The US could use a new eco­nomic strat­egy

The Pak Banker - - OPINION - Justin Fox

IN his four-plus years as the coun­try's first trea­sury sec­re­tary, Alexan­der Hamil­ton crafted an eco­nomic strat­egy that helped the U.S. rise from agrar­ian for­mer colony to global eco­nomic power.

Its main el­e­ments, Stephen S. Co­hen and J. Brad­ford DeLong write in their brand-new book, "Con­crete Eco­nom­ics: The Hamil­ton Ap­proach to Eco­nomic Growth and Pol­icy," were:

High im­port tar­iffs to pro­tect in­fant in­dus­tries and pay for the in­fant govern­ment. High spend­ing on in­fra­struc­ture. The cre­ation of a mod­ern fi­nan­cial sys­tem, built around the as­sump­tion of state debts by the fed­eral govern­ment and the cre­ation of a cen­tral bank.

No U.S. leader since has ar­tic­u­lated and then put in place an all-en­com­pass­ing eco­nomic plan in quite the way Hamil­ton did. But the coun­try has al­ways fol­lowed some sort of eco­nomic strat­egy, even if it has sel­dom been clearly de­fined. Hamil­ton's plan stayed in place for decades, even un­der pres­i­dents who dis­avowed it. Then came a suc­ces­sion of strate­gies -- culled from Co­hen and DeLong's book, but given ti­tles by me -that went some­thing like this:

In the se­cond half of the 19th cen­tury, a Repub­li­can-dom­i­nated U.S. govern­ment sup­ple­mented the Hamil­ton ap­proach with free land for rail­roads and home­stead­ers, freer la­bor (the abo­li­tion of slav­ery and the pro­mo­tion of large-scale im­mi­gra­tion dra­mat­i­cally in­creased the avail­able work­force) and free- dom for busi­nesses to in­cor­po­rate with­out spe­cial govern­ment per­mis­sion.

From 1900 through the 1930s, trusts were busted, reg­u­la­tory agen­cies cre­ated, tax­a­tion re­vamped and then var­i­ous ex­per­i­ments un­der­taken to stim­u­late the econ­omy dur­ing the De­pres­sion. The goal was not so much to de­velop the na­tion as to try to steer de­vel­op­ment in ways that spread the ben­e­fits more widely. With the U.S. the world's dom­i­nant eco­nomic power af­ter World War II, boost­ing growth abroad took pri­or­ity over pro­tect­ing U.S. in­dus­try from for­eign com­pe­ti­tion. But huge in­vest­ments in high­ways, hous­ing, sci­en­tific re­search and mil­i­tary tech­nol­ogy stim­u­lated and shaped the U.S. econ­omy in pro­found ways.

Start­ing in the 1970s, govern­ment be­gan to loosen con­straints that had kept banks and other fi­nan­cial in­sti­tu­tions in check since the 1930s. At the same time, East Asian coun­tries fol­low­ing a Hamil­to­nian de­vel­op­ment model built ex­port-led economies that lifted hun­dreds of mil­lions of peo­ple out of poverty but also bat­tered man­u­fac­tur­ing in the U.S.

Th­ese two forces com­bined to give fi­nance a much larger role in the U.S. econ­omy than it had ever played be­fore, which seemed like an OK idea in the 1980s and 1990s but hasn't looked so good since the 2008 fi­nan­cial cri­sis.

It is at least pos­si­ble that this last era has come to an end, with the be­gin­ning of fi­nan­cial re-regulation in the U.S. and a halt to the long up­ward trend in global trade that ac­com­pa­nied the rise of the East Asian ex­port economies. It's not at all clear, though, what's go­ing to re­place it.

DeLong, an econ­o­mist at the Univer­sity of Cal­i­for­nia at Berke­ley and a prom­i­nent and pro­lific blog­ger, and Co­hen, an emer­i­tus pro­fes­sor of re­gional and city plan­ning at Berke­ley, don't of­fer a plan. They sim­ply rec­om­mend that dis­cus­sion of eco­nomic pol­icy fo­cus on the con­crete -- what works -- rather than the­ory and ide­ol­ogy.

How's that been go­ing lately? Don­ald Trump's eco­nomic plat­form, how­ever mud­dled and un­re­al­is­tic, is at least a break from the nar­row ide­o­log­i­cal or­tho­doxy on eco­nom­ics that has held the na­tional Repub­li­can Party in thrall for the past cou­ple decades. On the Demo­cratic side, Bernie San­ders and El­iz­a­beth War­ren have of­fered a chal­lenge to the fi­nan­cial-sec­tor-friendly ap­proach that the party's main­stream set­tled on in the 1990s. Some in that main­stream have been re­con­sid­er­ing their stance as well -- DeLong was a deputy as­sis­tant trea­sury sec­re­tary in Bill Clin­ton's ad­min­is­tra­tion, and he has gone from de­fend­ing the dereg­u­la­tory moves of the 1990s to, in the new book, cri­tiquing them.

Mean­while, the eco­nom­ics pro­fes­sion's turn away from the­ory and to­ward em­pir­i­cal work, which I wrote about in Jan­uary, will pre­sum­ably of­fer prag­mat­i­cally in­clined pol­icy mak­ers more ma­te­rial to work with in the com­ing years.

Still, it's not easy to fig­ure out what the U.S. should do next. Na­tions play­ing catch-up -- such as the U.S. in the late 1700s, Ger­many in the 1800s, and Ja­pan and China more re­cently -- have con­crete ex­am­ples they can fol­low. But the U.S. of 2016 is the big­gest econ­omy on the planet, and by most mea­sures one of the strong­est.

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