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Chapter 1

Growing Together in the Dynamism Economy

In the 1990s, a new economic era was created when a period of intense globalization collided with an information technology revolution. Yet precisely defining a "new" economy is less important than understand-ing the nature of the change. I believe a more descriptive label is the "dynamism" economy. Of course, dynamic change in market economies is hardly new. The mid-twentieth-century economist Joseph Schumpeter identified the process of "creative destruction," positing that a healthy market economy is continually moving forward, replacing old capital, old industries -- and existing jobs -- with more productive alternatives. Yet, what feels most "new" for average citizens is the breakneck speed at which the increased globalization, rapid technological advance, and the explosion of the Internet are putting fierce competitive pressures on the economy and accelerating change not only in products and services, but also in entire job categories and industries.

Markets are moving to what would have been considered an ideal of global efficiency in which producers can look anywhere for the place, people, and technology to produce a good or service as cheaply and efficiently as possible. Thanks to the Internet, consumers can instantaneously compare the price and quality of almost every good and service produced in the world and choose the one that best meets their needs.

In 2000, about half the companies that had comprised the 100 largest industrial firms in 1974 had either gone bankrupt or been taken over. Between 1970 and 1990, the rate at which companies fell out of the Fortune 500 quadrupled. It is as if the search for the best product, service, or input went from a regional athletic competition to a never-ending global economic Olympics in one generation. Yesterday's champion is less secure, and as new products and services redefine the market, profit margins drop.

Dell Computers, the last major PC maker to manufacture in the United States, typifies this Olympic-level competition. Dell's factories attract awe and intense scrutiny for streamlined production. According to theNew York Times,"Designers give one another high-fives for eliminating even a single screw from a product, because doing so represents a saving of roughly four seconds per machine built -- the time they've calculated it takes an employee, on average, to use the pneumatic screwdriver dangling above his or her head." Dell rates each of its suppliers each week in a cutthroat search for better, cheaper parts. The result is that today it takes a single worker only five minutes to build a PC; a task that took two workers fourteen minutes only five years ago.

Nokia, the world's largest cell phone maker, is acclaimed for its efficient supply chain -- managing 60 billion parts a year from more than 29 countries -- but has found that in the new global marketplace, efficiency is not enough. In 2004, it saw its market share drop from 35 percent, where it had been for five years, to 29 percent when it fell behind in the fashion-driven market for flip-phones, color screens, and camera phones. Nokia responded by slashing prices and retooling its supply chain to be more responsive to operator networks. It sped development, moving more quickly from concept to commercial application, introducing 35 new models in 2004 and 40 new models in 2005. Nokia is now leading the next wave of "cool" phone technology using third-generation networks that were first introduced in the United States in 2004 -- releasing one phone that can hold up to 3,000 songs and another that can capture as much as an hour of video.

THE UPSIDES AND DOWNSIDES OF THE DYNAMISM ECONOMY

This fierce competition drives a never-ending focus on improving quality and efficiency and lowering prices for consumers. Many experts on competitiveness argue that one reason the U.S. economy outperformed Europe and Japan in the 1990s was that our open competitive economy put more pressure on businesses to modernize and innovate. Research by economist Martin Baily and the McKinsey Global Institute confirms that the intensity of competitive pressure in the U.S. economy drove a widespread adoption of technology across broad sectors of our economy, as even traditional bricks-and-mortar firms were forced to incorporate cutting-edge innovations to stay ahead. Competition kept average prices for consumer goods in the U.S. to only 21 percent above the lowest world prices, while prices exceeded global lows by 38 percent in Germany, 61 percent in the United Kingdom, and 102 percent in Japan. Productivity, which had averaged an anemic 1.5 percent over a twenty-three-year period from 1972 to 1995, has now averaged 3.1 percent from 1995 to 2004.

Yet the same competitive pressures generate wider economic anxiety. Previously, the threat that global competition would lead to downward pressure on a worker's wages, force her out of a job, or even decimate her entire industry was limited to a clearly identifiable portion of our workforce -- mainly factory workers in globally traded manufacturing industries. As globalization and technology now allow consumers and producers to scan the globe to maximize efficiency in everything from accounting to machine-tool production, the very forces that bring efficiency and lower prices raise new concerns about whether armies of new workers from China or India will eliminate jobs and force wages in the United States down for decades to come. Many fear that these trends will hollow out middle-class jobs and that the only workers who will not be vulnerable to this dramatic increase in global labor arbitrage will be either the super-educated and very hard to replace, or those in jobs that require a physical presence in the United States and are not subject to automation -- construction, cutting hair, and restaurant service.

These new concerns cloud today's economic debate. Often in politics it is easy to identify opposing interests: environmentalists versus loggers; union leaders versus corporate management; uninsured working parents versus small businesses struggling to keep health care costs low. Today's conflicts are far more nuanced and complex. Individuals can hold conflicting opinions in their many roles as consumers, workers, parents, and community members. As a consumer and parent, a low-income mom wants to make her money go as far as possible at Wal-Mart, but as a neighbor and worker she fears that Wal-Mart is driving down wages and forcing other firms to cut back health care benefits. The member of Congress may want to pursue greater economic ties with the country his parents emigrated from and yet fears that a new trade agreement could hurt workers in his district.

Clearly, consumers benefit from the low-cost products and services that global competition provides. But if that competition also reduces wages it could leave consumers with less buying power. From a worker's perspective, it may seem obvious that a dynamic economy poses a threat in the form of greater dislocation, but the same competitive pressure can also be the source of the next wave of good high-paying jobs for American workers in the industries of the future. For a concerned global citizen, the market openings and foreign investment that can shake up old, illegitimate, and corrupt power structures in developing countries can also be used -- at least temporarily -- to exacerbate income inequality and enrich an illegitimate status quo.

These tensions require deep, honest exploration that does not easily fit within any right-left, pro-globalization-anti-globalization perspective. Too many on the right side of the political spectrum approach these challenges of the dynamism economy with an unhelpful ideological presumption that less government always leads to higher economic growth. And too many on the left start with the presumption that restricting competition to protect jobs or ensure wages and benefits can be counted on to help working families in the long term. We are left with a deficit of serious discussion on policies thatbothrespect and even embrace the power of markets while ensuring that growth does not come at the expense of our progressive values.

Consider the debate over outsourcing in 2003 and 2004. In speeches I used to say we had a two-party system on outsourcing: the "Sky Is Falling Party" and the "Don't Worry, Be Happy Party." Neither really examined the realities of the dynamism economy and the legitimate needs and anxieties of workers. The Sky Is Falling Party disproportionately blamed outsourcing for job loss while giving the impression that policy could easily restrict market behavior and companies could protect U.S. jobs. The Don't Worry, Be Happy Party trivialized the concerns of workers at risk and failed to see that the lack of government policies to spur job growth, increase competitiveness, and cushion devastating dislocation was partly responsible for the economic pain and legitimate worry of an increasing number of workers and communities.

My solution was a third-party movement on outsourcing -- the Humility Party. The platform would recognize that because outsourcing is primarily a function of unstoppable forces such as the spread of global information networks rather than trade, there was no way to completely eliminate it without hurting long-term U.S. job growth. With hundreds of millions of new middle-class consumers coming into the world economy, we should be confident that in the long run America will win more than it loses from an open global economy. Yet the Humility Party would admit that we do not know for certain that global labor competition will not present a serious problem for American workers in terms of lower wages or dislocation in the future.

The Humility Party would ask hard questions: What practical options do we have between simply assuming greater globalization will lift all boats, and resorting to self-defeating protectionism? How can we lower the cost of job creation in the United States, in light of global labor market competition? Can we use tax incentives to encourage job creation or make investment more attractive in low-cost areas of our country? Can we, as Intel founder and chairman Andy Grove suggests, spark greater job creation in the United States by investing in basic research, a modernized technology infrastructure, and math and science education? Are we willing to accept slightly higher prices to ensure that global competition does not lead to a race to the bottom with firms squeezing every last penny -- not through innovation but by clamping down on employees' health and pension benefits? With the outsourcing debate dominated by one side condemning it and the other simply yawning at it, these questions received too little serious policy consideration.

MEMO TO PROGRESSIVES:

EMBRACE GROWTH AND ECONOMIC DYNAMISM

Too often in progressive policymaking circles, if an analyst raises concerns about whether a proposed progressive policy is inefficient, hurts growth, or might have the unintended consequence of creating negative incentives for work or job creation, many assume the motivation for such objections is to push for a centrist position or the moderation of progressive goals. The purpose of this book is not to moderate progressive goals, but to look for the most pro-growth means to achieve those goals. The "most-pro-growth alternative" test requires examining how progressive policies can be achieved at every step while maximizing economic growth and minimizing negative unintended consequences for the very workers, employers, and investors our policies are designed to empower. Of course, there are goals -- banning child labor in our factories; preventing racial, religious, and gender discrimination in the workforce -- that require direct intervention in the market regardless of their efficiency or economic impact. Yet on a host of policy goals, decision makers have many avenues to find policies that are both pro-growth and progressive. It will be easier to find those avenues if policymakers follow the six pro-growth progressive guideposts.

1. Dealing with the Inevitability of Economic Dynamism

Imagine you are a member of Congress and are approached by a patriotic CEO of a small electronics firm in your district. She desperately wants to keep buying from U.S. suppliers, but a direct competitor has cut prices by making insulated wiring more cheaply abroad. The CEO tells you that if she continues using her U.S. wiring supplier, she will not be price competitive, will risk losing business, and may have to cut jobs. She is committed to doing everything she can to keep buying American, but asks you to sponsor legislation restricting her competitor from buying from overseas suppliers.

What are your options? Congress could forbid all U.S. electronics firms from outsourcing overseas, but the CEO's competitor may then move his whole operation abroad and future start-ups may relocate in nations that allow them to search the globe for suppliers. You could enact quotas or higher tariffs on imported wiring to reduce the incentive to locate overseas or import from foreign producers. Even if this means higher consumer prices for electronic goods in the United States, you may decide it is worth it to protect the high-paying jobs in your district. But other companies in your district rely on low-cost electrical inputs from other nations to stay competitive, and local exporters could be hurt if other nations retaliate with quotas and higher tariffs to protect their own producers.

Furthermore, you have a sinking feeling that shutting off global competition in the long run might dampen the pressure for U.S. companies to innovate and seek higher value-added services or production, leaving your community more dependent on a product or service where they no longer have a competitive edge.

This all-too-real hypothetical illustrates that however admirable it is to want to take every imaginable step to save existing U.S. jobs, when we impede the economic logic of producers seeking to meet consumer demands by finding the lowest-cost inputs, we are engaging in a losing game. It is, as Robert Reich once explained, like building sand barricades on the beach to try to keep the tide from coming in.

What drives much of the economic upheaval in the dynamism economy is not simply globalization, but technological advance as well. The introduction of ATMs and self-service gas pumps would have shaken up jobs in the United States, even if we had a completely closed economy. Fifteen years ago, the Bureau of Labor Statistics predicted that travel agents would be among the fastest-growing U.S. job categories; instead those jobs contracted by 6 percent and are projected to shrink further over the next decade as more Americans book their travel online -- an option that did not exist fifteen years ago. Today, 25 percent of supermarkets now offer self-checkout services, and the IHL Consulting group predicts by 2010, 95 percent of checkout lanes will be self-serve.

Even countries that are often accused of robbing American jobs face constant price pressure from new technologies and even lower-cost nations. Advances in natural language speech recognition software are already responsible for automating many Indian call center jobs. A host of African countries are luring outsourcing with new strategies and even tax cuts. Indeed, when I mentioned outsourcing to a group of students at the Indian Institute of Management in Bangalore in 2003, they thought I meant outsourcing jobsfromBangalore to poorer parts of India and Africa. In China, low-cost manufacturers are already being squeezed by growing wages. Loh Sai Kit, manager of Yuh Fai Toys company in Dongguan, saw several local companies close in 2004 and move production to Vietnam. The Indian outsourcing company MsourceE has recently opened up a call center in Mexico -- where per capita income is about ten times higher than India's -- but has a workforce of native Spanish speakers to serve the U.S. market. Neeraj Bhargava, CEO of WNS, India's largest third-party offshore company, says, "I see ourselves eventually operating out of three or four clusters -- one for European languages, one for Asian languages, and then for risk reduction we may want to be in places like Mexico, Canada, or Latin America, which incidentally offers Spanish language capability too." At the 2005 World Economic Forum in Davos, the buzz was that as a new wave of outsourcing expanded to business processes like accounting and data entry, language would play a less significant role, sparking an even more intense global competition for providing these services.

Understanding the inevitability of change does not mean we should sacrifice progressive policy aspirations at the altar of economic efficiency or resign ourselves to an unrestricted, unforgiving global market where the tide may rise but many boats sink. It does mean that progressives must be pragmatic about the realities of the dynamism economy and choose the most pro-growth alternative to achieve any progressive goal.

2. Unintended Consequences:

Thinking Seven Steps Down the Road

Shaping a pro-growth progressive agenda requires acknowledging the difficulty of anticipating how any action or inaction can create negative unintended consequences. Mitigating these unintended consequences was a key goal when, during the presidential transition in December 1992, we sought to implement President Clinton's vision for a National Economic Council -- a corollary to the National Security Council that I would direct from 1997 to 2001. Bob Rubin, who was the first head of the National Economic Council, stressed to Bo Cutter, Sylvia Mathews, and me that while the immediate impact of many decisions might be predictable, the challenge was to try to "look seven steps down the road." To me this was the policy maker's Hippocratic Oath -- first do no harm by avoiding cures that are worse than the disease. Process is crucial here. In the face of an immediate or lingering economic problem, the pressure to "do something" can overwhelm careful consideration of unforeseen or unconsidered consequences.

For example, when gas prices spike, there are calls for the U.S. government to release oil from the Strategic Petroleum Reserve (SPR), a government-controlled reserve of 590 million barrels established after the energy crises of the 1970s. The first-order effect of a release is straightforward: increasing the supply of oil in the market should lower prices. Yet having felt this pressure on several occasions as NEC director -- and yielded to it on one occasion -- I found that calculating the second-, third-, and fourth-order effects is far more complicated. If releasing reserves is seen as an aggressive or even hostile tactic, and OPEC officials signal they will pull back supply in retaliation beyond the amount of the SPR released, the action could lower supply expectations in the market and raise prices. If using the SPR raises expectations that it will be tapped whenever there are shortages or price hikes, oil companies might hold fewer reserves in the future, increasing the likelihood of oil shocks. If investors viewed it as a politicization of economic policy, it could raise the costs of borrowing and discourage foreign investment in the United States. The one time that the Clinton administration did a "swap" -- a short-term release that had to be replaced -- the National Economic Council and Energy Secretary Bill Richardson foresaw some of these second- and third-order effects and managed the release and diplomacy well enough to avoid these pitfalls. But it is a far more complicated calculation than those who often call for SPR releases recognize.

Avoiding unintended consequences requires carefully considered policies, not minimalist government. Inaction or maintaining the status quo can have unintended consequences as well. Consider the corporate reforms that were not instituted in the mid-1990s, particularly SEC Chairman Arthur Levitt's recommendation to separate auditing and consulting practices to prevent conflicts of interest. Few policy makers anticipated thatnotacting would help lead to the stunning corporate scandals in the summer of 2002.

Whether or not one agrees with President Clinton's economic policies, his decision to create a National Economic Council as a coordinating body helped promote a process that subjected new ideas to rigorous scrutiny. It was not uncommon for our economic team to seize on a seemingly good idea, only to have it crumble under our own hard questioning. The process of collective deliberation and scrutiny can at times be harder in Congress, where offices tend to work more independently, often without the benefit of an honest broker.

3. Taking Silent Trade-offs Seriously

Progressives should be particularly concerned with an unintended consequence I refer to as a "silent trade-off," when well-intentioned policies to protect certain workers or communities impose burdens on similarly situated or worse-off workers who were not included in the immediate cost-benefit calculations. These trade-offs are silent because often the potential downsides to other workers are never openly considered and weighed in making the decision.

European "hire-and-fire" policies are meant to provide greater security for workers by mandating generous severance pay, notice periods, and firing restrictions. In Germany, employers must inform workers weeks or months in advance of firings; in Norway the permissible reasons for employers to dismiss workers are so narrowly defined that it is extremely difficult for anyone ever to fire an employee. But as economists like to say, high barriers to exit (i.e., lots of hurdles to firing workers) means higher barriers to entry (i.e., employers might be less likely to hire new workers). Such policies result in greater protections for workers with jobs, but can have a chilling effect on hiring, resulting in slower job growth and higher unemployment -- often referred to as Eurosclerosis. Some European policies have dramatically increased the average length of unemployment, putting the jobless at a higher risk of being permanently marginalized from the workforce. They have also made employers less likely to hire "risky" workers, increasing employment among working-age men at the expense of women and youth. More and more progressives in Europe now seem to grasp this; a main goal of New Labour in Britain and many Social Democratic parties across the continent has been implementation of labor market reforms designed to reduce these painful trade-offs while maintaining crucial support for workers.

4. Empowering People Directly

When pro-growth progressives take seriously the law of unintended consequences and the potential for silent trade-offs, a common theme often emerges:empowering people directly rather than trying to protect them by restricting or impeding markets.When hardworking families are forced to raise their children in poverty; when parents struggle to take time off to care for a sick kid or parent; when workers are devastated by a plant closing in their community, the well-intentioned progressive instinct is often to restrict market behavior to prevent such outcomes. Sometimes such intervention is the best or only option. Yet too often progressive policy makers rush to restrict market behavior without considering whether the same goal could be achieved by giving workers the resources they need and avoid new burdens on employers that risk negative consequences.

Consider the fact that too few part-time working parents have 401(k) retirement accounts. If politically feasible, some progressives would support requiring all businesses to offer part-time workers a generous pension with matching employer contributions. Such a regulation might cause some employers -- especially small businesses -- to hire fewer part-time workers and therefore reduce job opportunities for some working parents. The question for the pro-growth progressive is not whether to give up on the goal of better pension protection for working parents, but whether there is a better way to achieve that goal. In chapter 13, I describe new Universal 401(k) accounts with generous matching contributions that the government could offer directly to all workers, which could achieve the goal of increased pension and retirement security for part-time working parents while imposing no new restrictions on employers and avoiding any potential harm to part-time job prospects.

5. Recognizing the Potential Link Between Dynamism and Progressive Goals

When a company draws raves from Wall Street analysts and is rewarded with a higher stock price for a corporate restructuring that involved moving jobs overseas, it is easy for some to conclude that the benefits of the dynamism economy reflected in the Gross National Product (GNP) are reaped only by multinational corporations while the costs are carried by typical hardworking families and their communities. Yet the pro-growth progressive must be careful not to place inordinate blame on dynamic global competition for job losses or downplay the potential for such dynamism to play a key role in furthering progressive economic goals.

There is little question that our labor market performance in recent years has been exceptionally weak and that poor economic policy choices contributed to the worst jobs recovery since the 1930s. Three and one-half years after the end of the 2001 recession, we were still more than 8 million private sector jobs behind where we should be in a normal economic recovery. Yet it is far less clear that too much dynamism, technological change, or globalization were the primary drivers of our labor market troubles. The main difference between the historic job creation of the late 1990s and the historically weak job market of Bush's first term was not the number of jobs destroyed by economic change, but the economy's failure to create new jobs to replace them.

Consider that in 1999, fierce competition destroyed an astounding 32.9 million private-sector jobs, the equivalent of more than 20 percent of our workforce, according to the Business Employment Dynamics Survey published by the Bureau of Labor Statistics (BLS). Yet that same competition also helped create 35.5 million. The result: a net creation of 2.6 million jobs. At the same time, unemployment fell to its lowest level in thirty years and poverty to its lowest level since 1979.

Compare that to 2003, the second year of our anemic "job-loss" recovery. We might have expected many more jobs destroyed in such a weak year. Yet only 30.2 million jobs were eliminated, nearly 3 millionfewerthan in 1999. The force behind our net job loss was that only 30.1 million new jobs were created in 2003, nearly 6 million fewer than in 1999. In the end, rather than the solid 2.6 million net jobs created in 1999, we saw a loss of 120,000 jobs in 2003, according to this BLS survey.

This shift offers a crucial caveat for progressives. The increased pace of change and competition in our economy can be both a cause of great upheaval at the expense of workers and a powerful engine of job creation and economic opportunity.

Intense global competition and dynamism partly stimulated growth in the 1990s and delivered progressive results. The pace of technological change, together with open markets, sound fiscal policies, and investments in workers and technology did not prevent dislocation to millions, but it did foster the longest sustained economic expansion in our nation's history where the fruits of growth were broadly shared. From 1992 to 2000, every quintile of the income distribution, from the highest 20 percent to the lowest 20 percent, saw incomes increase. Indeed, those in the bottom fifth saw the largest increase in income growth of 22.5 percent. This presented a sharp reversal from 1979 to 1993, when the top 20 percent gained 28.4 percent while those at the bottom saw their incomes decline by 13 percent. The typical family saw its income rise $7,200 in inflation-adjusted dollars, an increase of 15.3 percent. African American families saw even higher income growth of $8,900, a striking 33 percent increase.

During the late 1990s, the poverty rate in America fell to its lowest level since 1978, and a lower proportion of blacks and Hispanics lived in poverty than at any time in history. For the first time more than two-thirds of Americans owned their homes. The fact that these outcomes occurred amidst such a burst of dynamism may not validate any isolated policy, but it should make progressives think twice about whether slowing the pace of change is a surefire way to achieve progressive goals.

6. Passion for Economic Growth

The Democratic Party should disband if it ever stops being the party that stands by the little guy, leads the fight against racial and economic disadvantage, sticks by working families when times are tough, and takes on those with privilege who don't play by the rules.

Yet when the publiconlyhears Democrats taking on powerful interests or fighting for those who have fallen on hard times, they may believe that progressives' and the Democratic Party's passion is limited only to helping those in distress, and not to spurring economic growth and helping families create wealth. Democrats cannot just be the party for you when something bad happens. They also need to be the party of your optimistic aspirations. Friends are most important during hard times, but most of us want friends who support our dreams and hopes as well. While any pro-growth progressive strategy must include a cost-sharing compact to help Americans manage risk and dislocation, progressives will make a serious mistake if they believe that Americans only aspire to a "safety net nation." The distinctive feature of the American character is the desire both for a safety net to ensure economic dignity in hard times and the chance to create wealth and move up the economic ladder. Even ultimate populist Huey Long deeply understood this. While he often resorted to shameless populist demagoguery, the first line of the theme song he played at virtually every public appearance was "Every man a king, every man a king, you can be a millionaire."

Indeed, this optimistic belief in upward mobility lies deep within the American psyche. Geographical expansion allowed early Americans who wanted wealth and opportunity to move to a new territory and try their hand; they did not have to wrestle it from those who had it. When the historian Frederick Jackson Turner declared the closing of the Western frontier in 1893, he predicted that "the American energy will continually demand a wider field for its exercise." And, as historian David Noble has chronicled, the movement from the farms back to the cities and urban areas had become the next great American expansion. While geographic expansion may be limited, growth and innovation remain the perpetual American frontier.

Continuing to push for a growing economic pie should be critical for those who believe in an America that always makes room for more people from diverse economic, cultural, and ethnic backgrounds who want to work hard to move up into the broad middle class. Simply put: it is easier to have a melting pot if it is a growing pot. When the economy stagnates, competition for a set number of jobs and resources becomes a war for scarce resources that can break down along racial and ethnic lines.

That is why the failure to "grow together" increases the risk that we will "grow apart" and become divided as a people competing for a shrinking pie of resources and opportunity.

Even when Democrats have taken correct and important stances on issues such as Social Security privatization and corporate misconduct they have often failed to appeal to the optimistic pro-growth aspirations of Americans because their strongest messages are seen only as critiques.

On Social Security privatization, Democrats have been right to criticize conservative plans to introduce unnecessary market risk into Social Security's guaranteed progressive benefit, and to level a broader critique of President Bush's misnamed "ownership society," which does virtually nothing to help 95 percent of Americans save and build wealth. In the summer of 2002, Democrats led by Senator Paul Sarbanes rightfully pushed for tough new legislation to address the conflicts of interest and corporate malfeasance that decimated wages and pension savings of millions of employees. Democrats also had good reason to question the practices of energy companies during the California energy crisis and whether pharmaceutical companies were subject to adequate pressures to keep prices low.

Yet if the only time most Americans hear leading Democrats speak with passion about investing in the stock market or large corporations is in a negative context, some may question whether the party is sufficiently passionate about helping individuals who want to invest more in the market or find a job with a large, growing company. Senator John Kerry recognized this in May 2004 when he acknowledged to the Business Roundtable that he had gone too far in broadly using the term "Benedict Arnold CEOs." "You can't love jobs but hate the people who create them," he explained.

The key for Democrats is not to pull our punches, but to match our critiques with passionate words and bold policies to spread wealth creation, and encourage entrepreneurship, risk-taking, and small business creation. A recent Pew poll found that the nearly 40 percent of crucial undecided voters respond overwhelmingly to the optimistic empowerment and growth messages that Democrats too often fail to deliver.

Imagine a very troubled company whose workers must choose between two finalists for a new CEO. One candidate lists a number of specific populist actions to improve the company, including selling off a private jet for top executives and closing down the executive dining room with its high-priced chef. Each change reflects good values and is overwhelmingly popular with the workers. The other CEO candidate brushes aside these symbolic changes and outlines his long-term plan to restore profitability. In an ideal world, the company's workers might want a CEO with both a long-term vision for profitability and a commitment to slashing lavish executive perks. But given the choice, they are likely to go with the CEO who has a plan to save their jobs, even if he doesn't share their values on corporate fairness.

President Clinton had an intuitive feel for defining his economic agenda within an optimistic and pro-growth vision. He never shied away from populist positions like addressing skyrocketing CEO pay, taking on the tobacco industry, critiquing foreign corporate tax avoidance, and pocket vetoing bankruptcy reform that he believed was a sop to the credit card industry. Yet he paired these positions with a future-oriented "economy, stupid" focus that highlighted the positives of technological advance, open markets, and "building a bridge to the future." On the issue of fiscal discipline, for example, he defined deficit reduction as critical to both creating a pro-confidence and pro-investment climate and achieving the progressive goals of saving Social Security and restoring trust in government. He also realized the importance of always providing a positive progressive alternative. When the Republicans won congressional majorities and pushed for a balanced budget in 1995, most of their specific measures were so unpopular with the public that most of Clinton's staff believed he could simply criticize individual spending cuts in the Republican budgets. Yet Clinton and Gore understood that without a progressive balanced budget plan of their own, they would cede the field to Republicans and drive voters concerned about fiscal discipline to the Republican plan by default, even with all its unpopular details.

Being a pro-growth progressive does not mean compromising progressive values or moving to soulless centrism or Republican-lite positions. It means having plans to realize progressive values and economic growth, understanding that those two goals can be consistent and even complementary.

MEMO TO CONSERVATIVES: A HANDS-OFF APPROACH WILL ALSO FAIL TO HELP US GROW, OR GROW TOGETHER

If the dynamism economy means accepting some degree of economic upheaval and dislocation as inevitable, it also requires rethinking the traditional conservative bias that smaller government is inherently pro-efficiency and pro-growth. Indeed, what may matter most today is the design, not the size, of government policy. Far from restricting markets or burdening employer choice, ambitious policies to improve the knowledge base of our workforce and help American families adjust to fast-paced change may be increasingly vital to both growing the economy and ensuring more Americans believe they are benefiting from its dynamism.

This should provoke a rethinking of fiscal policy among supply-siders: deficit-exploding tax cuts that are designed to starve the beast of government, rather than produce unrestrained free enterprise may cripple the government's ability to institute the policies necessary to avoid a backlash that could lessen support for open trade, vibrant markets, and fast-paced competition.

1. Conservative Humility

Much of the comfort that the "don't worry, be happy" crowd takes in a less-government-is-more approach is based on a faith that "sooner or later" markets will sort things out. Of course, this is sometimes the case in the long run. For example, fears of a "hollowing out" of middle-class jobs have characterized numerous periods in our history ever since the post-Civil War period when Northerners worried that their industrial jobs would all shift to the low-wage South. At each juncture, we have eventually created new jobs and new industries that might have seemed unimaginable years before. In addition, demographic trends suggest that our main challenge in years to come may be too few workers, not too few jobs. Americans also have reason for long-term optimism if, in the coming decades, the explosion of workers entering the global economy in countries like India and China come to constitute a new army of middle-class consumers that can purchase U.S. goods and services.

Yet even if history and long-term trends suggest that disruptive change sorts itself out, free-market conservatives should not assume that the recent trends in the dynamism economy are inflicting only mild or temporary pain for workers and their communities. In the early 1990s, fears over the temporary impact of competition from South Korea and Japan turned out to be overstated, but there is no precedent for the explosion of globalization and information technology combined with the integration of the economies of China and India, which together make up 40 percent of the world's population and have a seemingly limitless supply of cheap labor. While economic theory and experience may say that when poor nations grow, workers demand more wages, thus reducing the gap in labor costs, none of us knows how long it will take before we see significant wage increases in those countries. Even Paul Samuelson, the Nobel Prize-winning economist and ardent free trade supporter, has questioned whether the U.S. will always enjoy "surplus of winnings over losings" if trading partners like China and India simultaneously increase their numbers of highly skilled workers and maintain lower labor costs. What if new domestic industries are slower to materialize than the industries and jobs leaving? The absence of any targeted government responses to spark jobs, supplement wages, or help with economic adjustments could lead to far more protectionist, anti-growth backlashes.

Those who base their arguments for more open markets only on long-term macroeconomic forecasts must also recognize there is something disturbingly cold and utilitarian about people at comfortable jobs at comfortable think tanks and law offices opining that for the good of the economy, we must tolerate other people's pain. In the Clinton campaign war room in the fall of 1992, James Carville told George Stephanopoulos and me that he was willing to be for NAFTA, but he could hardly stand the way elite trade supporters discounted the cost of others' dislocation. "I am all for NAFTA and open trade," he said, "but I just wonder how the argument would go if all the facts showed that NAFTA would be good for the economy as a whole, but it would cost 50 percent of Washington elites the ability to get their children into a good private school. I wonder how much we would hear about the overall good of free trade then?"

Of course, many pro-free trade economists would rightly argue that while dislocation driven by globalization and technology can be extremely painful, sooner or later economic openness will raise all boats. When I hear that argument, I am reminded of President Clinton's "iron law" of politics that when someone said a problem was not about money, he was always talking about someone else's problem. My own iron law is that whenever someone says that dynamic economic change will benefit everyone sooner or later, he is always talking about someone else's job. When it is your livelihood, there is a profound difference between sooner and later.

The problem with our current discourse is that while those who call for increased trade barriers often have no strategy for how their company or industry will compete and prosper over the long term, those who argue against protectionism often have nothing to say to those facing pain and devastation today but "tough luck." This leads to an impoverished impasse:when it comes to workers and communities threatened by global competition, protectionists have no vision for the future and free traders have no vision for the present.

Conservatives and free traders have to recognize that we cannot break out of this deadlock if the only option we offer communities suffering economic devastation because of global competition is protectionism. Even where I have differed on proposals to raise trade barriers, I never accepted the callous claim that calls for such protection were the result of selfish special interests. When United Steelworkers of America President George Becker explained to me that despite the flurry of antidumping cases brought by the Commerce Department in 1999 and 2000, he still thought the administration needed to do more, I did not see a man fighting for an extra tax break or a special privilege. He was fighting for the jobs, the livelihoods of his workers. If the only choice is between economic devastation and protectionist policies, what union leader or elected official is not going to choose trade barriers?

For Erskine Bowles, President Clinton's former chief of staff, the lack of meaningful policies for communities threatened by global trade tore at him as he traveled to hard-hit areas during his first run for the United States Senate in 2002. Like many in the administration, he had supported trade expansions. But on the campaign trail in North Carolina he reversed those positions after talking with families in devastated mill towns. I asked him whether his new stance represented a change of heart or just the political realities of running for office in a state where politicians have to look out for globally vulnerable industries like textiles. He paused a while, and then said that after seeing the devastation of entire mill communities, he could not maintain the presumptions about free trade that he had in the White House if we could not come up with better alternatives. "The values my mom and dad brought me up on just tell me that it is wrong," he explained. In those communities, "there were no new jobs to even train people for. Whole communities were spiraling downward toward death." He still believed in the benefits of open markets, but now he felt that we could not go any farther until we found effective means to alleviate or prevent such economic suffering. If free traders continue to ignore the need to engage in serious discussion on solving the problems of dislocation and providing vulnerable communities with viable choices, they risk a further depletion of their ranks.

2. The Economic and Political Danger of Encouraging a Winner-Take-All, Loser-Lose-All Society

Conservative free marketers must also acknowledge that without more thoughtful government policies, the dynamism economy could become a winner-take-all, loser-lose-all environment with dangerous consequences.

In his thought-provoking bookThe New Financial Order,Yale economist Robert J. Shiller explains that the difference between who wins and who loses is increasingly a function of chance and unforeseen choices. "Individual careers," Shiller explains, "can be as dramatically harmed by being just marginally less productive as by discovering a key scientific result a week later than others." The savviest investors in the world have been unable to predict which industries will be the wealth and job creators of the future and which will fall by the wayside or become victims of global competition. Workers or high school and college students making choices about their careers should hardly be expected to do better.

Unfortunately, this unpredictability can wound our national psyche and our economy's potential if people believe that the difference between a sudden nest egg and a devastating fall is the result of luck and timing and not the traditional American virtues of hard work and education. In a flourishing free market, differential outcomes based on chance are inevitable. But the real question is whether our public policies mediate the role of chance -- and recycle opportunity for those with high aspirations and strong work ethics -- or exacerbate the inequities of market outcomes. The less-government, supply-side policies of the Bush administration are moving us toward a dangerous situation where not only market forces, but also our government policies, strongly promote a winner-take-all and loser-lose-all economy.

Most middle-class workers have traditionally believed that there was an unspoken economic compact in America: if they did all the right things -- got an education, found a job, and worked hard -- they would be guaranteed a basic level of comfort for their families. It is similar to the contract-law definition of "reliance" -- what a prudent, reasonable person would believe based on statements and promises, even without an explicit contract.

In the 1990s, when dynamism brought both record job growth and considerable dislocation, many Americans accepted President Clinton's view that this unspoken economic compact simply needed to be updated. People could still rely on a degree of economic security in a dynamic global economy if they added a commitment to pursue higher education, computer literacy, and lifelong learning to improve skills on the job. Even if it was too late for some older or less-skilled workers, they could take comfort in the fact that their children could rely on this updated social compact to succeed.

When economists downplay concerns of outsourcing by pointing out that the number of jobs being sent overseas is small compared to the size of our workforce, they miss the fact that even anecdotal stories of radiologists and investment bankers losing their jobs to overseas competition creates a sense of economic anxiety far beyond the immediate numbers affected. It causes millions of working Americans to question whether or not there is any economic reliance left. If only the super-educated are assured of being able to surf the waves of the global economy, what can the average hardworking American -- even with a solid college education -- rely on? One of the most frequently heard comments from people who have lost their jobs is: "This wasn't supposed to happen to me -- I did everything I was told to do: went to school, got a college degree, worked hard." Mike McGeehan, a member of Pennsylvania's state legislature, recently noted, "When the steel work went overseas, when the auto work went overseas, the textile work went overseas, everyone said it won't happen to my industry. Well, guess what, people? No one's safe in America anymore." As forty-nine-year-old Michael Tucker, a laid-off software developer, lamented, "Computer programmers are the textile workers of the future."

The Economic Danger: Less Risk Taking and Investment

If the government is seen to sanction an uncertain environment where workers have no economic reliance, an increasing number of people could decide that taking risks and investing in training and education will still leave them vulnerable -- stifling innovation and productivity in our economy. Over dinner recently, Clyde Prestowitz, president of the Economic Strategy Institute, mentioned that his son had been laid off as a computer programmer in Silicon Valley and had decided to start a snow removal business in Aspen. As his son explained, "At least I'll know they'll never be able to shovel our snow from India."

Robert Shiller envisions a scenario where millions of workers shun high-skilled career paths out of fear that they will be subject to an unforgiving global economy combined with minimal government assistance. "Brilliant careers go untried because of the fear of economic setback. The educations people undertake, the occupational specialties they choose, the ventures they set out on, are all limited by the knowledge that economically we are on our own and must bear all of the losses we incur."

We in the United States recognize that if a single bankruptcy resulted in a lifetime of oppressive debt or even debtors' prison, the cost would be not just in disappointed lives, but in less risk taking and entrepreneur-ship. The "fresh start" rationale of bankruptcy always had economic growth content: we did not want to discourage risk taking or leave viable entrepreneurial talent shackled due to bad luck or even a single bad business calculation. A one-strike-and-you're-out economy could under-mine the willingness of Americans to do what we know is in our national interest -- take risks, innovate, and invest in higher education and skills.

The Political Danger: Rejection of Pro-Growth Policies

With an increasing share of the public concerned that their jobs are, as economists say, "globally contestable" there is a greater risk of a broader political backlash against open markets and globalization. If accepting other people's pain is the only way to support dynamism, an increasing portion of the American public will translate their anxieties into a political voice.The Wall Street Journalreported that the number of high-skilled and technology workers' groups like Mad in the U.S.A. and the Organization for the Rights of American Workers support the anti-trade anti-openness position. Conservative free-market advocates could find that their laissez-faire view sparks a backlash that results in anti-growth outcomes.

3. Recycling Opportunity:

The Increased Importance of Progressive Taxation

Much of the push for tax reform in conservative circles, like the consumption tax or flat tax, would make our system less progressive and less flexible in moderating the ups and downs of the dynamism economy. Most Americans support our progressive tax system because they agree with the basic fairness of asking those who benefit most from our economy to bear a somewhat higher burden of taxation. The increasing role of chance in the dynamism economy is another compelling reason to maintain a progressive tax structure.

No one makes the case for progressive taxation more passionately than Bill Gates Sr., whose son is, of course, the richest man in the world. Gates Sr. explains that the "great man" theory in the United States -- that great wealth is amassed by the individual efforts of individual men -- "borders on mythology." Those who create great wealth do so on the backs and shoulders of previous generations of taxpayers whose money has helped construct the most reliable intellectual property system in the world, a strong judiciary, universal public education, stable capital markets, and government research investments. The "great man" in America is the beneficiary of the investments of millions of average people. As Gates Sr. told Bill Moyers, "The notion that 'You earned it' is more correctly 'you earned it with the indispensable help of the government.' If you'd been born in West Africa, you would not have earned it. It would not have occurred." Gates believes that progressive taxation is a means for those fortunate individuals "to pay a return" on the investments of millions of average workers who, over many generations, helped lay the foundations for that individual's success.

Gates's notion of "paying a return" takes on new significance in an economic environment increasingly characterized by chance for those whose jobs are tied to the accelerating pace of technological change and global competition. Consider the following scenario: three friends graduate from average colleges with a computer science degree. None of them finished at the top of their class or has the education to begin executive-track jobs, but each is hardworking and received the latest training. One friend chooses the next Intel and through stock options makes a small fortune. Meanwhile, one of his equally talented friends ends up at a company that was on top but is now struggling to survive, and the third finds himself at a company that is completely eclipsed by a new wave of technology. As Shiller stresses, it is hard to argue that skill has defined who is well off and who is unemployed. We accept such variance in financial well-being -- even due to pure luck -- as an inevitable outcome of a free-market economy. A progressive tax code ensures that those who have prospered the most provide resources to cushion the blows and provide new opportunities to those who end up with the short straw. If all workers are taxed at a flat 15 percent rate rather than through a progressive rate structure, the government has fewer revenues to support bold education and retraining policies, and the two losing friends will have less chance of gaining the new skills they need to take another shot. A tax code that is regressive and allows tax-free accumulation of large amounts of wealth can exacerbate winner-take-all outcomes in the dynamism economy instead of moderating them.

To the extent that progressive taxation can mediate such chance-driven outcomes, foster vital investments in workers, and lead more people to embrace our dynamism economy, it will make our entire workforce and our economy more productive. The 1990s is a perfect example. While income taxes were raised on the highest earners as part of the 1993 deficit reduction plan, by 2000 the top 1 percent of earners on average were making $423,000 more a yearaftertaxes due to a stronger economy. The dramatic transformation of our fiscal situation after 2000 from projected surpluses to projected deficits as high as $4.8 trillion over the next decade could not have come at a worse time. Beyond the harm these growing deficits pose to our financial stability, investment climate, and ability to address the baby boom retirement crisis, starving-the-beast with high-income tax cuts saps the government of the vital resources it needs to recycle opportunities and to help workers survive -- and hopefully thrive -- in a fast-paced dynamism.

4. A New Cost-Sharing Compact That Goes Beyond the Business Cycle

We need to recognize that the anxiety of workers at risk in the dynamism economy represents not only their fear of losing their paycheck, but losing health insurance for their kids, losing their home because they can't make mortgage payments, or suffering other dramatic setbacks. We need adjustment policies that are comprehensive and protect families against devastating economic falls. In chapter 4, I describe a set of bold new adjustment policies in areas such as retraining, health care, and wage and mortgage insurance.

We also need to break free from the outmoded view that seeks to determine why a worker lost her job before determining the level of adjustment assistance she should receive. Our current policy of offering increased income and health insurance support if you can show your job was lost due to trade is inequitable and out of touch with the complex nature of the dynamism economy. Indeed, even in manufacturing there is nothing to suggest that losing your job due to trade leads to a harsher adjustment process. Data from the Displaced Workers Survey in 2002 shows that while manufacturing workers who lost their jobs to import competition experienced an average 13 percent wage loss, manufacturing workers who lost their jobs for reasons unrelated to import competition experienced an average wage loss of 12 percent.

Imagine three brothers living next door to each other, each earning $50,000 and supporting three children. Brother One loses his machine tool factory job due to new low-cost competition from a new trade agreement. Brother Two loses his position at a bank because new online banking makes his job obsolete. Brother Three loses his job because a new Korean product has shrunk his company's market share. In our current system, Brother One has lost his job due to trade and therefore is eligible for generous training assistance and substantial assistance to buy health care for his family. Since Brother Two lost his job due to new technology, he will receive no health care benefits and a far less generous training assistance. Whether Brother Three gets the more generous or less generous assistance will come down to a complex and nuanced judgment from the government as to whether his job was lost due to trade or simply the creation of a new product line.

Treating the families of these three brothers so differently based on a causal analysis of how they lost their jobs is not just unfair but increasingly hard to determine. In the dynamism economy more and more job loss will resemble that of Brother Three: a mix of technological change, global competition, shifting consumer tastes, and product lines that will not be easy to sort out.

Beyond the Business Cycle

We should shed the antiquated practice of conditioning expansions of our adjustment efforts on downturns in the business cycle. The traditional justification for providing extra relief in times of overall economic distress contends that it may be harder for a worker to be rehired when jobs are scarce. This is why we provide extended unemployment insurance -- which is paid out for just thirteen weeks and to just 35 percent of job losers -- only when we are in or near a recession. Indeed, one reason lawmakers did not include temporary health insurance assistance for unemployed workers in the economic stimulus package in 2002 was their concern that, once enacted, the measure might become permanent.

This kind of business-cycle thinking is out of date in an economy where job loss is increasingly a permanent, not cyclical phenomenon. A study by New York Federal Reserve economists Erica Groshen and Simon Potter identified the job loss in the previous five recessions in industries that were experiencing cyclical change (jobs came back at the end of the recession) versus those that were undergoing structural change (job losses or gains continued independent of the rebound). Compared to the recessions of the 1970s and 1980s, where job loss was roughly split between permanent and temporary, 79 percent of jobs lost in the 2001 recession occurred in industries experiencing permanent structural change. Yet even this study misses a fundamental component of the dynamism economy: permanent job loss happens constantly, under both good and bad economic conditions. Our adjustment policies must catch up to this new reality.

5. Increasing the Pool

A presumption in favor of minimalist government will also prevent us from addressing two of the paramount challenges to America's competitiveness: how to ensure that we have an increasing number of highly skilled workers and how to stay at the cutting edge of the technological change that creates whole new industries and drives job growth in the dynamism economy. Conservatives will need to look beyond the simple assumption that all government investment slows growth and embrace bold investment to educate workers and spur technological innovation.

Harvard economist and current Dean of the Kennedy School of Government David Ellwood, through work with the Aspen Institute, has highlighted the stark reality that the robust 44 percent growth in our native-born workforce over the past two decades is coming to a halt. Over the next twenty years we will seezerogrowth. And as minorities and traditionally disadvantaged groups with lower education levels make up a larger share of our workforce, if these patterns are not changed the growth in average education among the workforce will slow dramatically. Over the past two decades, the share of workers with at least a college degree grew by 50 percent; over the next two decades it will grow by only 4 percent. Even in manufacturing, retiring baby boomers will create a need for ten million new skilled workers over the next twenty years, according to a study by the National Association of Manufacturers.

We can no longer rely on natural labor force growth to fill the high-skilled jobs of the future -- we must increase the share of our workforce that is highly skilled and educated.

China and India have made aggressive investments in their workers and in scientific research. While graduate enrollment in the U.S. in math and science has declined by 20 percent since 1993 and the President's 2006 budget cuts funding for R&D in real terms, the number of Ph.D.s awarded in China grew fivefold in the 1990s and China has doubled the percentage of its GDP invested in R&D between 1995 and 2002.

Every year billions of dollars flow through Washington lobbying shops as businesses and corporate leaders seek even the slightest regulatory advantage, yet national priorities like increasing investments in education are treated like hobbies. When it comes to equipping every child in America with a strong foundation of education from birth and opportunities throughout their childhood and adult life to increase their education and skills, most corporations substitute lobbying muscle for an occasional speech or small grant from their corporate foundation.

While no doubt many corporate leaders are concerned about these workforce issues, to become the "Statesman CEOs" that Peter Peterson has called for, challenges that are critical to our nation's long-term bottom line like universal quality preschool and opportunities for Hispanics, blacks, and women in the fields of math and science, must be given at least the same priority as the narrow and short-term issues that often dominate current corporate lobbying and advocacy.

Every child in America should obtain the kind of experiences and brain stimulation in their first years of life that builds a foundation for strong cognitive and analytical skills. We need a bold commitment to universal preschool. We should expand Head Start, provide universal after-school care and make it easier for kids from disadvantaged backgrounds to get a college education. In part III, I will explore key strategies to "increase the pool" of high-skilled workers that must be an integral part of a progressive pro-growth economic strategy.

The fight to attract high-wage jobs will grow increasingly competitive in this new environment. To remain a magnet for innovative companies and high-value added industries, we have an imperative to maintain economic stability, the strongest research capacity, and the best high-tech infrastructure. America should be pushing our investment in innovation and science into overdrive, not dragging our feet because some will label such critical investment "big spending." Particularly in basic research, government funding is critical to a continual stream of scientific and technological innovation. First, we cannot rely on the private sector with its product-driven research to expand the borders of knowledge. As MIT physicist and Nobel Laureate Jerome Friedman explains, "If you know what you are looking for, you are limited by what you know." Second, proactive government research investment increases the speed at which new ideas, discoveries, and technologies are disseminated. Private companies need monopoly prices to pay for their investment, so they receive patent exclusivity for seventeen years. However, many products and services would not have been possible without the foundation of basic research that doesn't require an immediate commercial application. For instance, the work on quantum mechanics by Albert Einstein, Niels Bohr, and Max Planck that led to the creation of the transistor and the laser also made the Internet and DVD possible.

Before diving into the specific areas of pro-growth progressive policy, I want to define the foundations of the approach. What does it mean to be progressive? What values do progressives want to support through economic policy?

Excerpted from The Pro-Growth Progressive: An Economic Strategy for Shared Prosperity by Gene Sperling
All rights reserved by the original copyright owners. Excerpts are provided for display purposes only and may not be reproduced, reprinted or distributed without the written permission of the publisher.

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The Pro-Growth Progressive An Economic Strategy for Shared Prosperity

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