American capitalism is at a serious inflection point. Many Americans, including the two of us, are alarmed by enormous levels of inequality and by declining economic mobility. We are concerned that in many cases American markets are no longer the most competitive in the world. And, we worry that our country’s long-term economic strength will slowly deteriorate because of an unsustainable fiscal trajectory that leaves future generations worse off.
The solution is not to upend the system. A market-based economy, for all its flaws, is still the best way to achieve broad economic prosperity and to ensure that living standards continue to rise over time. But the answer is not to maintain the status quo, either.
Radical change or complete inaction seem to be the only types of solutions that are being debated in today’s marketplace of ideas. Americans can’t afford to restrict our thinking based on political ideology and the false equivalency of having to pick one extreme or the other. That’s a recipe for stalemate.
Since founding the bipartisan Aspen Economic Strategy Group more than two years ago, our focus has been on bringing together leaders with different perspectives to highlight the importance of evidence-based policymaking. Earlier this week, 38 of our members signed on to a statement of principles that should guide the development of a new economic policy agenda. We also believe we must rigorously analyze some of the proposals that are being put forward in today’s policy debates, including universal basic income, “Medicare for all” and direct taxes on wealth.
Based on research from the newest book from the Aspen Economic Strategy Group, the two of us are more convinced than ever that those policies are fundamentally misguided and would result in economically harmful outcomes that could put our economy on an unstable and precarious path, harming the very people they are intended to help.
The collective work to identify specific policy solutions, however, also suggests to us that there are still many ways to ensure more that many more people can participate in America’s successes. And while there are no silver bullets, nor will there ever be complete agreement about every policy detail, we see many excellent ideas that are ripe for bipartisan collaboration and that can begin the process of adapting our economic policies so that they work for far more people.
First, we must aggressively invest in our human capital. That starts with addressing the supply side of the education market, including investments in community colleges to provide more students the option to obtain a high-quality education and complete their degree. This ensures that more American workers have the skills they need to compete in a global economy. Just as important, investing in education will increase economic productivity, which will help drive the wage growth needed to reduce income inequality.
There are other steps we can take to further address the distribution of economic opportunity and wage growth. But as Melissa Kearney and Magne Mogstad have argued, universal basic income is not a viable solution. It directs resources away from the neediest individuals and fails to address the underlying factors that contribute to inequality. Instead, we should look at more targeted and efficient approaches to encouraging work by supplementing the wages of low- and middle-income Americans, such as expanding the earned -income tax credit or enacting a wage -subsidy program.
Finally, we have to confront the uncomfortable truth that our country is on an unsustainable fiscal trajectory. Spending priorities such as education, infrastructure, and high-value research and development are underfunded, while our commitments to entitlements continue to rise indefinitely. Restoring the sanity of our fiscal position will require raising more revenue, slowing the rate of growth in health care spending, and making Social Security sustainably solvent.
Returning to fiscal responsibility through spending reform alone is neither just nor possible. The United States needs to reform its tax code in a manner that is more progressive and produces more revenue. But there are better approaches than a wealth tax, which would be highly distortionary and is unlikely to capture nearly as much revenue as its proponents claim. Making the income tax code more progressive and reforming estate and gift taxes to eliminate the loopholes that allow wealthy Americans to pass on wealth to their children at very low tax rates would be a better first step.
Whatever path policymakers choose, it is clear that we need to move away from theoretical arguments and wishful thinking and into the arena of pragmatic policy solutions that can actually be enacted. There is a plethora of policies that already enjoy broad bipartisan support, and these policies can be enacted only through effective government, which will require leaders to engage in principled compromise and make decisions grounded in facts and analyses.
The cost of inaction is severe and grows each day, as inequality undermines our economic strength and more Americans become disillusioned with the capitalist system that has made upward mobility a pillar of the country’s identity since its founding.
Henry M. Paulson Jr. was the secretary of the treasury from 2006 to 2009.
Erskine Bowles served as co-chairman of the National Commission on Fiscal Responsibility and Reform in 2010. They are co-founders of the Aspen Economic Strategy Group.
