MAINTAINING THE STRENGTH OF AMERICAN CAPITALISM Foreword by HENRY M. PAULSON, JR. and ERSKINE BOWLES Edited by MELISSA S. KEARNEY and AMY GANZ Copyright © 2019 by The Aspen Institute The Aspen Institute 2300 N Street, N.W. Suite 700 Washington, DC 20037 Published in the United States of America in 2019 by The Aspen Institute All rights reserved Printed in the United States of America Wye Publication Number: 19/011 MAINTAINING THE STRENGTH OF AMERICAN CAPITALISM Foreword by HENRY M. PAULSON JR. KEARNE and ERSKINE BOWLES Edited by MELISSA S. KEARNEY Y / and AMY GANZ GANZ Foreword by HENRY M. PAULSON, JR. and ERSKINE BOWLES Edited by MELISSA S. KEARNEY and AMY GANZ DECEMBER 2019 Acknowledgements We thank the many individuals who were instrumental in the production of this volume. First, the members of the Economic Strategy Group, whose thoughtful suggestions and discussion motivated the subject of this book. We are grateful to the authors of this volume, whose contributions advanced our understanding of complex topics and challenged us to think more deeply about potential policy responses. We are grateful for the individuals and organizations whose generous support makes possible the work of the Economic Strategy Group. We are grateful to the leadership of The Aspen Institute for its continued support of the Economic Strategy Group’s mission. We thank the staff who invested countless hours in producing this volume: Andy Morimoto and Kelley Folino for their helpful feedback; Dwyer Gunn and Kate Wheeling for excellent proofreading and editing assistance; Emily Vincent and Anne Hawkins for superb project management; Daniel Schiff for insightful research assistance; and Krista Martin, Sogand Sepassi, and Steven Johnson for their thorough editing and layout work. Henry M. Paulson, Jr. Erskine Bowles Co-Chair Co-Chair Melissa S. Kearney Amy Ganz Director Deputy Director This volume was produced to clarify different perspectives on some of the current challenges confronting American capitalism. Authors are invited to share their views about complex policy issues regardless of whether or not the co-chairs, staff, or members of the Economic Strategy Group agree with them. Therefore, the views expressed herein are those of the authors and do not necessarily reflect the views of the ESG members or the organizations they represent. Table of Contents Foreword .............................................................. 1 Erskine Bowles and Henry M. Paulson, Jr. Introduction ........................................................... 3 Melissa S. Kearney and Amy Ganz Part I: Market Concentration Causes, Consequences, and Policy Responses to Market Concentration..... 14 Thomas Philippon Concerns About Concentration ......................................... 34 Nancy L. Rose Part II: Rising Federal Debt and Slowing Economic Productivity Fiscal Policy With High Debt and Low Interest Rates ..................... 78 William Gale Can Innovation Policy Restore Inclusive Prosperity in America? .......... 116 John Van Reenen Part III: Increasing Government Redistribution in Response to Income Inequality and Declining Economic Mobility The Economics of Medicare for All .................................. 136 Craig Garthwaite Universal Basic Income (UBI) as a Policy Response to Current Challenges ................................................ 162 Melissa S. Kearney and Magne Mogstad Wealth Taxation: An Overview of the Issues ...........................180 Alan D. Viard Policy Options for Taxing the Rich .....................................200 Lily Batchelder and David Kamin Author Biographies . 235 1 Foreword By Erskine Bowles and Henry M. Paulson, Jr. The American economic system has always been the foundation of our national strength. But this foundation is showing cracks—from high levels of income inequality, declining economic mobility, and persistent economic insecurity among low- and middle-income Americans. Many now conclude that our economic system is broken. Recent polling data show that trust in capitalism is declining, especially among younger people. A 2018 Gallup poll found that less than half of respondents (45%) ages 18-29 held positive views of capitalism. This shift represents a 20-point decline since 2010 in the share of young adults’ who held positive views of capitalism. The upshot is clear: American capitalism is in trouble. We need to strengthen our system to ensure that more people participate in our economic success. This means updating and adjusting our policies to ensure the outcomes of our market-based economy are consistent with fundamental American values of freedom, opportunity, and equality. Doing so isn’t just an imperative for economic reasons. We believe that strengthening capitalism is as important for the health of the American economy as it is for the strength of our democracy. High levels of economic inequality will only contribute to increasing political dysfunction. The essays contained in this volume seek to clarify the lines of debate on some of the greatest economic policy challenges of our time and present evidence- based analysis on how to address them. It examines the hypothesis that growing market concentration is inhibiting a dynamic and competitive economy. Next, it examines the health of America’s fiscal situation and what it implies about the continued strength of our market-based economy. Finally, it takes a hard look at recent policy proposals that would dramatically raise taxes on the rich and expand access to public benefit programs in response to high levels of income inequality and declining economic mobility. The perspectives presented in this volume are not intended to represent the consensus view of Aspen Economic Strategy Group members. Our goal is to equip policymakers with the best analysis available to better inform decision making and to help Americans better understand the difficult trade-offs our leaders face in making such decisions. 2 Maintaining the Strength of American Capitalism There is no single solution to the challenges facing the American economy. The important role of evidence-based policies with bipartisan appeal, however, is difficult to overstate. This volume cannot claim to represent the end of thinking on ways to strengthen American capitalism, but we believe it provides a useful start. 3 Introduction By Melissa S. Kearney and Amy Ganz A national debate about the strength and fairness of American capitalism is taking place against a backdrop of vast levels of income and wealth inequality, growing pessimism about the state of economic opportunity and mobility, increased market concentration in many sectors, and a precarious fiscal situation. Restoring the promise of America’s capitalist system will require policies that enable more Americans to succeed in our market-based economy. Designing effective policies requires an accurate diagnosis of what is ailing American capitalism in order to effectively strengthen it. This volume brings to bear perspectives from leading subject matter experts on critical issues. This book is organized around three broad economic challenges facing the United States. Section I addresses the widespread concern that increasing market concentration in many sectors is stifling competition and undermining a more dynamic economy. Section II explores the federal government’s unsustainable deficit and debt position and the associated concern that such trajectories imperil the long-run stability and security of the American economy. Section III considers a range of current policy ideas—including a federal wealth tax, “Medicare for All,” and universal basic income— that would dramatically change our economic institutions and policies in order to achieve greater progressivity through taxes and government spending. Part I: Market Concentration Competition in product and labor markets allows for the efficient allocation of resources and is the foundation of the market economy. Competition drives innovation, lowers prices, and increases output. Yet, there is reason to worry that competition in the U.S. product and labor markets is dwindling. Fewer new firms are entering some markets; aggregate measures of firm concentration are rising; and mergers and acquisitions have increased. These trends coincide with a falling labor share of income and rising profits among market-leading firms, stoking concern among many observers about increasing firm monopoly power over consumer prices and monopsony power over employee wages. However, there is not consensus among scholars as to what the trends in market concentration are, let alone what they imply for consumer and worker welfare. A recent academic paper shows that concentration in local markets has actually 4 Maintaining the Strength of American Capitalism declined, even as aggregate measures have increased.1 Furthermore, to the extent that some industries have experienced increased concentration and a decline in the labor share of profits, it is not clear that the trends reflect anticompetitive forces or an erosion of labor institutions. For instance, a recent paper presents evidence that the decline in the labor share is consistent with a rise of “superstar firms.” In this framework, changes in the economic environment that advantages the most productive firms in an industry lead to an increase in product market concentration and a fall in labor share. Competing explanations for recent trends in market concentration have very different policy implications.2 This volume features two chapters on the state