Prosperity’s Secret Ingredient IDEAS Boston 2004 The Boston Globe Federal Reserve Bank of Boston Barry Bluestone Northeastern University Boston, Massachusetts June 7, 2004

The Post-War Glory Days Rapid GDP Growth in the U.S.: 1950s: 3.9% 1950s: 3.9% 1960s: 4.4% 1960s: 4.4% 1970s: 3.2% 1970s: 3.2% Real Family Income doubles (+104%) Declining Unemployment Unemployment Rate declines to 3.8% -- Unemployment Rate declines to 3.8% Rising Incomes for Most Families

Glory Days

Why the U.S. Grew So Fast

Y= C+I+G+X-M Consumer Boom Pent up Savings & Pent up Demand Union collective bargaining gains Investment Boom Conversion to Civilian Production Government Spending Boom State & Local Spending on Urban Renewal, New Suburbs, New Regions Cold War Export Boom - Marshall Plan Import Implosion - Legacy of WWII

The End of Affluence ….. An Age of Diminished Expectations

Declining Growth Rates

Rising Unemployment

Increasing Income Inequality

So Why Did the U.S. Growth Engine Sputter in the 1970s? Oil Crisis in the 1970s Business forced to focus on energy efficiency, not new products or new technologies Corporate Myopia and Arrogance in face of new competition Little emphasis on productivity, quality, and innovation Global Competitors stepped in Imports clobbered the economy

Plummeting Productivity

Surprise, Surprise! Prosperity Regained …

So Why did the U.S. Grow Again? The New Conventional Wisdom: The Wall Street Model

Wall Street Model Weak Trade Unions kept wages and prices down Welfare Reform increased labor supply, keeping wages and prices low Tight monetary policy kept inflation under control and interest rates low Deficit Reduction/Surplus Generation raised aggregate savings rate, lowering interest rates Free Trade depressed wages, forced prices down, and kept inflation under control >>>>>> All leading to a stock market boom and new investment All leading to a stock market boom and new investment

So Who’s responsible for the new economic boom? Was it Bill Clinton … who got the deficit under control? Was it Alan Greenspan … who got inflation under control? Was it Ronald Reagan … who got government under control? Answer: None of the above.... None of the above.... Despite all the ballyhoo, the Wall Street Model does NOT explain the U.S. boom in the late 1990s

It takes a little bit of history to understand America’s new prosperity... Long Lags in Technology/Productivity Cycle

Productivity Rebound began in the 1980s

New Technologies that spurred Economic Growth Steam Engine …. 19th C. Electrification …. Early 20th C. Integrated Circuit …. Late 20th C. –Computer Hardware –Computer Software –Internet –e-commerce But each takes decades to impact productivity and growth

Where did the new technology come from for the 1990s Boom? The Missile Race following Sputnik (‘50s/’60s) The Space Race with Russia (‘60s/’70s) From Government Spending on Defense to the Private Sector in a Quarter Century It was hideously expensive, terribly wasteful, but in a peculiar way it paid off decades later So who’s most responsible for U.S. Economic Boom? Nikita Khrushchev Nikita Khrushchev

Public Sector + Private Sector Working Together Federal Government provided Basic Research funds Local, State, and Federal Government educated and trained a labor force to effectively use the new technology Private sector converted basic research to applied development.... and productivity soared.... and productivity soared

Public Investment in the 1960s, 1970s, and early 1980s... Basic Research Basic Research Education (after Sputnik) Education (after Sputnik) Public Infrastructure (Interstate Public Infrastructure (Interstate highways, airports, internet) highways, airports, internet) PAID OFF IN THE 1990s

But We will Sabotage Prosperity if we stick with the Wall Street model...

The Wall Street Model says... Give tax breaks to the rich so that they will invest... and drive up stock prices Cut government spending to spur aggregate savings Expand Free Trade with no conditions Weaken Trade Unions Weaken the Social Safety Net RESULT: NO MONEY FOR INVESTMENT NO INSTITUTIONS FOR EQUITY

Trends in Public Investment

2.7% 1.75%

2% 1%

0.4%

Reagan “Boomlet”

.75%.10%

Energy Crisis.12%.015%

.04%.02%

.05%

.25%.10%

A Model of Growth for the 21st Century

Regaining and Sustaining Prosperity Quick stimulus in short run Public investment in basic research, education, homeland security, and infrastructure in the long run

Restoring Social Equity Higher Minimum Wage Labor Law Reform to Foster Unionization Fair Trade Invest in Public Schools Universal Health Care Coverage Expand Public Goods (e.g. Transportation, Day Care, Elder Care)