Lack of a Social Contract
Today, consensus is lacking on almost every aspect of social and economic policy. Economists argue among themselves about the causal relationships between investment, productivity, and economic growth, and about the causes behind economic recessions and expansions. Politicians promise voters to reduce taxes and increase government services and benefits. Consumer advocates demand better products for lower prices. Environmentalists demand less pollution and slower growth. Meanwhile, unemployment is high, productivity growth is slow, and the gap between the rich and poor grows wider. Everyone blames someone else. The poor blame the rich, and vice versa. The Democrats and Republicans blame each other, the President and Congress cannot agree, the voters blame the politicians, and the politicians blame government bureaucrats, or big business, or the breakdown in family values. Blacks and Whites donÕt trust each other. Ethnic hatreds divide Americans of Asian, African, Hispanic, Jewish, and Islamic origins. There is even growing hostility between the old and young.
It once was assumed that a rising tide would raise all boats. Supply-side Reaganomics promised that if taxes on the rich were reduced, the rich would invest enough to create prosperity for all. Instead, the rich spent their tax windfall on consumption, or "invested" in vacation homes, yachts, jewelry, and art collections. Only a small fraction of the 1980s tax cuts went into investment of any kind, and much of what was claimed to be investment was, in fact, real estate speculation, or corporate takeovers, that had no effect on productivity growth, and produced no additional output of real goods and services. Consuming power was simply transferred from the poor and middle-class to the rich.
Meanwhile, soaring federal deficits soaked up the private savings that otherwise would have been invested. During the 1980's, the rate of savings and investment actually fell. The national debt and trade deficit exploded, and the rate of U.S. productivity growth continued to lag the rest of the industrialized world as it had for decades.
Today, many people feel that the economy is on the wrong track. Unfortunately, there is little agreement on what is the right track, or what should be done to get on it. Most economists believe that more investment is needed, but there is no agreement at all about how to accomplish this goal. Some want to cut deficit spending, but are unprepared to trim entitlement benefits which are the primary cause of deficits. Others want to enlarge entitlements and increase government investments in research and infrastructure construction, but are unable to convince voters that taxes should be raised or borrowing increased to pay for it.
Clearly societies around the world are not saving and investing enough. Current fiscal and monetary policies are not producing anywhere near the optimal rate of investment. Just to break out of the current economic stagnation, substantial new investment will be required. If economic growth rapid enough to eliminate poverty in our generation is to be achieved, something quite different must be done to radically increase the rate of investment.
In order to implement radical changes in fiscal and monetary policies, a fundamental shift must be made in peopleÕs attitudes toward saving and investment. Before new economic policies to increase saving and investment can be enacted by the Congress and signed into law by the President, a broad consensus must be achieved on the goals, strategy, tactics, and implementation of the new policies, and the theory upon which they are based.
In order to achieve such a consensus, a new economic policy is needed that can produce the saving and investment needed to produce rapid economic growth based on productivity growth without inflation, while at the same time distributing both the sacrifice of foregoing current consumption, and the benefits of future profits, in a fair and equitable manner. In the next section, a proposal is presented that is designed to achieve all of the above goals.