Holes in the ‘New Economy’

Growing Prosperity: The Battle for Growth with Equity in the 21st Century
by Barry Bluestone and Bennett Harrison
Century Foundation, 2000, 345 pp., $25

Barry Bluestone and Bennett Harrison are two icons that progressive economists of my generation looked to for inspiration. Their 1982 book, The Deindustrialization of America, was mandatory reading in graduate school. It was a vivid description of the problems that led many of us to become economists.

This book is a worthy successor to it. Although that book painted a pessimistic picture of the country’s near-term prospects, the view presented here is far more optimistic. Bluestone and Harrison are believers in the “new economy.” Their new economy is not the grand vision of limitless growth and a 36,000 Dow touted by some of the more exuberant writers in the business press. Rather, it is a more serious perspective that sees the end of the period of productivity slowdown that began in 1973. Bluestone and Harrison believe that computerization and other new technologies have increased the economy’s potential output, and that we can now expect to see rates of productivity growth close to those experienced in the golden age from 1947 to 1973. More rapid productivity growth should allow the bulk of the population to sustain significant improvements in living standards.

But Growing Prosperity does not take this outcome for granted. The central theme of the book is the contrast between two visions of the economy. The first is the “Wall Street Model.” This vision sees the keys to prosperity as low inflation, low interest rates, high saving, flexible labor markets, and free trade. The alternative perspective is the “Main Street Model,” which views the main factors supporting growth as investments in infrastructure, research and development, and education and training. In the former view, government plays a limited role in the economy. Its main duty is to balance the budget, or ideally, to run a surplus. The Federal Reserve Board has the responsibility to keep the rate of inflation low, regardless of the cost in unemployment. Trade deals such as the North American Free Trade Agreement (NAFTA) play an important role in this model, because competition from imports helps to keep inflation under control. The Wall Street Model is the path currently being pursued by Bill Clinton and Alan Greenspan.

By contrast, the Main Street Model places more emphasis on using federal money for public investment. In the Wall Street Model, unions are an obstruction to flexibility in the labor market; in the Main Street Model they foster productivity growth and increasing worker security. In addition, by allowing workers to secure wage gains, unions ensure that demand keeps pace with output. The minimum wage appears in the same light, providing low-wage workers with more incentive to work and employers with greater i...