Policy should actively shape and create markets, not just fix them when they go wrong.
… it is time to move on from the debate over austerity to a new conversation about how to build smart, mutually beneficial public-private partnerships to fuel decades of growth.
For starters, we must invest in education, human capital, technology, and research. Massive technological and organizational advances have raised productivity in many sectors. Many (if not most) of these breakthroughs have their origins in publicly funded research.
… technological revolutions have historically required patient, committed public financing. In some countries, like Germany and China, public banks take on this role. In others, the job is done by strategic public agencies.
This also means de-financializing the real economy, which has been overly focused on short-term concerns, so that profits are reinvested into production and research and development, rather than hoarded or spent on share buybacks. Over the last decade, Fortune 500 companies in areas like information technology, pharmaceuticals, and energy have spent more than $3 trillion buying back shares in order to boost stock prices, stock options, and executive pay. Meanwhile, in the United States and Europe alone, companies have hoarded nearly $4 trillion. Companies should be rewarded for reinvesting their profits in production, innovation, and human-capital formation.
Next, we must increase wages and welfare. Until the 1980s, productivity increases were accompanied by wage increases and rising living standards. This link was broken by a drop in labor’s negotiating power and companies’ increased financial orientation. Unions are key to effective corporate governance and hence should be more involved in innovation policy, pressing for investments in education and training – the long-run drivers of wages.
Public institutions must also be strengthened. Bold policy choices require public agencies and institutions that are able to take risks and learn from doing so. Outsourcing government services that lie within the government’s own competency hinders this process as it reduces the public sector’s “absorptive capacity.” Creating a network of well-funded, decentralized agencies and institutions that work in partnership with business would make government both more effective and more strategically focused.
The tax system must be made more progressive as well…