austere truth

Big business isn’t investing in people anymore, so big government has to

May 7, 2013
May 7, 2013

Productive investments and social spending are essential to a healthy advanced society. Yet US president Barack Obama’s proposal to cut Social Security benefits and the bipartisan idea that social programs are “crowding out” investment set up a false choice between the two.

If we look at the federal budget in isolation, it appears that the government is growing in size. In the context of the US economy, however, the government is playing a role that large corporations have abandoned. The private sector has shed responsibility for both productive investments in areas like research and training and in providing social benefits to workers. To compensate, the government needs to be bigger than before. We cannot set an arbitrary limit on government spending without looking at the broader historical picture.

A generation ago, large corporations formed the backbone of the industrial economy. Many of these corporations were “vertically integrated,” in which they controlled all stages of production from more basic research through commercial development into marketable products. Companies had their own internal research labs, such as AT&T with Bell Labs and Xerox with PARC. While the research they conducted did not show up as government spending, it provided an important public benefit in spurring innovation that drove growth throughout the economy.  These corporations also provided widespread on-the-job training to unskilled workers that led to stable employment and middle-class wages.

At the same time, many of these large industrial companies acted as “welfare capitalists” that provided benefits to their employees, such as retirement pensions and health insurance. Employers formed a crucial part of the social contract. National social policy since the New Deal has been designed to supplement these established employer-based programs and preserve their existence.

Yet as corporations have moved away from vertical integration, they have reduced their roles in generating research and providing social supports. Businesses have increased their funding of overall R&D, but most of that emphasis has been on development and improvements to existing products or ideas rather than on more fundamental research that can create new technological breakthroughs. A National Research Council survey found that across a range of industries, firms are relying more on direct and indirect government-sponsored entities, including universities and federal laboratories, for research in science and technology. At the same time, fewer companies are willing to train unskilled workers, which has led companies to cite a shortage of qualified workers while unemployment remains high.

Companies also have moved away from providing benefits to their employees. Defined-benefit retirement pensions, which guarantee a fixed payout to employees after they retired, have diminished. The number of private sector workers at medium or large companies with access to a defined-benefit pension plan has dropped from 84% in 1980 to 35% today. Employer health insurance coverage has declined from 70% to 60% in the last decade alone.

Another institution needs to take the place of corporations to make up the shortfall in all of these areas. Businesses, individuals, and society at large will benefit if the public sector fills this role.

In many ways, increased responsibility for the government is an improvement over the previous welfare capitalist system. The public sector can provide social programs more equitably and efficiently than can private businesses. For example, public health insurance is able to provide wider access to medical care at a lower cost than a private system. And nearly all of the benefits of the current system of private tax-favored retirement savings go to the highest earners, while public programs like Social Security have done a better job of supporting most retirees.

The public sector also has always had a hand in spurring productive investments. Even in funding innovation—an area that provokes political questions of “winners” and “losers”—the government has been an important player in supporting new technologies and spurring economic growth. The government has been investing in technological advancement for military purposes since the country was founded. Even during the era of vertical integration, government investment was crucial. The Defense Advanced Research Projects Agency, or DARPA, founded in 1957, is responsible for major components of the information technology revolution, including the foundations of the Internet.

A larger role for the public sector will not inhibit economic growth; rather, it will enhance it. Increased investment in research, infrastructure, education, and training will stimulate the economy in the short term and provide the necessary foundations for growth in the long run. And research of European countries by economist Peter Lindert has shown that higher levels of social spending (and taxation) do not hurt GDP.

As long as health prices are brought under control, government should be spending more money on both social benefits and on growth-enhancing investments including infrastructure, research, education, and training. If it does not, the federal budget might appear smaller but the country will be far worse off.

 Josh Freedman is the lead editor of the recent paper series, “Renewing the American Social Contract.” We welcome your comments at ideas@qz.com

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