Opportunity lives in America because of its commitment to personal reinvention. Our forefathers streamed into America for nearly four centuries to leave behind a life of urban squalor to become a frontiersman; to transform from a menial serf to a skilled middle-class craftsman; to put behind a life of crime for a future as the pillar of a growing community; and, of course, to exceed the American dream, to leave poverty behind and achieve wealth in America.
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The powerful global allure of America is rooted in the freedom for social, cultural, and religious reinvention.
To some extent, this freedom to reinvent is woven deeply into our culture and the story of our economic success.
To some extent, this freedom to reinvent is woven deeply into our culture and the story of our economic success. Historically, the U.S. offered an unparalleled access to raw materials and open land, the ability to start new enterprises and retain the material returns to one’s work and effort, and easy access to expanding markets. The American economy grew and transformed itself at a remarkable pace, and permitted its population to follow suit.
At the same time, however, each era demands policy reinvention as well. For example, it is time to rethink our approach to business cycle policy. Economic reinvention is at the heart of business cycle recovery and economic dynamism. In the depths of an economic downturn, entrepreneurs take advantage of cheap, used capital facilities and idle workers to launch them in new uses. The productive supply-side reinvention leaves behind the broken economic model and unveils a creative venture of greater social value.
The failure to appreciate this core economic dynamic lies behind the failures of big-government attempts to micromanage the economy. Discretionary Keynesian stimulus is built on the notion of propping up the existing firms, labor market relationships, and purchase patterns. In the aftermath of the Great Recession and Obama Administration stimulus efforts, new-firm creation dropped dramatically in the U.S. and the recovery proved modest at best. This is not a coincidence. Interfering with the core mechanisms for reinvention harms the capacity of the economy to transform itself for the future.
It is time to return to fiscal policies that focus on long-term growth and avoid the temptation for activist policymaking. The failure of activism was one of the lessons of the 1960s and 1970s, during which both fiscal and monetary policy were regularly adjusted in an attempt to target full employment and low inflation. The result was exactly the opposite – sustained high inflation and high unemployment. This lesson was forgotten by Republican and Democrat Administrations alike, as discretionary policies were attempted in 2001, 2002, 2003, 2005, 2008, and 2009.
In addition, the past two downturns have been the result of the bursting of asset bubbles, the dotcom bubble of the late 1990s and the global credit/housing bubble in 2007. Why should one expect Keynesian responses to work when the business cycle is not an income-driven, industrial event?
Flexible markets, a ceaseless commitment to innovation, the capacity to organize and reorganize skills, risk capital, and technologies are the mechanisms of economic reinvention. Personal freedoms, religious freedoms, and small non-intrusive government are the mechanisms of social, cultural, and personal reinvention. Our policy future should be built on these principles, and not on top-down, one-size-fits-all regulatory and discretionary fiscal approaches.
America in 2014 is not the America of 2004, 1984, 1914, 1814, or 1714. But the commitment to the opportunity to be better yet again remains true. Our policies need to be updated to preserve the notion that reinvention is not just a possibility, but an important part of what drives the United States forward.
Douglas Holtz-Eakin is the President of the American Action Forum, and a former Director of the Congressional Budget Office