Advice for the Next President and Congress
Remarks delivered at Harvard University
Dean Douglas Elmendorf
September 9, 2016
Thank you. I am delighted to have this chance to talk with you today. And I do want to talk with you, not at you, because that will be more interesting for all of us. So, I thought I would start by offering 20 minutes of my advice for the next President and Congress, and then stop and let you agree or disagree with what I have said, tell me what you think I have missed, and offer your own perspectives.
Many observers of this year’s election have focused on the surprising outcomes and unusual candidates. Those are interesting but not the main point. One person who put this well is Stephen Hadley, who was President George W. Bush’s national security advisor and is a periodic visitor to the Kennedy School. He was quoted recently as saying: “This election isn’t just about Donald Trump. It’s about the discontents of our democracy, and how we are going to address them.” I think that he and others who have made similar points are exactly right. The most important priority for our next elected leaders is to restore confidence in the American system for millions of Americans whose lack of confidence has become very clear in this election.
The lack of confidence that many Americans have in our system stems partly from legitimate frustration that the country’s policies and practices are not serving them well. The lack of confidence also stems from a debased political process that has become further debased in this election. So, I will suggest a number of ways to improve both our policies and our political process.
Advice on Economic Policy
Let me begin with policy, and I will focus on economic policy, where the country faces two fundamental challenges. One is that overall economic growth has been quite slow in recent years. Some of the slowdown relative to previous years reflects the retirement of the leading edge of the baby boom generation, and some is a lingering shadow of the financial crisis and severe recession. But much of the slowdown stems from weak productivity growth.
The other challenge is that many people have benefited little from the growth of total income that we have seen in the past few decades. Between 1979 and 2013, real GDP per person increased 72 percent, while household incomes before accounting for taxes and transfers rose 18 percent in the bottom quintile, 12 percent in the middle quintile, and 85 percent in the top quintile. Those specific numbers substantially 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, such as free digital products available through the Internet. But clearly people across most of the income distribution have gained much less than people at the top, and many of them are justifiably unhappy about it and prone to blame our economic policies.
What should we do about these two challenges? Unfortunately, we do not have a set of policies for which we have compelling evidence they would produce rapid income growth across the distribution. However, we do have policies for which we have good evidence they would at least help. Let me offer five.
First, we should use monetary and fiscal policy to keep the economy close to full employment. The recovery in employment in the past few years has helped many people find jobs and receive higher pay, and it has pulled back into the labor force many people who had left out of discouragement. Thus, the return to full employment has been very important in both economic and social terms. But maintaining full employment will be difficult. In each of the past 3 recessions, the Federal Reserve has cut the federal funds rate by more than 5 percentage points. With equilibrium interest rates now exceptionally low by historical standards, the funds rate will not have reached 5 percent when the next recession hits, so the Fed will not have as much room to cut.
Therefore, the President and Congress should put in place stronger automatic stabilizers—that is, cuts in taxes and increases in spending that would take effect automatically when the economy falters—and should be ready to provide additional fiscal stimulus if necessary. A rush to normalize fiscal policy was the biggest policy error during this past economic recovery, and we should not let appropriate concern about long-term fiscal problems prevent appropriate short-term fiscal stimulus in the next recession.
To be sure, expansionary monetary and fiscal policy cannot generate faster sustained growth than is supported by the growth of labor, capital, and productivity. That takes me to my second recommendation:
We should increase federal investment. Under the current caps on annual appropriations, federal investment in infrastructure, research and development, and education and training will soon be smaller relative to GDP than at any time in at least 50 years. That is not forward-looking, growth-oriented budget policy. Instead of cutting federal investment, we should increase it. That is especially true because interest rates are so low and will probably stay low for an extended period.
We should invest more in our transportation system and other infrastructure, in basic research, and in education and training—and to gain the highest return on those investments, we should spend the money wisely. For example, as we choose transportation projects, we should apply cost-benefit analysis more consistently and charge fees to users when we can. We should also focus our investment in education and training on people who do not have good access today—both because the overall economic return will generally be higher and because we would enhance economic opportunity for people whose opportunities are currently quite limited. That means more preschool education, more support for primary and secondary education in low-income areas, more slots at community colleges (especially teaching marketable skills), and more mid-career training.
My third recommendation is to reform the tax code to increase the efficiency of business investment. As you know, the current tax code distorts businesses’ decisions regarding types of assets to invest in, industries to invest in, organizational forms to adopt, and geographic locations of their activities. Reducing those distortions would boost future incomes. Moreover, we should accept incremental tax reform if comprehensive reform is too difficult to achieve politically.
My fourth recommendation is to pursue entitlement reform and to do so in ways that protect lower- and middle-income people from substantial cuts in benefits. Reform of Social Security, Medicare, Medicaid, and other federal benefit programs—as well as tax increases—will be needed at some point to put federal debt on a sustainable path. Some elements of reform can enhance the effectiveness of programs, but other elements of what we call reform will amount to benefit cuts, explicitly or implicitly. Cutting benefits will generally make the recipients worse off. Because lower- and middle-income people have experienced much smaller income gains than higher-income people in the past few decades, we should try to insulate them from the benefit cuts and tax increases, and instead focus those changes on people of greater means.
My fifth recommendation is to put greater emphasis on buffering the adverse effects of immigration and international trade on some people’s incomes. Economists have known for a long time that greater immigration and trade generally raise a country’s average standard of living. We have also known for a long time that greater immigration and trade hurt some people’s standard of living. That second effect may or may not seem like a big deal if different people are being hurt at different times and if everyone’s income is rising briskly for other reasons. But it is certainly a big deal 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.
In addition, we should recognize that people value stability as well as growth. And we should recognize that immigration affects not just the economic environment but also the social environment in ways that some people find understandably unsettling. Especially among less-educated people, there is a growing feeling that their world is changing in ways they do not control and do not like.
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 less-educated workers, and we should try to influence the pace of economic and social changes so people have time to adjust. That means giving extra support for mid-career re-training. 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.
Advice on the Political Process
Those are the economic policies I recommend to the next President and Congress. Let me turn now to our political process.
We can see the challenge here in the rise of Bernie Sanders and Donald Trump. Both candidates gained substantial support from voters who are very unhappy with more traditional candidates. Donald Trump’s rise is much more surprising, of course, because he is so different from most Republican leaders, including the Republican Members of Congress with whom I have worked. His policy proposals are not consistently conservative by the usual standards, and he violates two core principles of our country: He shows prejudice against people based on their race, gender, religion, and ethnicity, while our country stands for fair treatment of people with different characteristics. And he is uninformed about public policy and shows little interest in becoming informed, while our country believes deeply in the importance of education. Yet, Donald Trump has gained the support of millions and millions of Americans. In different ways, Bernie Sanders also gained the support of millions of Americans. We need the next President and Congress to address the factors that have led to such strong support for candidates who are far from traditional candidates.
Some of the factors are economic, and I have just offered some ideas for making our economic system work better for more people. Some of the factors involve prejudice, and our elected leaders should firmly and unambiguously reject appeals to prejudice. And some of the factors are part of a breakdown of our political process. Let me offer five recommendations for improving the process.
First, our elected leaders should reduce the vitriol and rancor in their rhetoric. At one point in the 2008 presidential campaign, a woman made disparaging remarks to Senator McCain about then-Senator Obama, and Senator McCain replied: “No, ma’am, he’s a decent family man and citizen that I happen to have disagreements with on fundamental issues.” We need more leaders talking and acting like that. Instead, our leaders demonize their opponents and accuse them of advancing policies that are not just wrong but un-American, illegitimate, and beyond the bounds of reasonable debate. Some of that rhetoric has always been present, but the amount we see now is unprecedented in my lifetime. And it is not just unpleasant, it is damaging, because it encourages fear and anger by citizens and feeds a false perception that the essence of the country is at risk.
The ongoing debate about the Affordable Care Act is an important example. Republicans have quite legitimate reasons for opposing the act: It significantly expanded the safety net and increased regulation of health insurance, both of which conservatives would naturally resist. And the debate about the act in 2009 and 2010 was no harder fought or more exaggerated than some previous debates about significant legislation. However, the continuous, intense attacks on the law since 2010 have been well beyond previous norms. The investigations, court cases, attempts to defund the administration of benefits to which people are entitled by law, prolonged government shutdown, threats to default on the debt, and so on are not typical political behavior in this country.
These attacks are damaging because they show an unwillingness to accept the outcome of our political process; because they have created an environment of hostility, not just disagreement, over health policy; because they have hindered the effective operation of the government in many areas; and because they have misled people into thinking that something un-American has happened. In fact, the structure of the ACA is the most market-oriented way to achieve nearly universal health insurance coverage—which is why Governor Romney used the approach in Massachusetts, why proposals from conservative experts are generally more like the ACA than the pre-ACA world, and presumably why Republican leaders in Congress have not put forward any replacement in six years. Certainly, people can continue to disagree with many aspects of the ACA—with the goal of universal health coverage, the cost of achieving that goal, or any specific features of the law—but those are disagreements we should have without using apocalyptic rhetoric or tactics.
My second recommendation for the next President and Congress is to respect facts. If we have entered a “post factual” politics, as some assert, it is because many of our leaders are pandering to voters by avoiding hard truths. To do better, our leaders should respect expert opinion and admit to the difficult tradeoffs we often face.
Elected leaders sometimes say they favor “common sense” solutions, and who doesn’t? But common sense cannot tell you whether the climate is changing, or how a particular regulation will ripple through the financial system, or what technical conditions are important in international nuclear agreements, or the answers to many other critical questions about public policy. Experts can tell you, both what they know and what they do not know, about those questions, and that will usually imply tradeoffs in formulating policy. Our elected leaders should listen.
I do not mean that experts should make decisions about public policy; decisions should be made by our elected leaders. But our leaders should base their decisions on the facts, uncertainties, and tradeoffs presented by experts. Pretending that there are easy and obvious ways to solve problems, or that problems do not exist, may help leaders pick up votes in the short run, but it also fosters bad policy choices and increases voters’ dissatisfaction with outcomes that are unavoidably messy and somewhat unsatisfying.
As one important example, the next President and Congress should have a serious debate about the best policies for responding to climate change. They should base that debate on evidence provided by scientists, economists, and other experts, and they should admit that it is hard to get something for nothing. They should not waste time challenging the scientific consensus that climate change is occurring.
My third recommendation for our elected leaders is to accept compromise. Our Constitution requires it: The government cannot function without cooperation between the President and Congress, and the President and Congressional majorities are often from different parties. Moreover, the Senate and House cannot function without cooperation between Democrats and Republicans because of the fairly even numbers of Members from the two parties. Therefore, elected leaders and citizens need to view the negotiations that generate compromise as effective leadership rather than weakness.
Fourth, we should strengthen the leaders of the political parties relative to newcomers and outsiders. The reporter Jonathan Rauch had a long article in The Atlantic this summer arguing that well-meaning attempts over many decades to democratize the political system had backfired, because we ended up weakening the parties and their leaders—who are the ones that recognize the importance of maintaining constructive governance, whereas individual politicians can gain more from unconstructive “chaos.” That argument fits my experience in Washington very well, because I watched Congressional leaders struggle constantly to work with their backbenchers in the policymaking process. Jonathan recommends a number of steps that would bring money and power back to party leaders.
My fifth and final recommendation is to make the government operate more effectively. For Congress, this means confirming Presidential nominees more quickly and no longer shutting down the government or threatening to default on the debt. For the President, this means demanding rigorous cost-benefit analysis of regulations and further developing the performance metrics now being posted at performance.gov. For the President and Congress together, it means pursuing evidence-based policies, for example through the work of the new Commission on Evidence-Based Policymaking that Speaker Ryan and Senator Murray designed. And, for the President and Congress together, it means reforming the Civil Service so that bad performers can be fired more easily and good performers can be rewarded better; to have an effective government, we need to attract more of our most talented people to work for it.
Addressing these nuts-and-bolts issues is less glamorous than developing grand strategies, but it is no less important to rebuilding citizens’ confidence in their government. Paul Volcker quoted to me in the spring a comment by Thomas Edison that “vision without execution is hallucination.” We need less hallucination in our government.
Well, that is the end of my advice to the next President and Congress. These 10 changes in economic policy and the political process would not be easy to put into practice. They would require our leaders to stand up to some of the pressures they face on a daily basis. But I think that leaders who stand up in these ways may well be rewarded by voters. And we need our leaders to stand up, so that the “discontents of our democracy,” in Stephen Hadley’s phrase, can gain renewed confidence in the American way. Thank you.