Budget Debate Ignores What Really Fuels America’s Engine: Productivity

Take away the names scrolling across C-SPAN, and the debate that droned through the Senate last week on President Bush’s budget could have been lifted from 1981, 1951 or 1931. All the players read lines so familiar they could have been cribbing from cue cards left behind by Thomas P. “Tip” O’Neill and Ronald Reagan--or, for that matter, Franklin D. Roosevelt and Herbert Hoover.

Farm state senators--even those who otherwise fulminated against shameful federal spending--shamelessly sought more federal subsidies for their voters, er, constituents. Liberals demanded billions more for Medicare (oblivious to the fact that the rising cost of Medicare and other programs for the elderly threatens to crowd out spending on the needs of anyone who doesn’t personally remember VE Day). And conservatives insisted the most important thing Washington can do is cut taxes (even though Congressional Budget Office figures show that the federal income tax bite has dropped since 1993 for all but the top 20% of families).

It was an argument powered more by reflex than reflection. No one listening would sense that America is undergoing a historic transformation to an information- and innovation-based economy--or that the transformation itself was facing its first serious bump with the bursting of the dot.com bubble and the sagging of the stock markets. Missing, in other words, was any sustained discussion of how Washington’s fiscal decisions can support the information revolution and nurture the revival in productivity growth the new technology has ignited.

Productivity is the pivot of social progress. In the quarter-century after World War II, as American industry flexed its muscle worldwide, productivity grew at an annual rate of 2.9%; over that same period, average families saw their income double. From 1973 through 1993--amid oil shocks, inflation and corporate sclerosis--productivity growth fell to just 1.3% a year; living standards stagnated.

But as the computer and Internet advances have diffused through the economy, productivity has surged again. It’s averaged 2.8% annual growth since 1995 and hit an eye-popping 4.2% last year. Once again the updraft is lifting incomes.

Those at the top have done best, but the benefits of rising productivity (together with low unemployment) have cascaded through the economy. From 1995 through 1999, the median income jumped by more than 10%--more than twice the gain over the previous 20 years. In inflation-adjusted dollars, families on the bottom fifth of the income scale had a lower median income in 1995 than they did in 1973; but by 1999, their median income was nearly $2,000 higher than it was just four years earlier. Poverty rates have dropped more since 1995 than in any four-year period since the late 1960s, another era of dynamic productivity growth.

It’s difficult to imagine any government program or tax cut that could generate such broad social gains.

It would seem to follow that the Senate’s debate over the federal budget might have focused at least in part on how Washington can help boost productivity. But that issue was drowned out by stale arguments about the rapacious rich and greedy bureaucrats.

To its credit, the Senate took one step Thursday toward recognizing the importance of productivity: It approved a bipartisan amendment to spend significantly more than President Bush proposed on advanced scientific research. Such federal support is a critical element of any initiative to accelerate productivity growth; federal dollars seeded the initial development of both the semiconductor and the Internet.

But investment in federal research, though critical, is only one piece of the puzzle. Late last week, congressional Democratic leaders--working closely with the Progressive Policy Institute, a centrist think tank--released a more comprehensive strategy to spur innovation and drive productivity. For a blueprint produced by committee, it’s an unusually farsighted and inventive document.

The plan is organized around four big ideas. It aims to expand access to advanced technology (largely by using federal subsidies and tax credits to speed the development of broadband technologies that will allow the Internet to operate at far greater speeds). It would boost research and development with more federal spending and an expanded tax credit to encourage corporate R&D.;

Next, it calls for upgrading education and training--with grants to improve science and math education in elementary and secondary schools, incentives for companies to increase worker training and a new government-business collaboration to increase the number of students receiving advanced degrees in science and engineering. (That supply-side approach to productivity would provide more people with the skills to produce innovations as yet unimagined.) Finally, it outlines a series of ways to encourage greater Internet use by government and business (centered on stronger measures to protect privacy online).

Any of these specifics are open to debate. What’s less debatable is the need to think freshly about ways to sustain the productivity revival that’s boosting living standards so broadly. One lesson of the Nasdaq’s woes is that the information revolution may not be such an irresistible force that it no longer needs a helping nudge from government--not in the sense of an industrial policy that subsidizes individual industries but as a broad public commitment to encouraging innovation.

“There is no reason, especially if public policy supports the underlying forces behind productivity--high levels of investment, research and development, a skilled work force, and pervasive use of the Internet and information technology--that the productivity performance of the last half of the 1990s can’t extend out another two decades,” says Rob Atkinson, the director of the technology and new economy project at the Progressive Policy Institute.

Focusing on productivity would require both parties to move beyond the tired arguments over fairness and federal overreaching that they flogged like last-leg old nags last week. But the payoff could be enormous. Grow the pie through continued productivity gains and both sides will have more money to fund their priorities. More important, productivity gains mean income gains, and that could benefit more families than anything else the Senate debated last week.

*

Ronald Brownstein’s column appears in this space every Monday.

See current and past Brownstein columns on The Times’ Web site at: http://161.35.110.226/brownstein.