America needs to fix capitalism to save it
Apply “Lincolnvelt” policies of greater opportunity and social insurance, says Glenn Hubbard of Columbia Business School
Open Future
Oct 18th 2019
This is a guest contribution for The Economist’s Open Future initiative, which aims to foster a global conversation on the challenges of the 21st century. You can comment here or on Facebook and Twitter. More Open Future articles are at Economist.com/openfuture
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In “The Communist Manifesto” of 1848, Karl Marx and Friedrich Engels noted: “The bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than all preceding generations together.”
They were not praising capitalism so much as expressing their anxiety about it—fears that we still grapple with today.
An economic system has to fulfil several roles. Two of them are familiar: mobilising resources for productive activity, and allocating output and income. That much, capitalism has accomplished stunningly well, as Marx and Engels observed. Yet two other roles define a successful, long-lasting economic system: improving living standards over time and delivering this prosperity widely.
Here, questions can be raised about whether today’s capitalism delivers a broad and growing base of prosperity and not just high average prosperity enjoyed individually by a few. In a time of rapid technological change, and globalisation, devising solutions to these shortcomings is urgent. Popular support for capitalism depends not just on preparing people for economic participation, but also on helping them respond to economic dislocation.
Strikingly, there are lessons to be drawn from the past. America in the late 1800s and 1920s also faced jolting technical and economic changes, and the model of capitalism was questioned. Those periods brought forth policy responses to soften capitalism’s rough edges, by expanding economic opportunity in the first period and embracing social insurance in the second.
In the 1860s President Abraham Lincoln created land-grant colleges to broaden education; the Homestead Act with land opportunity for new settlers; and the transcontinental railroad to connect the nation’s markets—all designed to break down barriers to expanding individual opportunity. Over the subsequent decades, government policies weakened monopolies’ hold on business and imposed regulation for consumer well-being. Government policy aimed to expand capitalism’s benefits.
In the 1930s, in the midst of the Great Depression, President Franklin Roosevelt pushed through sweeping social-insurance policies. These reforms strengthened unemployment insurance and introduced Social Security. Government policy aimed to embrace workers buffeted by economic forces beyond their control amid capitalism’s chilly winds.
Together, these policies—perhaps call it “Lincolnvelt”—have been vital for capitalism’s adaptation and survival. Technological change and globalisation have disrupted mass prosperity in developed countries, while generously rewarding highly skilled professionals and entrepreneurs. Meanwhile, a hollowing-out of many middle-class jobs by these macro forces has left many voters worried. These twin “Lincolnvelt” reforms can guide us today.
Expanding capitalism’s benefits
First, be Lincolnesque and focus on physical and knowledge infrastructure. In particular, invest in community colleges. These publicly funded, two-year institutions are on the frontline of development and training for lower-skilled workers and work well with local employers seeking skills. College completion or high-quality certification leads to large wage premiums over the pay of non-college-educated workers.
Yet community colleges have seen their public funding wither. Numerous studies demonstrate that the lack of institutional funding hurts student performance and completion rates, especially at institutions that serve economically vulnerable students.
The Aspen Economic Strategy Group, of which I am a member, recently proposed a programme of federal grants to provide new funding to community colleges, contingent on institutional outcomes in degree-completion rates and labour-market outcomes. In the image of Lincoln’s Morrill Land-Grant Act, which spurred the creation of colleges in the 19th century, these modern grants would provide support for the ambitious goal of raising community-college completion or transfer rates among incoming college students to 60% by 2030. This would equalise graduation rates across two-year and four-year public institutions of higher education. It also proposed the goal of increasing the share of Americans aged 25 to 64 with a college degree or other high-quality credential from 47% today to 65% by 2030.
This shift matches the skills predicted for the labour market and would amount to 30m more American workers with the preparation for jobs in a rapidly changing economy. The cost of this is estimated to be about $20bn per year. This amount is large (though not by the standards of calls for “free tuition” and “Medicare for all”). Some of the funds can come from public-private partnerships with businesses in local communities. Federal support can be focused initially on regions hardest hit by economic dislocation.
Other reforms to expand capitalism’s benefits include more funding for basic science and to enlarge the Earned Income Tax Credit (EITC) programme to households without children, not just those with kids, at a cost of about $20bn per year. Alternatively, the government could boost labour demand via subsidies to employers, as my Columbia colleague and Nobel laureate Edmund Phelps has suggested.
Embracing capitalism’s vagaries
Second, think Rooseveltian and boost social insurance. This means increasing support to those unemployed for long periods and boost funding for market-oriented reforms to make access to high-quality health care universal.
For individuals likely to encounter a long spell of unemployment, Personal Reemployment Accounts would combine a fund to support income and retraining while unemployed with a bonus if a new job is found within a given period. President George W. Bush proposed the accounts in 2003 and studies were conducted, but the idea never became federal law. (Governor Mitt Romney proposed a similar plan in the 2012 presidential campaign.) Such schemes recognise that the current emphasis on unemployment insurance and temporary lay-offs is out of step with an economy in which far greater transitions and reskilling are needed.
Another reform is a federal intervention for wage insurance, particularly for older workers. The idea is that workers can be compensated if they move to jobs with lower pay. This can address the problem of diminished income after re-employment (as opposed to making up part of lost income during a spell of unemployment, as in traditional unemployment insurance).
At the same time, tax subsidies to health care can make possible universal support for catastrophic health insurance, while using saving arrangements (for middle-income individuals) or existing public programmes (for those on lower incomes) to mobilise funds for deductibles and copayments. Broader coverage in this way reduces barriers to changing jobs. By reducing health-care spending, such reforms can actually raise wages within total compensation, as John Cogan and Daniel Kessler of Stanford University and I have argued in the book “Healthy, Wealthy and Wise” (AEI, 2006).
From Lincoln to Roosevelt to today
These double-barrelled “Lincolnvelt” interventions provide flexible support for those affected by shifts in the economic environment. They are work-centric to promote social connection and individual dignity. And most of all, they provide freedom of opportunity and respect personal responsibility, without having to absorb all costs of risks beyond one’s own control.
At first glance they might seem wonkish and incremental. But they actually represent a big departure from the current centre-right and centre-left technocratic tweaking. Perhaps for that reason, they haven’t yet been done. Their pedigree traces back to classical 19th-century British liberalism that championed mass opportunity and individual flourishing. Yet their roots draw on the Scottish Enlightenment of Adam Smith—ironically, one of the few economists that Karl Marx respected.
America can afford the “Lincolnvelt” reforms needed to put capitalism back on track. Alternatives of populist statism or socialism will both require greater public expenditure and worsen economic outcomes for everyone. Trimming social-insurance subsidies for the well-off or progressive tax reform to raise their average (but not marginal) tax burdens is a modest price to pay for buy-in for a largely successful economic system.
The reforms align with a traditional vision of America and American capitalism, though the message rings true around the world. They are about mass prosperity and a flourishing society. And this was a subject close to Abraham Lincoln’s heart in 1860, when he gave a speech in New Haven, Connecticut. “I do not believe in a law to prevent a man from getting rich; it would do more harm than good,” he observed. “So while we do not propose any war on capital, we do wish to allow the humblest man to get rich with everybody else.”
Seventy-five years later, Franklin Roosevelt built on that idea when he signed the Social Security Act, noting: “We can never insure 100 percent of the population against 100 percent of the hazards and vicissitudes of life [but aim to] take care of human needs and at the same time provide the United States an economic structure of vastly greater soundness.”
We can learn from this ethos today, and combine their ambitions by expanding economic opportunity and embracing social insurance.
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Glenn Hubbard is the Russell L. Carson Professor of Finance and Economics at Columbia Business School and recently stepped down as the school’s Dean. In 2001 to 2003, he served as Chairman of the Council of Economic Advisers under President George W. Bush.
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