The U.S. business model is broken.
One doesn't often hear talk of a "business model" for the sprawling, diverse, market-driven U.S. economy. But—sometimes explicitly, sometimes implicitly—there is an economic-growth strategy that underlies government policy, investor bets and business and consumer behavior.
Ours isn't working. Two years after the economy turned from contracting to expanding, output still hasn't returned to prerecession levels. We're still 10 million jobs short of full employment, and the fraction of adults at work, 58.2%, is at a 28-year low. The latest bad economic data have proved this isn't the typical recovery, sparked fears of a double-dip recession and reinforced the case that old drivers won't power future growth.
Paul Romer, a New York University economist who has spent his career thinking about economic growth, calls this time the "Great Distress," a period of pain that he predicts will last five or even 10 years.
As Austan Goolsbee, the president's departing economic adviser, argues, the U.S. shouldn't aspire to return to the national business model of the past decade in which debt-fueled consumer spending and a housing bubble drove the economy. "We can't just go back to what we were doing in the 2000s," he said.
He prescribes a recovery "fueled by business investment, by export growth, by innovation." Sounds good, but how do we get that?
Lurking beneath this week's congressional debate were two alternatives. To oversimplify a bit, they go like this:
One view is that if the government steps back, the private sector will step forward. "We want to create jobs, and the best way to do that is to stop taking money out of the private sector, stop overtaxing the people in this country, leave that money in the private sector and allow it to be used to create jobs," said Rep. Virginia Foxx (R., N.C.). The slogan: no tax increases.
The alternative view is that the private sector is working only for a thin layer of winners at the top; government should play Robin Hood. "Tax cuts do not...create jobs," said Rep. Barbara Lee (D., Calif.). "When we do not ask the super rich and the corporations who make billions of dollars of profits off of the American economy, we will not have the funds to keep that engine running...to make sure that we can meet our nation's obligations to our seniors, our children and our poor." The slogan: no Medicare, Medicaid or Social Security cuts.
The usual columnist's device at this point is to criticize both views and segue to a wise alternative. That's not my intent. The facts don't favor the case that big government is crowding out the private sector now: There is so much unused capacity, so many idle workers, so much low-interest credit available to big companies. And the facts show the gap between winners and losers in the economy has been widening for the past few decades.
But the congressional debate did miss something. Two big sectors of the U.S. economy have been on steroids: finance and health care. If anything is crowding out more productive activities, it's them, as Mr. Romer argued in a recent National Academy of Sciences lecture.
The bloated financial sector—all those brains lured by big bucks who might otherwise have been employed in science, software, engineering or other fields—has harmed the U.S. economy more than any of our post-World War II communist adversaries did. The American health system costs more per person than any other, but isn't delivering the world's healthiest people. The U.S. isn't getting its money's worth from either sector.
Why have they grown so big? Mr. Romer has a theory: Profit-seeking players in finance and health care have captured Congress, resisted regulation that would curb their excesses and exploited antiquated rules and policy for private gain. "The legislative process may just be too vulnerable to manipulation by very well-financed entities with an enormous amount of wealth and income at stake," he said. "Congress is for sale at bargain-basement prices."
His solution: Congress should tie its own hands more often, retaining power to investigate and vote proposals up or down but avoiding the detailed crafting of legislative provisions that influence the flow of money. In other words, he wants more bodies such as the Base Closure and Realignment Commission (to decide which military bases to close), the Independent Payment Advisory Board (to identify ways Medicare can save money) and, perhaps, the new Joint Select Committee on Deficit Reduction (to find $1.5 trillion in deficit-reduction cuts).
Maybe that's an answer. But it's clear that future prosperity depends on the U.S.—its government, business, people and universities—coalescing behind a strategy for growth and creating incentives so talent and capital flow to promising sectors where the U.S. still has an edge in an increasingly competitive global economy.