Founding financial father.

Photographer: Andrew Harrer/Bloomberg

The U.S. Could Use a New Economic Strategy

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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In his four-plus years as the country's first treasury secretary, Alexander Hamilton crafted an economic strategy that helped the U.S. rise from agrarian former colony to global economic power.

Its main elements, Stephen S. Cohen and J. Bradford DeLong write in their brand-new book, “Concrete Economics: The Hamilton Approach to Economic Growth and Policy,” were:

  1. High import tariffs to protect infant industries and pay for the infant government.
  2. High spending on infrastructure.
  3. The creation of a modern financial system, built around the assumption of state debts by the federal government and the creation of a central bank .

No U.S. leader since has articulated and then put in place an all-encompassing economic plan in quite the way Hamilton did. But the country has always followed some sort of economic strategy, even if it has seldom been clearly defined. Hamilton's plan stayed in place for decades, even under presidents who disavowed it. Then came a succession of strategies -- culled from Cohen and DeLong's book, but given titles by me -- that went something like this:

The era of free stuff. In the second half of the 19th century, a Republican-dominated U.S. government supplemented the Hamilton approach with free land for railroads and homesteaders, freer labor (the abolition of slavery and the promotion of large-scale immigration dramatically increased the available workforce) and freedom for businesses to incorporate without special government permission.

The era of intervention. From 1900 through the 1930s, trusts were busted, regulatory agencies created, taxation revamped and then various experiments undertaken to stimulate the economy during the Depression. The goal was not so much to develop the nation as to try to steer development in ways that spread the benefits more widely.

The era of investment. With the U.S. the world's dominant economic power after World War II, boosting growth abroad took priority over protecting U.S. industry from foreign competition. But huge investments in highways, housing, scientific research and military technology stimulated and shaped the U.S. economy in profound ways.

The era of financialization. Starting in the 1970s, government began to loosen constraints that had kept banks and other financial institutions in check since the 1930s. At the same time, East Asian countries following a Hamiltonian development model built export-led economies that lifted hundreds of millions of people out of poverty but also battered manufacturing in the U.S. These two forces combined to give finance a much larger role in the U.S. economy than it had ever played before, which seemed like an OK idea in the 1980s and 1990s but hasn't looked so good since the 2008 financial crisis.

It is at least possible that this last era has come to an end, with the beginning of financial re-regulation in the U.S. and a halt to the long upward trend in global trade that accompanied the rise of the East Asian export economies. It's not at all clear, though, what's going to replace it.

DeLong, an economist at the University of California at Berkeley and a prominent and prolific blogger, and Cohen, an emeritus professor of regional and city planning at Berkeley, don't offer a plan. They simply recommend that discussion of economic policy focus on the concrete -- what works -- rather than theory and ideology.

How's that been going lately? Donald Trump's economic platform, however muddled and unrealistic, is at least a break from the narrow ideological orthodoxy on economics that has held the national Republican Party in thrall for the past couple decades. On the Democratic side, Bernie Sanders and Elizabeth Warren have offered a challenge to the financial-sector-friendly approach that the party's mainstream settled on in the 1990s. Some in that mainstream have been reconsidering their stance as well -- DeLong was a deputy assistant treasury secretary in Bill Clinton's administration, and he has gone from defending the deregulatory moves of the 1990s to, in the new book, critiquing them.

Meanwhile, the economics profession's turn away from theory and toward empirical work, which I wrote about in January, will presumably offer pragmatically inclined policy makers more material to work with in the coming years.

Still, it's not easy to figure out what the U.S. should do next. Nations playing catch-up -- such as the U.S. in the late 1700s, Germany in the 1800s, and Japan and China more recently -- have concrete examples they can follow. But the U.S. of 2016 is the biggest economy on the planet, and by most measures one of the strongest. In the latest World Economic Forum global competitiveness rankings, for example, it trailed only Switzerland and Singapore. There is surely much we can learn from those (and other) well-run little nations, but in the U.S. remains largely sui generis.

I'm almost certain that more infrastructure investment would be a smart part of any new U.S. economic strategy. But I'm not so sure what should be built and where, or what else the nation should be doing. It's unlikely that any one person would have all the answers anyway. Since Hamilton, U.S. economic strategies have been the product of politicking, intellectual debate and sometimes dumb luck. Got any suggestions?

  1. Disclosure time: The book is published by the Harvard Business Review Press, of which I was editorial director when the book was acquired. That's about where my involvement started and ended, though. 

  2. For an explanation of this, I recommend "Cabinet Battle #1" from the musical "Hamilton."

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
Zara Kessler at zkessler@bloomberg.net