THE BLOG
08/09/2011 10:47 am ET | Updated Oct 09, 2011

Was the Innovation Economy Killed by the Debt Debate?

Only a week has passed the debt ceiling deal was finally signed, and we've already seen USAAA become US of AA plus, followed by the return of the worst global market turmoil since the financial chaos of fall 2008. Major U.S. indicies fell between 5 and 7 percent on Monday , a lead Financial Times opinion piece called avoiding a new recession "mission impossible," and governments have already spent all the public money they can find on bailouts and the general stabilization of dubious valuations. As things go from bad to worse, is there anything in the U.S. political discussion that could make things better?

The apparent answer is no. Congress' approval rating has fallen to an almost nonexistent 14 percent, and 77 percent of respondents in a CNN poll thought their representatives had behaved like "spoiled children." There was some agreement that even if S&P was wrong about U.S. debt, it was right about U.S. politics, which was unlikely to use the important tool of higher taxes to lower its deficit. The new round of name calling, as in John Kerry's attempt to launch the term "Tea Party downgrade," won't inspire anyone to look to Washington for help.

The ideological standoff is exactly where it was earlier in the summer. Everyone is equally unhappy. Deficit hawks can point to limited and non-binding progress on debt reduction. Advocates for growth and jobs can lament a Hooveresque austerity that will prolong our "Lesser Depression" and, ironically, increase the deficit.

Republicans may be realizing that their only truly popular program of the past thirty years -- "no new taxes" -- is now a minority position favored by only 20 percent of the public in a July Gallup poll, and can now pass only with acts of undemocratic coercion of the kind we saw this summer.

Democrats rightly lament that they don't actually know whether their president opposed cutting core public services like health care or embraced these cuts.

Behind the obvious political dysfunction -- the propagandistic major media, the limited choice between far-right and center-right national parties, the overwhelming power of special interests -- is the deeper problem. Neither party in Washington has any plan to revive a faltering economy whose 2011 slowdown has, if extended over the 10-year tax cut period, already cost the country as much as it will save in projected spending cuts.

Instead, both major parties compete to offer their overlapping bases false substitutes for economic and social development.

I say overlapping because nearly as high a percentage of Tea Party voters as registered Democrats were anxious to keep Medicare. Both parties are stocked with majorities of "fiscal conservatives" in the sense of people who don't like large debts and uncertain revenues. The people who do like these things are largely in the financial, insurance and real estate industries that make piles of money by borrowing, leveraging and gaming minor price movements in ways that most people find alien, if not repugnant.

In addition, much Tea Party anger is focused on the failures of "professional politicians" rather than on the evil of public services. It's true that the Republican right has long argued that government wastes all the money it gets and that the only good tax is a zero tax. But many Tea Partiers don't hate public services as such. They hate the political class that serves itself rather than society with the revenues it gets in the name of public services.

American tax rates are the lowest in the high-income world, but so are its levels of everyday services. In one category of social welfare expenditures the U.S. is dead last among high-income countries, and behind Turkey (see p. 533 here, or scroll down to the Welfare Expenditures table). The relative miseries of American health care, job retraining, public infrastructure, public safety, cultural programming, and so on discourage the consumers of these services from wanting to pay more.

To make matters worse, our low tax regime has not produced prosperity or a decent quality of public life. It has instead yielded the high-income world's most extreme levels of income inequality. One mainstream columnist recently called the United States "our banana republic."

In reality, our extreme inequality is extremely unpopular, nearly as much on the right as on the left. But once the banana republic has been established, low taxes make individual sense, and in the U.S. they function as a kind of political booby prize. With the stock and housing booms over, most people feel they can't increase their own incomes through known legal means, and since virtually no one thinks they can make America more egalitarian, low taxes on our modest incomes can look like the next best thing.

The only thing close to a real proposal to revive jobs and incomes is the "innovation economy" that Obama featured in this year's State of the Union address. But the combination of no-taxes on the right and austerity on the Obama center-right will keep this from getting off the ground. Obama has not told the public the truth about the high level of investment that a real response our new "Sputnik moment" would require.

More fundamentally, the Obama administration has not given the wider public reasons to prefer the high-tech economy to the industrial economy that national policy has long been undermining. The reason is that "innovation" has for thirty years gone hand-in-hand with job destruction and job exporting -- first in the industrial heartland, and more recently in supposedly post-industrial replacement industries like real estate. The innovation economy's "STEM" jobs (sciences, technology, engineering and mathematics) have mean wages of close to $80,000, or nearly twice the national average, but the major STEM categories are nearly ten times smaller than those of the country's largest occupations. Scrape together 97 STEM categories as the Bureau of Labor Statistics did and you still get to no more than 6 percent of the total U.S. workforce.

As for most jobs, nine of ten of the biggest occupational categories have mean wages between $20,000 and $32,000 per year. These widespread subpar wages persist thirty years or so into our innovation economy.

In this context, the working- and middle-class bases of both major parties act rationally when they prefer low taxes on their stagnant incomes to increased taxes for innovations that have an established track record of passing them by.

In short, the rational distrust of tens of millions of people for an innovation economy that requires ever-higher levels of public investment for not-so-democratically distributed economic benefit bolsters Tea Party refusals of any kind of public action. It is now trapping the country in a devolutionary spiral.

Is there anything that could turn this around? The most useful research I've seen, from James Carville and Stanley Greenberg, determined that the strongest message is, "We have to start by changing Washington... The middle class won't catch a break until we confront the power of money and the lobbyists." This research reinjects a major taboo into the debate -- confrontation with economic elites, starting with Wall Street and continuing with Wall Street's largely, if not wholly, negative impact on the middle class.

Greenberg ties his "change for the middle class" framework to a series of plausible policy reforms. I am quite sure that these are premature. Democrats will not reform a Washington from which they benefit as much as Republicans unless they are subject to massive popular pressure. Pressure requires mass participation in political confrontation of the kind for which Keith Olbermann recently called. But why would people line up to participate in a risky confrontation with politicians and financial backers who have repeatedly demonstrated their enormous power, ruthlessness and lack of remorse?

Two things need to happen first to get regular people of any party to pony up for investment and innovation in a major way.

First, innovation economy advocates need to tie innovation to employment. Silicon Valley has not done this, and has instead focused on its need to cherry-pick foreign workforces via expanded visa programs -- and on moving manufacturing abroad. Apple Computer, whose market capitalization puts it just behind Exxon-Mobil, employs about 50,000 people. Its chief foreign manufacturer, Foxconn of Taiwan, employs 920,000. (General Motors, so last-century, still employs four times more people than Apple. It's great to have an innovation economy. Where the hell are the innovation jobs?

Second, mass participation needs to be inspired through the deliberate cultivation of a new egalitarian vision. Rational economics supports this. The current concentration of wealth is grossly inefficient. Creative quality-oriented people in every walk of life are simply not getting the resources they need to develop.

But there is a deeper feature of equality for which there is no hard data, but which is real nonetheless. That is the mass demoralization that results from levels of inequality that make no sense in terms of creativity, output, productivity, justice or religious values. What kind of a country sanctions the top-25 hedge fund managers earning $22 billion personally? What kind of country cuts services to people who would need 250 years to earn the salary a CEO earns in one year -- so that CEO can pay lower taxes than his secretary?

Our political discourse has successfully shamed people out of asking these questions. But when they do, the answer to what kind of country we are is: not a country that fairly rewards hard work, individual creativity or pulling together to solve shared problems. Any belief in the general benefits an innovation economy are mocked by current levels of inequality, fueled by a mania for tax avoidance, much like that which created poverty amid the aristocratic plenty of pre-revolutionary France.

Until policymakers can support both innovation jobs and levels of equality that spell mutual respect, the majority will not vote to pay for the economic renewal we need.