How to Restore the American Dream

Technology and globalization are shattering the middle class. With the midterms around the corner, the good news is that a bipartisan policy agenda can return the U.S. to prosperity. But no one says it will be easy

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Danny Kim for Time

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Recapturing the Dream
So what is the solution? It's easier to identify the wrong answer than the right one. It would be pointless and damaging to try to go down a protectionist route, though polls show a stunning drop of support for free trade, even among college-educated professionals, its usual cheerleaders. But technology is a much larger driver of the hollowing out than trade. You cannot shut down this new world. How would you stop people from sending one another e-mails, which is what a lot of offshoring comes down to these days? Nor can you help a modern economy by shielding industries from world-class competitors, which just encourages greater inefficiency. I grew up in an economy made up of those kinds of industries, all tightly protected from "foreign exploitation and domination." It added up to stagnation and backwardness.

There are solutions, but they are hard and involve painful changes — in companies, government programs and personal lifestyles. For more than a generation, Americans have been unwilling to make these adjustments. Instead, we found an easier way to goose the economy: expand consumption. During the early 1950s, personal consumer expenditures made up 60% to 65% of the U.S.'s GDP. But starting in the early 1980s, facing slower growth, we increased our personal spending substantially, giving rise to new economic activity in the country. Consumption grew to 70% of GDP by 2001 and has stayed there ever since. Unfortunately, this rise in consumption was not triggered by a rise in income. Wages have been largely stagnant. It was facilitated, rather, by an increase in credit, so that now the average American family has no fewer than 13 credit cards. Household debt rose from $680 billion in 1974 to $14 trillion in 2008. This pattern repeated itself in government, except on a much larger scale. People everywhere — from California to New Jersey — wanted less taxes but more government. Local, state and federal governments obliged, taking on massive debts. A generation's worth of economic growth has been generated by an unsustainable expansion of borrowing.

That is why the current economic debate between another stimulus and deficit reduction is frustrating. Right now, there is a strong case for government stimulus, since no one else is doing much spending. But then what? What happens after another year of federal spending? Consumers still might be cautious; do we really want them to spend like they did in the old days? Is the strategy simply to reinflate the housing bubble? In recent years, the left and the right in America have conspired in feeding consumption spending. The left expands government, much of which means more consumption (pensions, health care). The right focuses obsessively on tax cuts, which have a similar effect. The political system, pandering to today's constituents, encourages both tendencies. But when will we invest for our children's economy?

What We Need to Do Now
Ultimately American jobs are created from the bottom up by companies, not from the top down by government fiat. But there are measures we can take that will encourage the process. Here are the key ones:

Shift from consumption to investment. Fundamentally, America needs to move from consumption to investment. Everyone agrees that the best way to create good jobs in the U.S. is to create new industries and companies and to innovate within old ones. This means large investments in research, technology and development. As a society, this needs to become our strongest focus.

Despite substantial increases and important new projects under the Obama Administration, the federal government is still not spending as much on R&D as a percentage of GDP as it did in the 1950s. I would argue that it should be spending twice that level, which would be 6% of GDP. In the 1950s, the U.S. had a huge manufacturing base that could absorb millions of semiskilled workers. Today, manufacturing is a small part of the economy and faces intense global competition. The only good jobs that will stay in the U.S. are jobs related to knowledge and innovation. Additionally, in the 1950s, America was the only research lab in town, accounting for the vast majority of global scientific spending. Today, countries around the world are entering the arena. Two weeks ago, South Korea — a country of just 50 million people! — announced plans to invest $35 billion in renewable-energy projects. We should pay for this with a 5% national sales tax — call it an American innovation tax — which would be partly offset by a small reduction in income taxes. This would have the twin benefits of tamping down consumption and yielding some additional funds. All the proceeds from the tax should be focused on future generations, because we need to invest massively in growth.

The often overlooked aspect of investment is investment in people. America has been able to create the future in large measure because it has tapped into the energies and work of immigrants. It has managed to invest in human capital by taking smart, motivated people from around the globe, educating them in the planet's best higher-education system and then unleashing them in a dynamic economy. In this crucial realm, the U.S. is now disinvesting. After training the world's best and brightest — often at public expense — we don't find ways to make sure they stay here by giving them a green card but rather insist that they leave and take their knowledge to another country, where they will invent, inspire, build and pay taxes. Every year, we send tens of thousands of the smartest Indians and Chinese back home, which is a great investment — in the future of those countries.

Training and education. "Most jobs that will have good prospects in the future will be complicated," says Louis Gerstner, the former CEO of American Express and IBM. "They will involve being able to juggle data, symbols, computer programs in some way or the other, no matter what the task. To do this, workers will need to be educated and often retrained." We need more and better education at every level, especially job retraining. So far, most retraining efforts in the U.S. have not worked very well. But they have worked in countries that have been able to retain a manufacturing base, like Germany and parts of Northern Europe. There, some of the most successful programs are apprenticeships — which cover only 0.3% of the total U.S. workforce.

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