Make America invest again

FORT LAUDERDALE  —  From last November’s $1.2 trillion infrastructure bill, which promises upgraded American roads, bridges, and broadband, to the recently enacted CHIPS and Science Act, which will allocate more than $52 billion to boosting the American semiconductor industry, major economic legislation is the order of the day in America. And we may soon be able to add the Inflation Reduction Act (IRA), now headed to the House, after passage by the Senate, to that list.

In the current polarised political environment, shaped by zero-sum mindsets, such breakthroughs could almost be considered miraculous. The reversal of an extended period of past underinvestment is striking. Though not directly related to the economy, the first gun-control legislation to make it through Congress in nearly 30 years also deserves mention here. Commentators have certainly been quick to tout them as victories for US President Joe Biden and the Democrats, with many observers wondering whether they will help turn the tide in November’s midterm elections.

Whatever their political implications, the infrastructure bill, the CHIPS Act, and the IRA amount to a stunning increase in long-term investment in America’s growth potential, and in balancing out the various dimensions of its growth pattern, prominently for carbon dioxide emissions reduction and sustainability.

In fact, the IRA would authorise the largest investment in climate action in American history, giving the United States a fighting chance of approaching its goal of halving emissions by 2030. Since the US is the world’s second-largest CO2 emitter (after China), such investment is essential, not only to reduce global emissions directly, but also to motivate others to do their part. The IRA also contains provisions that have nothing to do with climate, like allowing Medicare to negotiate prescription drug prices, extending Affordable Care Act subsidies until 2025, and introducing some version of a 15 per cent minimum corporate tax.

Likewise, the CHIPS Act reinvigorates US investment in science and technology, including the human capital that drives the expansion of the economy’s technological base. The legislation pays special attention to semiconductors and digital technology, with a share of the investment aimed at reducing America’s dependence on potentially unreliable foreign actors.

But, most important, the CHIPS Act materially increases the likelihood of a productivity surge in the medium or long term. With old-age dependency ratios rising and labor-market conditions tightening, higher, digitally enabled productivity growth will be needed to achieve demographically equitable growth patterns in the coming decade and beyond.

Expanded public-sector investment, and the incentives it creates, will unleash a surge in private investment in key areas. This is not mere speculation. Well-targeted public investment in science, technology, people, and infrastructure creates opportunities that a dynamic private sector and financial system will seize, driving innovation, growth, and employment.

There undoubtedly remain wide divisions in the US on matters related to the distribution of income, wealth, and opportunity. But even here, recent legislation implies a recognition that reversing damaging trends requires public investment, especially in education, and a supply-side agenda that creates opportunities. Redistribution is not to be dismissed, but it is far from a complete solution.

One might worry that this newfound, partial, and still-fragile consensus on the importance of investing in tangible and intangible assets and supportive infrastructure is underpinned mainly by geopolitical considerations, especially the competition with China. After all, the Cold War brought a surge in public investment in basic science and technological innovation. Policymakers thus might not fully grasp the importance of a balanced long-term economic agenda to support the digital revolution, the renewable-energy transition, and progress toward sustainable, equitable growth.

At the risk of sounding flip, I would advise anyone expressing such concerns not to look a gift horse in the mouth. This is not to say that a new cold-war agenda aligns perfectly with a sustainable-growth agenda. But they are aligned closely enough that policies based on a shared interest in “winning” the strategic competition with China can bring long-term economic benefits, compensating for the absence of bipartisan convergence on a robust growth agenda.

The Democrats’ recent legislative victories also show that a centrist agenda and a willingness to compromise can still produce results. Although the Senate approved the IRA in a party-line vote, provisions had to be adjusted or dropped to secure the needed support, particularly from Joe Manchin of West Virginia and Kyrsten Sinema of Arizona. However dissatisfying the result for some of the bill’s supporters, that is the nature of compromise, which is the key to shared progress.

The recent legislation also suggests a willingness to advance the broad public interest in economic, scientific, technological, and environmental dimensions, despite deep differences on social issues. Separating issues and objectives likewise bodes well for US policymaking, as it prevents an entire agenda from being held hostage to the most contentious questions.

While there is no guarantee that the revival of American public investment will last, there is reason for hope. The experiences of many countries, including successful developing countries, suggest that the hardest part of a major economic transition is the beginning. Once the benefits of investment programmes start to become visible, popular support for a centrist, forward-looking economic agenda grows, reducing the chances of reversal.

There is no telling whether American policymakers’ resolve will last that long. For now, we should praise those who have shown that, despite deep partisan polarisation, pragmatic, results-oriented leadership can bring about real progress.

Michael Spence, a Nobel laureate in economics, is an emeritus professor at Stanford University and a senior fellow at the Hoover Institution. Copyright: Project Syndicate, 2022. 

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