There are still two weeks to go until the US presidential elections, but Democrats are feeling optimistic enough to start talking about what a Joe Biden cabinet might look like. Much of the conversation has been focused on race and gender diversity. But Democrats should be paying just as much attention to economic and political diversity.
That is because the next president will need a highly heterodox team to handle a very complex problem: how to bridge the historic divide between the fortunes of US companies and workers.
It has become almost a cliché to discuss the split between Wall Street, where asset prices remain near historic highs, and the real economy of the US, where the 31 per cent drop in gross domestic product reached Depression-sized proportions in the second quarter. At the same time, painfully high aggregate unemployment figures mask even more painful unemployment levels for certain types of worker.
Even as we may all understand the basic outlines of the problem, there is new and disturbing data that shows just how separated financial markets have become from Main Street. Addressing that separation requires a rethink in policy across nearly every area of government — from treasury and commerce, to labour and education.
For example, a new piece of research from academics at Ohio State University and the University of Pittsburgh shows that publicly listed firms in the US as a group contribute far less to levels of employment or gross domestic product than at any point since the 1970s. There are many reasons for this. But one key point is that the fortunes of the country, its companies and its workers were far more interlinked when the largest listed firms operated in the industrial and manufacturing sector than in services, as they do now.
That has become ever more true with the shift to a high-tech economy. While the share of technology companies as a percentage of market capitalisation at the end of 2019 was 32.8 per cent — rising to over 40 per cent in the second quarter of 2020 — those firms represented only 16.3 per cent of total employment among listed companies, and less than 5 per cent of total nonfarm private employment. As the study’s co-author René M Stultz puts it, “high valuations can arise for many different reasons, but many of these reasons have nothing to do with the current economic contribution [of the companies]”.
This is why President Donald Trump’s habit of equating stock prices to economic wellbeing, although helpful for 401k pension accounts, is so grossly misleading (10 per cent of households own 84 per cent of the stock). As investors know, the upside down nature of today’s markets has meant that in recent years “good” news, such as a stronger economy, has often been “bad” news for stock prices, which tend to dip if there’s an indication central bankers will pull the plug on low rates and easy monetary policy. This is a key reason behind today’s record high asset prices.
It’s also why Mr Biden is absolutely right to say that we need to start rewarding “work, not wealth”. But slogans are one thing, and shifts in economic paradigm are another. The changes that will be required to right the listing ship aren’t incremental but systemic. After more than four decades, financialised growth via easy monetary policy is tapped out. What is needed now is a big fiscal stimulus to get through the coming months and years.
There is also, quite rightly, growing concern about debt. While the failure to pass another short-term stimulus plan is more about pre-election politics than true concerns about the American fiscal position, it is also true that for the first time since the second world war, the US is approaching a national debt-to-GDP ratio of nearly 100 per cent.
That’s fine as long as interest rates stay low and the dollar remains the global reserve currency. But I don’t think the dollar’s privilege will last for ever — in part because of the international goodwill and trust that has been squandered by the Trump administration (which has also run up the national debt faster than its Democratic predecessor).
If the public sector takes on more debt, it must be productive debt — ideally, a fiscal stimulus that creates jobs in the short term and pushes long-term investment into high-growth strategic areas such as clean tech.
Mr Biden’s multitrillion fiscal stimulus plan, which would link climate change, infrastructure and human capital investment, could do both. Executed properly, it would also not be incremental. We are talking about reshaping the entire US economy, and that will require not only a team of willing and competent technocrats, but real leaders with the political capital to drive change.
That means someone like Massachusetts senator Elizabeth Warren at the Treasury, who has the will and ability to re-anchor the financial sector to the real economy, and perhaps former New York City mayor, Michael Bloomberg, at the commerce department, who could orchestrate a national competitiveness plan for a world in which we need closer collaboration between employers, educators and workers.
Mr Biden has said that, if elected, he would be a transitional president who acts as a bridge to a younger generation of leaders. If that’s true, he has nothing to lose by sticking to his economic vision — and picking a truly diverse team to execute it.