From the Main Street Model of Growth to the Wall Street Model
Whether the U.S. economy can break through the 2.3 percent speed limit, leading us to a new era of prosperity more equally shared, will ultimately depend on what model of growth we decide to pursue.
Historically, periods of exceptional economic growth have been stimulated by the opening of vast tracts of land, by the discovery of rich deposits of oil and ore, or by new inventions - from the spinning jenny that launched the industrial revolution to the steam engine and the railroad that marked the full realization of the industrial age. Each of these discoveries and inventions gave new impetus to economic growth.
So too has been the mighty influence of the demand side of the market. Mountains of World War II household savings, for example, fueled a postwar buying spree, not only inducing new capital investment to satisfy it, but creating the incentive for business to invest in a vast array of new consumer product innovations. If ordinary workers and consumers had not felt as well off as they did at the end of World War II, it is doubtful whether the 1950s would have become the golden age of the automobile, whether television would have exploded onto the American scene quite as fast as a new medium for news and entertainment, or whether by the end of the decade, Boeing jet airliners would have been setting a new standard for speed and comfort in commercial air travel.
In retrospect, we can discern the key factors that stimulated the sustained GDP growth rates in excess of 4 percent that we enjoyed in the first two decades following the war. Together, they provide the essential ingredients of what we might call the Main Street model of economic growth. As Figure 1.1 [above] depicts, a combination of enormous pent-up demand and pent-up savings after the war set off a consumption boom the likes of which no country had ever seen. The consumption boom, along with additional stimulus from government spending on the cold war, the interstate highway system, the GI Bill, and the expansion of public amenities in city and suburb led to unprecedented levels of new investment. With demand for new products booming and capital expenditures rising, the incentive for technological innovation was extraordinary. Together, investments in new plant and equipment and new technologies provided for remarkable levels of productivity growth. Combined with increases in labor supply, induced in part by a ready access to jobs, economic growth took off. As a consequence of the prodding of strong unions and the imposition of government- mandated minimum wage requirements, faster growth meant rising wages and benefits, so that workers benefited as well as stockholders, and income inequality declined.
This virtuous cycle, based on rising family incomes and consumption, continually refueled economic growth for a quarter of a century. So did federal, state, and local government spending. We may not have relished the idea of spending profuse amounts of tax dollars on national defense during the cold war, but the research and development (R&D) generated by the Department of Defense on everything from synthetic rubber, plastics, radar, and sonar to jet fighter planes had an enormous impact on commercial technology. Television, satellite communications, and modern commercial airliners were just a few of the benefits. The government was an invaluable partner with the private sector in producing technological breakthroughs in all manner of industry. Similarly, the construction of the interstate highway system and a national system of airports, air traffic control, and aircraft guidance beacons ushered in a whole new era of auto, truck, and airline transportation.
What is extraordinary about the new growth spurt of the late 1990s is that nearly everyone believes it has been based on a very different model of economic growth. According to the new Wall Street model, America is growing again because we have the best, most varied, and most pervasive set of instruments for accumulating and distributing finance capital of any country in the world. Economic success - the maintenance of steady growth - depends first and foremost, according to this new model of growth, on assuring a rising stock market. Anything that helps do this is basically good; anything that might put a damper on the accumulation of paper wealth is bad. In a nutshell, keeping Wall Street happy is now considered the surest way to help Main Street, not the other way round.