit like Brazil and other Latin American countries. Modest growth, huge inequality and a shrinking middle class.

No good answers

These are really major issues. And nobody has a good answer. How do we reduce inequality without punitive actions against those who do better or very well? How can we help the shrinking middle class without creating a gigantic and ultimately unaffordable welfare state? And –most critical issue– how do we recreate the magic of broad based innovation? As I said, nobody really knows, for sure.

Retreaded political ideas

But politicians are forced by the circumstances to come up with answers. Confronted with this phenomenon of lower incomes for the middle class, while those at the top have become fabulously wealthy, the left simply retrenched to familiar ground. This growing inequality –its leaders say– is unjust and immoral. The state should do more to help those at the bottom. And you finance these needed social safety nets by taxing the rich who are taking more than fair share anyway.

Redistribution

This approach may make some people feel better. But in the long run it is self-defeating. No public policy founded on redistribution ever managed to give any real impulse to growth. The rich will hide their wealth whenever they can and/or move to another country if they have the opportunity. Those who cannot escape will lose their motivation to invest and expand. If things are bad today, you can rest assured that they will be worse tomorrow.

Free-market capitalism will work its magic

That said, the orthodox pro-capitalist have no new insights either. The idea that, if you leave the system alone –that means deregulation, lower taxes– it will take care of itself, looks at best a bit naive, at worst utterly disingenuous. While one should not tinker with innovation by having politicians picking winners and losers and by subsidizing this or that, are there ways in which public policy can stimulate innovation and expand opportunity?

Expanding opportunity

Is there anything that can be done to give a good, if not excellent, public education to millions of poor kids who are stuck in mediocre or failing public schools? These kids are part of our future human capital reservoir. If we let them grow up with no education, they will be able to do little for themselves and even less for society.

These lean times should stimulate new, constructive ideas. But they do not. The left thinks in terms of redistribution financed via higher taxes imposed on the rich. The right still thinks in terms of pure free market capitalism whereby the “invisible hand” will take care of everything.

Immediate handouts seem better 

These stale recipes will not work. Sadly, in this unimaginative political landscape it is likely that those on the left who promise a free lunch to people who are really hungry will get more attention.

The millions of Americans who are not doing well are more inclined to listen to the politicians who offer immediate relief. Paraphrasing the old story, for most people in need receiving a fish now seems more appealing than enrolling in a course that will teach them how to fish.

The point is that we shall soon run out of fish.

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