Restoring Confidence in the U.S. Economic and Political System

Remarks at the Harvard Club of New York
March 9, 2017
Dean Douglas Elmendorf

Thank you. Good evening, everyone, and thank you for coming. It is great to see some of you again and to meet many of you for the first time. Let me start by offering my appreciation to Lyn Thoman for inviting me and arranging this event; I am grateful for this opportunity to talk with you. I am also grateful to the Harvard Club of New York for hosting us. And I am grateful to all of you for being here. With so many alumni and friends of the Kennedy School and of other Schools at Harvard here this evening, the spirit of the Harvard community feels very strong. That spirit is important for the world because your interest in public policy, your engagement as active citizens, your leadership, your volunteering, your advocacy, and your giving to causes you believe in make a real difference. The spirit of the Harvard community is also important for those of us at Harvard today because your interest and support matter tremendously to us. Thank you for all of that.

I am excited to be here this evening to talk about the challenges facing public leaders and concerned citizens in this country---and to talk about some ways those challenges can be addressed. After I have offered my perspective on these challenges and solutions, I will be interested in hearing your reactions to my comments and your own perspectives.

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 8 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. If someone had described that scenario to me some years ago, I would have predicted that Americans would feel very good about their country and their lives.

Yet, that seems not to be the case. 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. They rejected what they viewed as the 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 the US 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. Let me highlight three:

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.

You 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. Out-of-wedlock birth rates have diverged by education level, life expectancy has diverged by education level, and we have a frightening rise of opioid use. So, 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, because good work and good pay are integral to people’s sense of self-worth and to their ability to engage fully in our society. 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 an alienation from the establishment. 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 enhance our position in the world.

A second factor that has weakened confidence in the American system by some of our fellow citizens 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 other Americans, the change is jarring. As another example, some communities have been devastated by a loss of jobs stemming from a surge in imports from certain countries. The loss of those previously vibrant communities is not just an economic problem, it is a profound social loss. As another example, 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. Of course, 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 political process that is undermining the foundations of our democratic political system rather than reinforcing them. To begin, our political system is designed to distribute political power among people with different perspectives and contending views---and to require civil discourse and compromise between them. But too many of our elected leaders demonize their opponents and accuse them of advancing policies that are not just wrong but are illegitimate or threatening to the essence of our society, and too many of our elected leaders refuse 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 give leaders a short-term tactical advantage over their opponents, but it is damaging in the long term. It is damaging because it stokes fear and anger, and because 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 natural, while compromising with someone who you claim wants to ruin the country does not. And the blame for these problems lies not just in our leaders, but also in ourselves as citizens in the way we treat and interact with each other.

Moreover, our democratic political system depends on more than elections and 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 governments, on engaged citizens participating in public life, and more. Too many of our elected leaders ignore or attack those institutions and traditions when it suits their short-term interests. Again, that approach may give leaders a short-term tactical advantage over their opponents, but it is damaging in the long term. And again, the blame lies not just in our leaders, but in ourselves.

What should we do about these challenges? How can we restore confidence in our economic and political system? 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 only 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 and prepares people for those jobs, because that approach 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. For example, 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.

A number of people at the Kennedy School, including David Ellwood, my predecessor as dean, are working hard on ways to enhance economic opportunity and mobility.

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. And I have already noted the negative social consequences of international trade and immigration for some people.

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 CBO 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 estimates predate the benefit and tax increases in the Affordable Care Act, which increased the progressivity of the federal budget but did not change this basic picture. Cutting benefits would hurt lower- and middle-income Americans directly through the lost income.

But what, one might ask, 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. For example, the labor force participation rate of both prime-age men and prime-age women is lower in the United States than in most 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 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 would 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 low and will probably stay low for an extended period. I have done some research on these considerations myself, as have other faculty at the Kennedy School.

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 lagging, 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, weak infrastructure tends to divide well-off and less-well-off Americans, while strong infrastructure brings us together.

Fifth, and here I turn from economics to politics, we should respect and support the vital institutions of our political system. One such institution is a free and vigorous press. Of course, elected officials often have complicated relationships with the press, tending to celebrate the importance of news coverage when it is favorable and to complain about the unfairness of coverage when it is not favorable. 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 with a very, very active press.” My colleague Nicco Mele is organizing important work about the role of the media today.

Another critical institution is the court system. Again, elected officials tend to praise the wisdom of the courts when the courts agree with them and criticize the courts when the courts disagree. But all officials should, all of the time, respect the right of the courts---indeed, the responsibility of the courts---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 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 it is no less important to rebuilding citizens’ confidence. Thomas Edison once said “Vision without execution is hallucination”; we need better execution and less hallucination. My colleagues Jeff Liebman and Jorrit de Jong are each leading ambitious projects to improve government execution.

Sixth, we should respect truth, facts, and expertise. If we have entered a “post-factual” politics, as some observers assert, it is because 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.

When our leaders duck facts and expertise, they sometimes say they favor “common sense” ideas because truth is unknowable and experts cannot be trusted. Certainly I am not against common sense. And I realize that experts can be wrong in their assessments of the world, because of analytic errors, group-think, or unconscious or conscious bias. But the solution to these problems 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. Common sense cannot tell us 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. Experts can tell us, using facts, both what they think is true and what uncertainties attend their thinking.

I do not think that experts should make decisions about public policy, because evidence does not dictate policy choices: Such choices ultimately depend on our values as well. But policy choices that are not based on facts and evidence along with values are doomed to failure.

Seventh, we should build bridges between people of different race, gender, religion, national origin, urban or rural lifestyle, coastal or midwest location, socioeconomic status, political perspective, 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 for us. We believe that inclusiveness is also crucial to the ability of societies to help make better lives for their people. Our original national motto 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 those differences and disagreements away or expect them to disappear. What we can do, 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 differences and disagreements. Those are important attributes of a society, and too many people 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.

Lack of listening and understanding makes compromise harder. But we need compromise. Therefore, in ourselves, and in our leaders, we need to view compromise as good citizenship and good leadership rather than bad.

Those seven proposals are my starting list for restoring confidence in the US economic and political system. You may be wondering what you can do to help accomplish these goals. I think the 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 the Kennedy School on all of these issues. I will close with one more quotation from John Kennedy: He said “One person can make a difference and everyone should try.” Thank you.