A different strategy for economic renewal

Every week there seems to be more news on American trade. This past Friday, for example, the Trump administration’s trade war with China took a big leap forward – the first round of tariffs were imposed on $34 billion worth of Chinese goods. Thanks to news like this, our national debates about the economy now focus almost entirely on taxes and tariffs (which are just taxes imposed on certain categories of imports). But this tunnel vision is unlikely to solve our economic problems.

While Donald Trump can be blamed for the fixation on tariffs and trade deals, his campaign triumphed precisely because establishment politicians had little else to offer. Most of Trump’s Republican opponents also emphasized economic renewal through massive tax cuts. At the same time, Hillary Clinton argued for higher taxes on the rich and higher taxes on short-term capital gains to encourage a focus on long-term goals. All of them wanted to increase productive investment in the economy by manipulating tax or tariff levels.

{mosads}But there are other strategies for increasing investment levels. You only need to look to America’s history for some inspiration.

Throughout our history, the government has structured the financial system to make cheaper capital available for previously neglected types of investment. For example, in 1936, the Rural Electrification Act extended low interest rate loans to help rural communities connect to the national electrical grid. Electrification made a huge difference in farm country driving up agricultural productivity and allowing farm families to acquire refrigerators and washing machines. But this is just one example; similar programs financed canals and railroads in the 19th century, helped to provide credit for farmers, loans to small business, and funds for clean energy innovation, including a critical $465 million loan to Tesla in 2010.

The fact is that manipulating tax rates is an indirect mechanism that might encourage some businesses to invest more. But new financing mechanisms work more directly by lowering effective interest rates not just for businesses, but also for farmers, small businesses, nonprofits, state and local governments, and even households. The cost of such programs to the federal government can generate far more impact per dollar spent than tax cuts. And since the additional investment will help economic growth, these programs can often pay for themselves.

Just imagine the massive investments that could be unleashed with well-designed financing arrangements. The American Society of Civil Engineers has estimated our nation’s 10 year infrastructure spending deficit at $2 trillion, with thousands of bridges, roadways, and sewer systems in urgent need of repair. Households, businesses, and governments could invest tens of billions in energy retrofits that would pay for themselves in two to five years. There is also an acute crisis of affordable housing with millions of households forced to pay over 30 percent of income to keep a roof over their heads. The obvious solution here is accelerated building of affordable multi-family housing. Finally, many small businesses, including high technology startups, are not able to borrow the capital that they need to grow. But few of these investments are being made because the financing is unavailable or too expensive. 

So why is hardly anybody talking about this route to national economic revitalization? 

In the current political context, it sounds too much like Big Government and even “socialism”. To be sure, Barack Obama and the Senate Democrats have long talked about a national infrastructure bank that would facilitate substantial increase in infrastructure spending by government and some businesses. Sadly, the idea has not really caught on.

But this mindset is precisely the problem. Business leaders, many politicians, and large swathes of the public have been persuaded that the capitalist market must be allowed to self-regulate and the proper role of government is to stay out of the way of business by minimizing both regulation and taxes. It’s time to challenge this thinking — the government has long played a critical role in facilitating business innovations and in structuring the financial system under both Democratic and Republican administrations. If we want a stronger economy, we have to return to these policies.

Fred Block is Research Professor of Sociology at U.C. Davis and a member of the Scholars Strategy Network. His latest book is Capitalism: The Future of an Illusion. 

Tags Barack Obama Donald Trump Hillary Clinton

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