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Advice for the New President and Congress

Dean Douglas Elmendorf
April 8, 2017

In many respects, the state of our union seems quite strong. Unemployment is back below 5 percent, inflation remains very low, and national output and income have been growing steadily for almost eight years. Serious crime in this country is near its lowest level in decades. We are the most powerful country in the world with no close rivals, and the terrible terrorist attacks of 9/11 have not been repeated in this country. If someone had described those conditions to me a decade ago, I would have predicted that Americans would generally feel very good about their country and their lives.

Yet that seems not to be the case for many people. Many Americans are frustrated about their lives, disappointed in their country, and angry at their leaders. They were frustrated, disappointed, and angry enough during last year’s presidential campaign to turn away in large numbers from traditional public leaders toward Bernie Sanders and Donald Trump in the primaries and then toward Donald Trump in the general election. These Americans rejected the political establishment and criticized people they viewed as elite for being out of touch and self-serving. They showed a profound lack of confidence in the American economic and political system.

In my view, the most important priority for our elected leaders today is to restore confidence in our economic and political system for millions of Americans whose lack of confidence has become so clear. The lack of confidence has arisen from a combination of economic, social, and political factors. I will focus today on domestic issues, and the recommendations I will make involve domestic policies. That focus reflects my own expertise and should not be interpreted as a conclusion that international issues and policies are unimportant.

Let me highlight three factors that have been central to the loss of confidence for many people:

First, living standards for many lower- and middle-income Americans have improved only slightly during the past few decades. According to official statistics, between 1979 and 2013, real gross domestic product (GDP) per person in this country increased 72 percent, while household incomes before accounting for taxes and government benefits rose 18 percent in the bottom quintile of the distribution, 12 percent in the middle quintile, and 85 percent in the top quintile. Those specific numbers understate the true increases in people’s incomes because the data do not fully capture quality improvements or the introduction of new goods and services. In addition, the measurement of household incomes is fraught with many other challenges. But even if we do not put much weight on those specific figures, it is clear that market incomes of people across most of the distribution have increased fairly little during the past few decades.

Moreover, underlying economic forces will probably make these problems worse over time. For example, there are roughly three and a half million drivers of taxis, buses, and delivery vehicles in this country. Many of those drivers are men without college degrees, and many are earning enough to put them in the middle class. But the rise of self-driving vehicles will probably cut the number of those jobs substantially over the next few decades. Similarly, manufacturing jobs will not increase to any great extent in this country, regardless of our policies on international trade, because the primary cause of the decline in those jobs has been technological advances in manufacturing. Unless those advances stop, there will be further downward pressure on compensation for less-skilled people in this country.

We can see the consequences of a lack of economic opportunity for many Americans in other measures as well. The labor force participation rate for men without college degrees has fallen sharply relative to the participation rate for men with college degrees. Long-lasting trends in life expectancy have diverged sharply by education level during the past few decades. Out-of-wedlock birth rates have diverged by education level. We have a frightening surge of deaths from opioid use. Clearly, slow income growth and a lack of economic opportunity are harmful not only for people’s material well-being, but also their social well-being. Good work and good pay are integral to people’s sense of self-worth and to their ability to engage fully in our society. Voltaire wrote: “Work keeps at bay three great evils: boredom, vice, and need.” There is truth in that. In addition, this situation is damaging to our political system, because many lower- and middle-income people feel a growing distance from higher-income people and a growing alienation from the established institutions of our country. And the situation weakens our international leadership because it casts doubt on the desirability of our system and because people’s frustration hampers our ability to adopt policies that would strengthen our position in the world.

A second factor that has weakened confidence in the American system for some people is rapid social change. For example, people born outside the United States now represent a larger share of the population than at any time in roughly a hundred years. For myself and for many Americans, immigrants bring a wonderful diversity of ideas, cultures, experiences, languages, foods, and more that greatly enrich our society. But we should not be surprised that, for some Americans, the changes are jarring. As another example, some communities have been devastated by a loss of jobs stemming from technological change and a surge in imports from certain countries. The loss of those previously vibrant communities has not only an economic cost but also a profound social cost. For just one way to get a taste of that social cost, I recommend the new play Sweat, which tells the story of one such (fictional) community. As a third example of social change, women, members of racial and ethnic minorities, and others who previously had been pushed to the edges of our society are now taking their rightful places in the middle of society. Those changes are long overdue, and we must firmly and unambiguously reject any attempts to reverse them. But we should not be surprised that people who are not in those groups want their problems and concerns to be recognized as well.

A third factor that has reduced confidence in the American system is a sharp deterioration in the effectiveness of our political process. Our political arrangements are designed to distribute power among people with different perspectives---and to require civil discourse and compromise. But too many of our elected leaders are demonizing their opponents and accusing them of advancing policies that are not just wrong but illegitimate and threatening to the essence of our society, and too many of our elected leaders are refusing to compromise with each other. Some rhetoric and behavior of that sort has always been present, but we have seen much more in recent years than in preceding decades. Vitriolic rhetoric may offer short-term tactical advantages, but it is damaging to our system in the long term. It is damaging because it stokes fear and anger, and it feeds a false perception that the fundamental nature of our country is at risk from ordinary policy disagreements. Such rhetoric also discourages compromise: Compromising with someone you disagree with seems reasonable, while compromising with someone who you claim wants to ruin the country does not. And the blame for these problems lies not just with our leaders, but also with ourselves as citizens in the way we interact with each other and the things we reward in the people we elect.

Moreover, our political process depends on more than our elected leaders---it depends on many institutions and traditions of civil society. We rely on a free and vigorous press, on an independent judiciary, on facts and evidence, on effective administration of government programs, on engaged citizens participating in public life, and more. Too many of our elected leaders are ignoring or attacking those institutions and traditions for short-term tactical advantage, and in the process are causing long-term damage. And again, the blame lies not just with our leaders, but with ourselves as citizens.

Because of those three factors, and others, too many Americans have lost confidence in our economic and political system. What can the President and Congress do to restore that confidence? Or, more specifically, what can they, and we, do to help people get good jobs at good wages? To help people feel that they matter in society? To make our political process more effective?

Let me offer seven recommendations for our leaders and for ourselves as citizens.

First, we should empower people to be effective in well-paying jobs by increasing public investment in education and training for people who do not have good access to education and training today. When the development of new tools and techniques in farming put agricultural employment on a downward trend in this country, we moved toward universal high school education. Now that manufacturing employment has fallen to less than 10 percent of total employment, and jobs for less-skilled people in the services sector are under pressure, we should improve the education people receive through high school and significantly increase the education and training they receive after high school.

We should focus that investment on people who do not have good access to education and training today. That focus is important both because the overall economic return would generally be higher and because we would enhance economic opportunity for people whose opportunities are currently limited. That means more preschool education, more support for primary and secondary education in low-income areas, more slots at community colleges, and more mid-career training. For primary and secondary schools, we should ensure that we are getting our money’s worth. For community colleges and mid-career training, we should invest in education that is linked to specific jobs, because that is usually more effective than general education.

We should also encourage less-educated men to enter professions they have traditionally been reluctant to enter but are of growing importance in the economy. A friend recently sent me a speech where he said that we should “make work in the caring professions acceptable and desirable to … working class white males”; I agree.

Second, we should put greater emphasis on buffering the adverse effects of international trade and immigration on some people’s incomes. Economists have known for a long time that greater trade and immigration generally raise a country’s average standard of living. We have also known for a long time that greater trade and immigration hurt some people’s standard of living. That second effect may or may not seem important if different people are being hurt at different times and if everyone’s income is rising briskly for other reasons. But it is surely important if the same people are being hurt over and over, and if those people’s incomes are also being hurt by technological change and other forces. That is what has been happening to less educated workers in this country.

My Kennedy School colleague Dani Rodrik wrote 20 years ago that “the most serious challenge for the world economy [is to ensure] that international economic integration does not contribute to domestic social disintegration.” Half a dozen years ago, he added: “Countries have the right to protect their own social arrangements, regulations, and institutions. That’s more important than squeezing out the last bit of purported efficiency gains from trade.”

Therefore, as we set trade and immigration policies, we should make those policies good not only for the country as a whole but also for lower- and middle-income workers. That means giving extra support for mid-career retraining. It means providing greater transition assistance of other sorts. It may also mean foregoing or at least slowing changes in immigration and trade that would help the country as a whole but be hard on people whose economic and social circumstances are already shaky.

Third, we should maintain the current scale of federal benefits for lower- and middle-income people. According to estimates by the Congressional Budget Office several years ago, nonelderly households in the bottom quintile of the income distribution receive about 3 percent of total income before accounting for federal taxes and benefits and about 7 percent of total income after including those taxes and benefits, because they receive substantial benefits and pay very little in taxes. For households in the middle quintile, the corresponding figures are 14 percent and 14 percent, because they receive smaller benefits and pay more in taxes; and for households in the top quintile, the figures are 55 percent and 49 percent because they receive very limited benefits and pay a lot in taxes. Those specific estimates predate the benefit and tax increases in the Affordable Care Act, which increased the progressivity of federal benefits and taxes but did not change this overall picture. Given those figures, it is clear that cutting benefits would hurt lower- and middle-income Americans directly by reducing their income.

But, one might ask, what about the effect of benefits on people’s work effort, the possibility that benefit cuts could enable reductions in budget deficits or tax rates that would spur the overall economy, and the disappointing outcome of the War on Poverty? It is true that cutting benefits would probably increase work by the recipients, but the evidence suggests that the increases would generally be small. We have both direct and indirect evidence of this point. As one piece of indirect evidence, I would note that the labor force participation rate of prime-age workers is lower in the United States than in many other developed countries, despite those other countries’ more expansive safety nets. It is also true that lower benefits would allow for a combination of smaller deficits and lower taxes, which would increase overall GDP. But the income gains that might result for lower-income people would not be large enough to offset the loss in their benefits. It is further true that the War on Poverty has not succeeded in eliminating poverty. However, the federal benefits we have provided have been fighting against the effects of technological change, globalization, and other forces that have depressed wages for less-skilled people, and one cannot realistically expect the amount of benefits we have provided to have overcome those forces. Moreover, there is a growing body of evidence that children in lower-income families that receive certain government benefits do better in the labor market when they grow up than children in families that do not receive those benefits.

I am not arguing that safety net programs are perfect as they stand. We can and should make changes to improve them. Recent proposals by groups of experts from the American Enterprise Institute and the Brookings Institution provide valuable starting points. However, we should not pretend that those changes could reduce government spending significantly without hurting the people affected.

Fourth, we should support people’s incomes and strengthen social ties by increasing federal investment in infrastructure. Under the current caps on annual appropriations, federal investment in infrastructure---such as highways, mass transit, and water treatment facilities---will soon be smaller as a percentage of GDP than at any time in at least 50 years.

That is not forward-looking, growth-oriented policy. Additional federal investment in infrastructure would raise future output and income. Just maintaining the traditional amount of investment relative to the size of the economy would require a substantial increase in the caps. Moreover, we should probably increase federal investment relative to its traditional amount, because interest rates are very low and will probably stay below their historical average for an extended period.

Public infrastructure can be especially important for the well-being of lower- and middle-income people because they are less able to use private substitutes for public services. Higher-income people can use private cars when mass transit is poor, they often have more flexible work schedules and can arrange for more deliveries when roads are congested, and they can buy private water when public water is unhealthy. So, poor infrastructure tends to divide well-off and less-well-off Americans, while good infrastructure brings us together.

Fifth, we should respect and support the vital institutions of our political system. One such institution is a free and vigorous press. Elected officials often have complicated relationships with the press, tending to celebrate news coverage when it is favorable and to complain about unfairness when it is not. But elected officials should try to step back from their immediate interest. We too, as citizens, should try to learn from news reports we do not like. John Kennedy said once about the news: “Even though we never like it, and even though we wish they didn’t write it, and even though we disapprove, there isn’t any doubt that we could not do the job at all in a free society without a very, very active press.”

Another critical institution is the court system. Again, elected officials tend to praise the wisdom of the courts when verdicts are helpful and to criticize the courts when verdicts are unhelpful. But all officials should, all of the time, respect the courts’ right---indeed, responsibility---to judge the legality of actions by elected officials and others. As citizens, all of us should show that same respect.

Other critical institutions are our federal, state, and local governments. Too often, elected officials and citizens show disdain for government employees and the work they do, without providing sufficient resources or flexibility for those employees to work more effectively. We need to demand high performance from our governments; make the structural changes needed to achieve that performance, such as reforming the federal Civil Service; and give high-performing government workers the respect and support they deserve. Addressing these nuts-and-bolts issues of governance is less glamorous than developing grand strategies, but no less important to rebuilding citizens’ confidence. Thomas Edison once said “Vision without execution is hallucination”; at all levels of government, we need better execution and less hallucination.

Sixth, we should respect truth, facts, and expertise. Too many of our elected leaders are pandering to voters or inciting voters by avoiding hard truths, unpleasant facts, and experts’ judgments, and substituting untruths and convenient but unfounded speculations.

To be clear, I do not think that experts should run the world. Experts can be wrong in their assessments of evidence, because of analytic errors, group-think, and unconscious or conscious bias. And even if experts’ assessments of evidence were always right, decisions depend on values as well as evidence, and experts have no particular claim to having better values.

However, the solution to these challenges is not to abandon facts and expertise. The solution is to collect more facts, examine data more carefully, and explore more deeply the consensus view and alternative informed views. Then, decisions should be made by our elected representatives based on facts and evidence about the likely consequences of alternative choices.

Seventh, and last, we should build bridges between people of different race, gender, political views, religion, national origin, urban or rural lifestyle, coastal or Midwestern location, socioeconomic status, and other characteristics. We see every day at the Kennedy School that such inclusiveness is crucial to our ability to improve public policy and leadership in the United States and around the world. For example, one of my colleagues recently pointed out to me that, in our international development program, our students are taught by “three Americans, a Turk, a Pakistani, two Venezuelans, an Indian, a Brit, a Canadian, a Greek, a Cuban, and a Brazilian.” That diversity of background is a source of immense strength at the Kennedy School. We believe that inclusiveness is also crucial to the ability of societies to help make better lives for their people. The original national motto in the United States was E pluribus unum---”out of many, one”---and although the original focus of that motto was a union of states, we should interpret it today as a union of people and we should make it our goal.

I do not mean that we should all be alike or think alike. There is a wide range of perspectives and opinions in this country, and we cannot wish away those differences or expect them to disappear. What we can and should do is to listen to each other better, try harder to understand each other, treat each other with respect and civility, and find more ways to solve problems together despite our disagreements. Those are important attributes of a society, and too many of us are not good enough at that now. As one important example, liberals and conservatives tend to get their news from different sources, live in different counties, and prefer that their children not marry someone of the other political persuasion. Those factors and many others diminish how much we listen to people with different views from our own, which can cause us to forget that other people of good will see the world very differently than we do. The great economist John Stuart Mill wrote “It is hardly possible to overrate the value … of placing human beings in contact with persons dissimilar to themselves, and with modes of thought and action unlike those with which they are familiar.” I agree.

Those seven proposals are my starting list for restoring confidence in the US economic and political system. I hope that the President and Congress will pursue at least some of those proposals.

You may be wondering what you can do yourselves to help accomplish these goals. I think the basic answer is to be active citizens. You can vote, run for office, advocate for causes you believe in, object to policies and developments you do not like, work together with other active citizens in organizations that address social problems, and of course keep track of what we are doing at Harvard on all of these issues.

Let me close with a quotation from Stanley McChrystal, a retired general who wrote in the New York Times this week in support of PBS---and who, by chance, will be speaking at the Kennedy School next week. General McChrystal wrote: “My experience has taught me that education, trusted institutions and civil discourse are the lifeblood of a great nation.” I think he’s on to something, and I hope the President and Congress are listening. Thank you.