Beneath the Surface

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I want to give special attention to one other chapter of Haskel and Westlake’s Restarting the Future, and that is Chapter 5, “Financial Architecture: Finance and Monetary Policy in an Intangible-Rich Economy.” The authors summarize their argument in an opening statement:

An intangible economy makes borrowing harder and riskier. It also lowers the natural interest rate and so squeezes monetary policy. We need reform that allows pension funds and insurers to fund innovative companies and that allows fiscal policy to provide commitment to stabilising the economy with less space for monetary policy.

There’s a lot to unpack in this statement.

Financing investment

Where do companies get the financing they need for their capital investments? How is financing different for investments in intangible capital? Here I will focus on the financial needs of smaller businesses whose good ideas may well exceed their financial means, but whose potential for growth is essential to an innovative economy.

Small businesses are especially likely to rely on debt financing in the form of bank loans. A very few are able to get funding from venture capitalists. Bigger, more established businesses are likely to raise capital through public stock offerings.

Lenders tend to favor borrowers with tangible assets that can be used as collateral for the loan. (Bigger firms are more often able to borrow against their large cash flow.) But intangible assets are harder to use as collateral. Their value is harder to assess, and their worth may drop to next to nothing if the borrower’s business fails. Investments in intangibles carry other risks, such as the ease with which a competitor may latch onto the same idea. These are the issues of sunk costs and spillovers discussed earlier. The authors point out that as the intangible economy has developed, commercial banks have increasingly favored real estate loans over business loans because of their more predictable returns.

Even for companies that raise capital by selling stock, the intangible economy may increase the advantages of the most established firms. Consider the competition between two companies. The first has implemented a successful business plan and scaled its operations up to a high level, achieving high profits and a high stock price. The second is very innovative but not yet very profitable. If both companies owned traditional assets like plants and equipment, a stock investor might consider the second firm worth buying if its stock price were low in relation to its assets. With harder to evaluate intangible assets, such “value investing” becomes more difficult and less successful. A stock investor can do just as well buying the big “glamour stocks,” despite their high price.

One of the ways to overcome a shortage of financing for promising startups is to look to large pension funds and insurance companies. The authors recommend that we “alter financial regulations to make it easier for investment managers to back intangibles-rich firms, especially ones whose securities are less liquid.” They also recommend establishing “a collective fund (or funds) that…would spread risk and also achieve economies of scale to enable the kind of monitoring of companies that investment in illiquid assets requires.”

Some investment funds already engage in ESG investing, meaning that they favor companies with good records on environmental, social, and governance issues. (Social issues include things like human rights and data protection; governance issues include things like fair pay scales and freedom from corruption.) ESG policies may encourage certain kinds of intangible investments, such as new knowledge that can benefit the common good.

Funds with an ESG mandate should put a premium on firms that invest heavily in R&D, in design, and in training and other assets with positive spillovers, and asset owners who care about the future of the world should seek out funds with such a mandate.

I should mention that ESG investing is controversial, since it violates the neoliberal “Friedman doctrine” that a corporation’s only responsibility is to generate profits for its shareholders. Under the Biden administration, the Labor Department has issued a regulation that would give money managers more freedom to consider ESG factors when selecting investments, but Republicans are trying to kill it either with lawsuits or legislation. Some Republican politicians even want states to refuse to do business with companies that apply ESG criteria to investments. That, however, has produced a backlash not only from liberals, but from conservatives who think government should let private organizations invest as they please.

Monetary and fiscal policy

Macroeconomic policy to promote a thriving economy may also have to be different in the age of intangibles. Conventional policy in recent decades favors the manipulation of interest rates by the central bank to moderate expansions and contractions in economic activity. The idea is to cut interest rates to encourage borrowing and spending when weak demand creates high unemployment, but to raise interest rates to discourage borrowing and spending when excess demand creates inflation. Assigning this responsibility to an independent central bank like the U.S. Federal Reserve is supposed to minimize political interference with sound economic policy.

This approach may be losing much of its effectiveness in the intangible economy. Because business loans in intangible assets are riskier, money flows toward safer assets like treasury bonds. Interest rates on those assets fall, since buyers who prioritize safety are willing to tolerate lower returns. If the real interest rate is not far above zero even when the economy is doing well, the central bank has little room to lower rates when the economy suffers from weak demand and high unemployment.

On the other hand, raising interest rates to curb inflation may not have the desired effect either. Higher rates create additional financing problems for the small company with mainly intangible assets. At the same time, the more established company may be unfazed by higher rates, since it finances its expansion less by bank loans and more by retained earnings and equity. A big company with intangible assets of proven worth can also deliver software or stream entertainment to more customers at little additional cost.

Given the uncertainties surrounding monetary policy, the authors expect a greater role for fiscal policy in the management of the intangible economy. One danger, however, is that taxing and spending policies are more vulnerable to political conflict and lobbying. A possible solution is to give more authority to “independent auditors of fiscal policy” such as the Congressional Budget Office. Another is to agree on some automatic stabilizers that adjust taxes and/or spending to economic conditions. Governments do some of that already with means-tested social programs like Medicaid, for which more people become eligible as incomes drop. Another proposal—not discussed in this book—is the Public Service Employment program recommended by Stephanie Kelton and other proponents of Modern Monetary Theory. It would maintain full employment by expanding when private employers are laying workers off and contracting when they are rehiring. That is in sharp contrast to conventional monetary policy, which tolerates high unemployment as the price society must pay for low inflation.

The intangible economy is a work in progress, and a book of this kind inevitably combines description and speculation. We are moving into uncharted territory, where conventional ideas about how the economy works are due for some revision.

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Jonathan Haskel and Stian Westlake believe that the advanced economies of the world are experiencing something like growing pains. They are becoming economies in which intangible forms of capital are more important than ever, but the institutions such economies require are not yet fully developed.

I found this general framework very helpful for understanding recent economic problems like underinvestment, chronic stagnation and increased inequality. The thesis is very abstract, however, and that poses challenges for both the authors and their readers. We have to try to imagine what fully developed intangible economies will look like, although many of the details are yet to be filled in. I found many of their descriptions and recommendations rather vague, but maybe that is unavoidable in a book of this nature.

With that warning in mind, I turn to the authors’ discussion of public policy, especially their treatment of public investment and intellectual property in Chapter 4.

Public investment

The main issue here is finding the right balance between public and private investment in intangible capital. The private firms of industrial capitalism have a lot of experience investing in tangible capital equipment. They do it in the belief that it can boost productivity and generate sales revenue in excess of capital costs. No investment is a sure thing, but tangible capital at least provides reasonably secure ownership, as well as some residual value even if its particular use is less successful than expected. Investment in something as intangible as a worker’s expertise or a software design entails special risks. Intangible assets are harder to control, since they are more easily copied or shared (the problem of spillovers). And they may disappear into thin air if an investment doesn’t pay off (the problem of sunk costs).

From the perspective of public policy, however, spillovers have a positive side. The fact that knowledge and ideas are so easily shared makes them a public good. Public investment in such intangibles can pay off in any number of ways—many hard to foresee—resulting in a wealth of contributions to the common good. Compared to a private firm, a democratic society often has more to gain—and less to lose—from investment in intangibles.

Governments, along with nongovernmental bodies such as universities, fund or subsidise education and training, R&D, and artistic and creative content for the benefit of firms and citizens. They also invest in intangibles for their own benefit, and some of these intangibles have wide and important spillovers.

Many of the most successful products seemingly created by private enterprise actually depend on previous investments in intangibles by government.

You think of the iPhone as a private-sector triumph, but it is nothing of the sort. In fact, all its component parts, from its touchscreen display to the architecture of its chipsets to the protocols used to encode the web pages and music files you can download, had their origins in significant amounts of government investment.

The importance of public investment does not mean that a centrally planned economy is a good idea. That’s because a high quantity of investment is not enough. The quality of an investment often depends on the particular combination of intangibles that create a useful product. This relates to another feature of intangibles, their synergies. Putting investment decisions in the hands of a central authority is useful for creating intangibles with many possible uses. But encouraging investment decisions by entrepreneurs is useful for harnessing the creativity of decentralized actors with their own information and expertise. Both are important.

A capable state providing generous intangible investment subsidies (such as R&D or student loans) may not on its own be enough to encourage enough productive investment, which also requires an active entrepreneurial ecosystem to generate variety and the valuable synergies that arise when you hit upon the right combination…. A strong state can coexist with strong businesses.

The reference to student loans is a hint that this analysis is relevant to the debate over educational funding. Historically, the U.S. economy got a great boost in productivity from its public investment in primary and secondary education. Public spending accomplished a great quantitative increase in years of education. One might wish to extend the quantitative approach by publicly funding college education as well. However, as a student gets older, the need for a general education coexists with a need for the more specific knowledge and skills required for an occupation. The public may be less enthusiastic about underwriting the traditional four-year degree without regard to the content of a student’s curriculum.

As a retired college professor, I am a strong believer in higher education in both its general and more specialized aspects. As a sociologist, I believe in the potential of the liberal arts and social sciences to help create the informed citizens democracy requires. I disagree with popular critics like Bill Maher who have taken to deriding college education as a waste of time. But I do grant that advocates of human capital investment must consider education for work as well as education for life. Taxpayers may reasonably resist fully funding baccalaureate degrees for children of the wealthy, as long as vocational education for working-class children remains poorly supported. College graduates still make more money than other workers, but the gap is now shrinking. Maybe that is because more employers are willing to consider applicants with fewer years of formal education but more relevant skills.

As my reference to class implies, more careful consideration of both the quantity and kind of human capital investment could also address the problem of economic inequality. Much of the resentment directed at more educated “cultural elites” comes from people whose opportunities to acquire today’s job skills are currently too limited.

Consistent with their emphasis on investment quality, not just quantity, the authors make this recommendation:

[W]e should increase public funding for other types of intangibles alongside basic research and education, including more investment in well-designed vocational training (including training provided directly by state-owned businesses such as national broadcasters or national arts organisations), more investment in big open-data and open-source software projects, and more industrial development (for example, by funding R&D tax credits or public research centres…

Intellectual property

From the standpoint of an individual company, a spillover of intangible capital from one user to another can be a threat. Why invest in new knowledge or product designs if they can easily flow to one’s competitors? The protection of intellectual property by means of patents and copyrights is a very big issue for an increasingly intangible economy. One of the functions of government is to act as the “spillover police.” Government “overcomes the spillover problem by granting inventors a temporary monopoly over the intangible asset they have created, banning others from taking advantage of the spillover.”

Here too, government faces a dilemma. Too little protection of intellectual property reduces the incentive to innovate. But too much protection inhibits further innovation by preventing companies from using existing intellectual property in creative ways. Some companies make money buying up patents they have no intention of using, except to extort money from other companies that are trying to innovate. For example, “war by patent has become an integral part of the smartphone industry.”

While some observers have advocated the elimination of intellectual property rights altogether, the wiser course is probably a more moderate policy. The “Tabarrok curve” (named after economist Alex Tabarrok) represents the relationship between intellectual property rights and innovation as an inverted U. The most innovation is expected where property rights are neither too weak nor too strong. The authors then recommend some moderation of the existing intellectual property regime:

[W]e should cautiously weaken IP rights, rolling back patents in areas where their remit has grown—for example, by ending patents on software and straightforward business processes, reducing patent lengths in selected industries, requiring genuine disclosure of what makes underlying technologies work, and introducing prizes or patent buyouts for certain socially desirable inventions, such as antibiotics.

Patent regulation is an example of the kind of administrative job that requires great expertise. What the intangible economy needs is not so much smaller government or bigger government, but smarter government. This is a recurring theme in the book’s policy discussions.

The politics of public policy

In both Chapter 4 and the Conclusion, Haskel and Westlake address the political challenges of making government more responsive to the needs of the intangible economy. They acknowledge that it won’t be easy to move from the present polarization and gridlock to a set of policies that a majority can understand and support.

The authors distinguish two kinds of challenges. The first is to build state capacity. This is “partly a matter of resourcing: hiring technically skilled staff, building analytical capacity, and using these capabilities to invest in intangibles and administer well-run IP [intellectual property] regimes.” Government agencies need rules to constrain their discretion and limit their susceptibility to political influence, but not so rigid rules that they cannot respond flexibly to technological change.

The second kind of challenge is to achieve political legitimacy by earning and spending political capital. If people feel that government isn’t working for them, they become suspicious of—and resistant to—government initiatives. They become hostile to those who produce and manage intangible assets, especially government experts. Government investments that pay off in actual improvements to the quality of life build trust, which helps generate support for more such investments. Part of the art of politics is trying to “craft narratives to make intangible investment more politically resonant.”

The authors acknowledge that the policy agenda they have in mind is somewhat “unfashionable” across the political spectrum, but they regard its unpopularity with conservatives as especially obvious. “[S]ince at least the Reagan and Thatcher eras, many on the right have sought to cut not just the state’s size but also its agency and even its knowledge.” I would add that in the U.S., the increasing unpopularity of the Republicans’ anti-tax, anti-regulation policies has led the party to rely on culture wars to retain a degree of power. The party offers little by way of policy proposals for strengthening the intangible economy, but devotes its time instead to attacking immigration, reproductive rights, LGBTQ rights, and efforts to address systemic racism.

Liberals are more receptive to building state capacity and investing in human capital, but they may rely too heavily on quantitative, centralized approaches that spend too much money carelessly. It is one thing for government to pick up the bills for existing forms of health care or education, but another thing to steer investment toward the kinds of health care or education that are most cost effective.

Subsidizing intangibles—for example, through tax breaks, public funding, or direct government investment in training or R&D—helps solves the quantity problem of underinvestment… But, at the margin, these policies can reduce the quality of investment by encouraging gaming or low-quality research, or simply because the funding rules have not kept pace with the latest practices and technologies.

This book got me thinking a lot about the state of our two-party system and how it might be reformed. Instead of playing on fears of cultural change and trying to take the country back to the 1950s, the conservative party might more usefully represent the interests of economic innovators willing to work with government rather than against it to strengthen the intangible economy. For its part, the liberal party could represent not just more taxing and spending, but support for those profit-motivated investments most compatible with the common good. Idealistic, perhaps, but certainly more sustainable than the present state of antagonism and standoff.

Continued

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Jonathan Haskel and Stian Westlake. Restarting the Future: How to Fix the Intangible Economy. Princeton University Press, 2022.

British economists Jonathan Haskel and Stian Westlake have an explanation for why the most advanced economies in the world have been underperforming in recent decades. They cite five symptoms of underperformance:

• Stagnation: Compared to growth in the second half of the twentieth century, twenty-first-century growth has been significantly slower.
• Inequality: Within economically advanced countries, disparities in wealth, income and social status have been increasing.
• Dysfunctional competition: While the largest and most profitable businesses prosper, fewer new businesses are starting up and entrepreneurship is in decline.
• Fragility: Economies are more vulnerable to severe disruptions, such as financial shocks, energy shortages or pandemics.
• Inauthenticity: Economies generate too much “fakery, too much work that does not produce useful, tangible results.”

The authors associate these symptoms with the transition to what they call the “intangible economy.” The problem is basically that the economy is still struggling to make this transition, and that the social institutions required for the new economy are not yet fully developed. Here is what I found to be the best statement of their thesis:

We believe that the economy is partway through a fundamental change from one that is largely material to one that is based on ideas, knowledge, and relationships. Unfortunately, the institutions on which the economy depends have for the most part failed to keep pace. The problems we see are the morbid symptoms of an economy caught between an irrecoverable past and a future that we cannot attain.

The intangible economy

The underlying assumption of the entire analysis is that the capital on which capitalism runs is not what it used to be.

Once upon a time, firms invested mostly in physical capital: machines, buildings, vehicles, computers. Today, as society gets richer, most business investment goes to things you can’t touch: research and development, branding, organisational development, and software.

Because the term “intangible” is deliberately broad, the intangible economy is not quite the same as the “knowledge economy” or the “postindustrial (service) economy.” For one thing, investments in human capital like educated and healthy workers are important in both manufacturing and service industries. An intangible economy is one where most people have satisfied their basic material needs, and now “demand a wider variety of goods and services, often with the kind of expressive or emotional value that intangibles can provide.”

The authors identify four main characteristics that distinguish intangible assets from tangible assets:

• They are highly scalable: A successful software design is easier to reproduce on a grand scale than a physical piece of equipment.
• They have spillovers: It’s harder for a company to keep an idea to itself than to maintain sole ownership of a machine.
• They are sunk costs: Machinery may have some value even when a company fails, but an intangible asset like a talented workforce may just scatter.
• They have synergies: The value of an idea depends on how it is combined with other ideas.

These characteristics of intangible capital pose new challenges for the economy. For example, they make it trickier for companies to decide to invest or banks to decide to lend. The benefits are harder to calculate because they depend more on uncertain synergies, and the risks are greater because of possible losses from spillovers and sunk costs.

Economic crisis

The authors’ analysis of the contemporary economic crisis is mainly a matter of connecting the dots between the distinctive challenges of the intangible economy and the symptoms of underperformance already cited.

Economies may stagnate because investment in intangible capital fails to keep pace with the growing need. Who will invest in tomorrow’s creative workers? Talented children may lack the resources to develop their own talent, but investors may be reluctant to invest in elusive benefits that could be lost to spillovers and sunk costs.

In many industries, healthy competition gives way to dysfunctional competition. Firms with useful intangible assets can scale them up to the point that they dominate an industry—think Amazon or Google. Newer firms with new ideas have trouble getting off the ground.

Inequality worsens partly because of the gap between leading and lagging firms. In addition, the increased importance of synergies encourages leading firms to cluster together geographically, creating large disparities between flourishing cities and economically depressed areas. This is reflected in income and wealth gaps among households, especially because property values are so much higher in thriving cities. Intangible assets also create more disparities in social status, since people with more education and cutting-edge ideas are valued over less educated and more traditional segments of the population.

Economies are more fragile because inadequate investment in intangible capital limits their response to economic threats like pandemics, supply shocks or pandemics. For example:

The path out of the pandemic…required massive intangible investment: software and processes to track, trace, and quarantine people with the disease; research to develop effective drugs, treatment protocols, and vaccines; and networks, systems, and campaigns to ensure that people got vaccinated.

The authors suggest that the inauthenticity they observe in the economy is related to a proliferation of ideas. Because ideas have the potential to be reproduced on a large scale and “the right combination can release big synergies,” the rush is on to promote all kinds of business schemes, from the brilliant to the wacky. Already in the 1990s, fortunes were being made or lost by “dot.com” companies that might or might not have a viable product. We have also seen massive frauds by crooks like Bernie Madoff (phony investments) and Elizabeth Holmes (phony blood tests). And of course, the internet “seems to be plagued by charlatans, misleaders, and hucksters.”

All these problems suggest that we do not yet have the institutional constraints to make the intangible economy work for the general good.

Institutional change

The authors rely on Douglass North, a leader in the New Institutional Economics, for his conception of institutions. He defines them as “the humanly devised constraints that shape human interaction.” Economic institutions in particular exist “to create order and reduce uncertainty in exchange.”

Consider the contract that my partner and I signed when we agreed to buy a home that was about to be constructed. The home’s value depended on the institutionalized property rights that came with it. As long as we fulfilled our side of the contract, no one could take it away from us. We also had an institutionalized means of enforcing the contract. (Here I confess to some dissatisfaction, since the builder required us to submit any disputes to arbitration and waive our legal right to a day in court, a troubling trend in sales contracts.) The contract’s value was also backed by “mechanisms for collective decision-making,” such as zoning restrictions to keep my neighbors from opening a gas station on their front lawn, or municipal agencies to insure the cleanliness of the water supply. Beyond the legal institutions, character-building institutions like families, churches and schools are supposed to generate enough “trust, reputation, and reciprocity” to assure us that the developer is not a fraud.

The authors say that the importance of institutions to economic growth is now “uncontroversial” in economics. This has not always been the case, however. Economists have a long history of attributing the workings of the economy to natural laws that require no conscious human intervention. Early institutionalists like Thorstein Veblen were very controversial critics of this mainstream view. Even today, many economists seem to take institutional constraints for granted and devote little attention to them. As a sociologist, I welcome the authors’ more explicit focus on institutional change.

Institutions are essential, but they can also be poorly adapted to the needs of a changing society. In particular, new technologies may not achieve their potential for economic benefits without some new rules.

The specificity of institutions means that the institutions that helped promote equitable and sustained growth in yesterday’s technological landscape may not work as well today. Their inertia means that these outmoded institutions often persist after they have ceased to be useful. Their unpredictability means that well-intentioned efforts to shape institutions to deal with new technologies may miss the mark, especially in the early days of those new technologies. And the politics of institutions are such that small groups with vested interests often prove very effective at defending institutions that are, on balance, socially harmful.

The intangible economy makes new demands on institutions, highlighting the need for institutional change. For example, the benefits of intangible investments are harder to privatize because of spillover effects. A new idea very easily spreads to people who had nothing to do with thinking it up. The existing patent and copyright laws may need revision in order to achieve the best balance of private incentive and public benefit. The economy may need some expansion of public investment as well as revised protection of private investment.

Having described the general problem of the intangible economy in Part I, Haskel and Westlake then devote Part II to specific areas of institutional reform.

Continued

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The last major section of Heather Boushey’s Unbound discusses how inequality distorts the economy. Here the author discusses how the shift of income and wealth toward the top of the distribution has affected macroeconomic processes. The first chapter in this section focuses on the economic cycle—the circular flow from production to income and back again by way of saving and investment in more production. The second chapter concentrates on investment in particular, and how growing inequality has affected the level and nature of investment.

The economic cycle

If a country wants to sustain a high level of economic activity—lots of production and consumption of goods and services—does it matter how income and wealth are distributed?

In the economically depressed 1930s, John Maynard Keynes emphasized how much the economy needs consumers as well as savers and investors. Thrift is a good thing up to a point, but too much thrift undermines the aggregate demand that firms need to justify high levels of production. The distribution of income and wealth has a bearing on this because of the “marginal propensity to consume.” The poor have to spend more of their income, while the rich can afford to save more. Milton Friedman questioned how much the propensity to consume depends on current income. People with variable incomes may smooth out their spending over time, drawing on their past income or borrowing against future income at times when their current income is lower.

Nevertheless, recent research does confirm that the rich do save more, while others have to spend the bulk of their income or even overspend and run up debt. A substantial shift of income and wealth toward the top of the distribution makes it harder for ordinary households to consume without incurring more debt.

Boushey regards the financial crisis of 2007 and the resulting Great Recession as the “perfect case study” for examining that proposition. Alan Krueger’s research found that “between 1979 and 2007, about $1.1 trillion (in 2007 dollars) was annually shifted toward the very rich.” Consumption by the rest of the population held up pretty well, not because incomes were rising for them, but because households took on more debt. Household debt rose from less than 60 percent of GDP before 1979 to 100 percent by 2007. (After the crisis it fell back somewhat, but is still around 80 percent now.)

The federal government responded to the Great Recession with expansionary fiscal and monetary policies that lowered interest rates and stimulated aggregate demand. Economic recovery was very slow, however. Some economists believe that the government was too quick to turn back toward austerity and phase out programs aimed at low-income households.

The lesson from this experience seems to be that the economy can sustain a high level of economic activity for a time despite growing economic inequality. But eventually, the economy is dragged down by either too little consumption or too much debt. Economic inequality is associated with financial instability, as Mark Zaindi concluded:

In a recent essay, Moody’s Analytics’ Zandi—who oversees one of the most well-respected forecasting models—integrated inequality into his model for the United States. Adding inequality to the traditional models did not change the short-term forecasts very much, but he concluded that higher inequality increases the likelihood of instability in the financial system when looking at the long-term picture or considering the potential for the system to spin out of control.

Investment

Since the rich are able to save more than the poor, “the shift in income from the bottom to the top of the income distribution accounts for an increase…in the global savings rate.” As Boushey puts it, “more savings are sloshing around in the economy.” Productive investment of all those savings is another matter, however. If incomes are not growing in the middle and bottom of the distribution, businesses may be reluctant to expand production or launch new products.

One thing that personal savers and businesses can do with their money is lend it, especially when household debt is growing. Finance is one industry that can have a boom even when other areas of investment are weak. The deregulation of finance in the 1980s and 90s facilitated such a boom, but at the risk of more financial instability. Commercial banks were allowed to own banks in multiple states, charge higher interest rates, and engage in investment banking. New financial instruments like credit default swaps got exemptions from traditional forms of regulation. One result was a boom and bust in home mortgages, as complicated loans that borrowers couldn’t understand or really afford were packaged into more complex securities, which were then overrated by rating companies and insured by unregulated credit default swaps. When mortgage defaults began to rise, the financial system collapsed. “The rise in credit supply—made possible both by the additional savings flooding the economy and the deregulation of finance—was the leading cause of the Great Recession.”

In this era of greater inequality, corporate profits have boomed, and a larger portion of the profits have been distributed to shareholders through dividends and stock buybacks. That leaves a smaller portion for companies to reinvest in actual expansions of goods and services. “Economic inequality means lots of savings but too few attractive opportunities for profitable investments, which creates a long-term trajectory of slow growth… The term economists use to describe this combination of trends is secular stagnation.”

This view is in sharp contrast to the politically popular idea that tax cuts for the rich and greater wealth at the top will support more investment and more rapid economic growth. That was the thinking behind the Reagan, Bush and Trump tax cuts, as well as Governor Brownback’s failed experiment in Kansas. To the extent that such tax cuts discourage government spending on human capital development and other economic needs not addressed by private firms, they further weaken the economy.

Between the need for investments in the development and deployment of green energy, the need to mitigate the effects on our food supplies, and the need to assist communities upended by the rising prevalence of climate change-induced natural disasters, there’s a comprehensive agenda to be enacted. At the same time, there’s an unmet need for investments in health care, education, and the diverse needs of the elderly and families caring for young children or disabled family members that would lead to improvements in quality of life and sustain economic growth.

A Paradigm Shift

To some, Heather Boushey’s critique of economic inequality may sound radical, even “socialist”. I do not think of it that way. Nowhere does she recommend abolishing capitalist competition or ending unequal rewards tied to real differences in contribution. On the contrary, what is troubling is the spectacle of large corporations and their executives wielding so much power that they can grab the lion’s share of the rewards whether they deserve them or not. Society has to balance the need to motivate people through higher pay with the need to give everyone access to the means of economic participation. Workers need the human capital to be productive; consumers need the buying power to demand investment in useful goods and services; and citizens need the voting power to make government work for the benefit of the many, not just the few.

If Boushey’s desire for a more egalitarian society were very radical, the changes she would like to see would have little chance of happening, since the United States is not a radical country. As it is, she detects a change in thinking in economics that may portend changes in policy as well. Certainly the Biden administration is more in touch with the new thinking than previous administrations.

In 1962, when Kuhn laid out how scientific revolutions happen, he argued that a paradigm changes when the consensus shifts. This is happening right now in economics. Behind the scenes, in academic conferences and journals across the nation, a new framework is emerging, one that seeks to explain how economic power translates into social and political power and, in turn, affects economic outcomes.

The country may be ready to move on from its forty-year experiment with more extreme inequality and “trickle-down economics” It has not generated the economic growth promised—the rising tide that was supposed to lift all the boats. In many ways, the country may be going back to something reminiscent of an earlier age, a passionate concern for the common good.

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The next part of Heather Boushey’s Unbound discusses how extreme inequality subverts our economy. She emphasizes two aspects of this: first, the subversion of fiscal policymaking, the government’s taxing and spending policies that can support a thriving economy; and second, the subversion of the kind of market structure that can sustain competitiveness and innovation. Each of these two gets a chapter.

Public spending

Here Boushey begins with the effects of tax cuts on public resources and the government’s ability to spend on public goods. Advocates for tax cuts often claim that any lost revenue due to lower tax rates can be offset by growth in the tax base through higher personal saving and investment. In opposition to that view, Boushey cites the example of Kansas under Governor Sam Brownback. He dramatically cut taxes between 2015 and 2017 in his widely publicized “red state” experiment.

Within the first two years of the tax cuts, the state’s funding levels for schools, healthcare, and other public services fell by 8 percent and the state transferred almost $1 billion from its Highway Fund to its General Fund, postponing numerous transportation projects indefinitely.

In 2017, growing public opposition to these policies led the legislature to repeal the tax cuts over Brownback’s veto.

At the federal level, tax cuts have generally favored the wealthy by reducing the top-bracket rates, as well as reducing taxes on investment income. The evidence does not show a correlation between such cuts and rates of economic growth. What it does show is that such cuts increase federal budget deficits.

Not surprisingly, wealthy people more often support the tax cuts from which they benefit the most. This may also reinforce income inequality, since the rich may fight harder for additional compensation if they know it will be lightly taxed. Since top executives often serve on interlocking boards of directors, they are often in a position to support one another’s pay increases. Wealthy donors usually dominate campaign contributions. Boushey cites a New York Times report from the 2016 presidential campaign showing that “just 158 families and the companies they control [accounted for] nearly half of all donations at that point.” Both parties have to be responsive to the policy priorities of wealthy donors to some degree, but the Republican Party does so “overwhelmingly”.

In contrast to the old argument that less government means a stronger economy, Boushey emphasizes the legitimate role of government in public investment—investing in things that are good for the economy but that private firms don’t find profitable to pay for. Among these are the human capital investments discussed in the first part of the book, such as education and affordable health care. By depriving government of revenue, tax cuts for the rich may discourage human capital investments and undermine the productivity of our workers compared to those in other countries. Other economically important public goods are infrastructure improvements and new technologies whose profit-making potential is not yet clear to private firms. For example:

Leslie Berlin, in Troublemakers: Silicon Valley’s Coming of Age, points to Global Positioning System technologies and touchscreen capabilities as immensely valuable discoveries that required such large investments of resources, and offered so little certainty that the research would lead to anything commercially important, that no private sector business pursued them.

Public opinion on fiscal policy is shifting, with less support for tax cuts and more support for public initiatives like Obamacare. Only about one-third of the country supported Donald Trump’s 2017 tax cuts. The biggest complaint people now make about taxes is not that they are too high, but that rich people and corporations don’t pay their fair share. Opportunities to avoid taxes are much greater for rich people with complicated financial profiles than for ordinary working people whose incomes are reported on their W-2s. “Tax noncompliance costs the US government more than $400 billion annually—more than twice what we would need at the federal level to cover the costs of both a paid family and medical leave insurance program and a universal childcare program.”

Since Boushey wrote that, the IRS estimate of lost revenue has risen to $600 billion a year, and Biden’s Inflation Reduction Act has allocated $60 billion for increased enforcement. Such enforcement efforts bring in much more revenue than they spend. Nevertheless, many Congressional Republicans are insisting on cutting that enforcement spending as a condition for raising the debt ceiling. That would force the country to choose between two forms of financial irresponsibility: either cut tax enforcement and lose revenue to tax cheats , or refuse to pay the bills that Congressionally authorized spending has already incurred. (Either would increase the national debt, the first by losing revenue, and the second by damaging our credit and increasing interest payments.)

Market Structure

Here Boushey’s main concern is that concentration of economic power in a small number of corporations within industries makes the economy less competitive, less innovative, and less fair to workers and consumers.

Many traditional economic models have assumed a state of perfect competition, in which no one firm has power over prices or wages. Economists have acknowledged exceptions—“situations where one monopoly firm—or an oligopoly of a few firms—has enough market power to set prices, limit competition, or dictate conditions for suppliers.” But they haven’t been considered common enough to contradict the general theory. Boushey believes that market concentration has become too large to ignore. She discusses several industries now dominated by a small number of firms, including health care, pharmaceuticals and telecommunications.

Economists have put forth conflicting hypotheses about the relationship between economic concentration and innovation. Some have said that oligopolistic firms do not have to innovate as much, since they face less competition. Others expect them to innovate more, since they can afford to make longer-term investments that may only pay off at a later time. The evidence is mixed, but the findings from recent studies point more toward the first hypothesis. In the recent era of increasing concentration, new investment has lagged relative to the financial valuations of companies, the number of new startups has declined, and productivity growth has slowed.

Market concentration reinforces other forms of inequality. Dominant firms have more power to mark up prices above costs to increase their profits. They can then spend those profits on higher executive pay and greater rewards for shareholders. But since reduced competition also gives them more power over workers, they can “pay non-executive employees lower wages and provide worse working conditions without losing staff.” This period of increasing concentration is also noted for generally higher profits and a decline in labor’s share of national income.

Dominant corporations have the means to influence legislation through expensive lobbying campaigns. Often they obtain favorable tax breaks or block inconvenient regulations. “Since 2010, the number of mergers filed has increased by more than 50 percent, but appropriations to the agencies that enforce the antitrust laws have been flat in nominal terms.” However, in 2021 President Biden ordered government agencies to step up antitrust enforcement, so times may be changing there too.

Continued