Path to ProsperityRoger C. Altman, Jason E. Bordoff,

Jason Furman and Robert E. Rubin

HAMILTONTHE

PROJECT

StRAtEgy PAPERSEPtEMBER 2008

The Hamilton Project seeks to advance America’s promise of

opportunity, prosperity, and growth. The Project’s economic

strategy reflects a judgment that long-term prosperity is best

achieved by making economic growth broad-based, by

enhancing individual economic security, and by embracing a

role for effective government in making needed public

investments. Our strategy—strikingly different from the

theories driving economic policy in recent years—calls for fiscal

discipline and for increased public investment in key growth-

enhancing areas. The Project will put forward innovative

policy ideas from leading economic thinkers throughout the

United States—ideas based on experience and evidence, not

ideology and doctrine—to introduce new, sometimes

controversial, policy options into the national debate with

the goal of improving our country’s economic policy.

The Project is named after Alexander Hamilton, the

nation’s first treasury secretary, who laid the foundation

for the modern American economy. Consistent with the

guiding principles of the Project, Hamilton stood for sound

fiscal policy, believed that broad-based opportunity for

advancement would drive American economic growth, and

recognized that “prudent aids and encouragements on the

part of government” are necessary to enhance and guide

market forces.

HAMILTONTHE

PROJECT

Advancing Opportunity, Prosperity and Growth

Printed on recycled paper.

HAMILTONTHE

PROJECT

Path to Prosperity: An Economic Strategy to Achieve More Broadly Shared Growth

Roger C. Altman

Jason E. Bordoff

Jason Furman

Robert E. Rubin

SEPTEMBER 2008

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The views expressed in this strategy paper are those of the authors and are not necessarily those of The Hamilton Project

Advisory Council or the trustees, officers, or staff members of the Brookings Institution.

Copyright © 2008 The Brookings Institution

Abstract

Today,toomanyAmericansarenotfullysharinginournation’sprosperity.Realmedianwageshavestagnated,incomeinequalityhasincreased,andchangesintheeconomythathavebroughtbenefitshavealsobroughtnewrisksandinsecurities. Inresponsetothesechallenges,ournationneedstoactnowonthreefronts.First,ournationmustmaketherightlong-terminvestmentstopromoteeconomicgrowththatisbothstrongandsustainable.Second,itisnecessarytoputinplaceeconomicpoliciesthatwillbetterachievebroad-basedparticipationinthatgrowth.Third,forgrowthtobesus-tainable,itisnecessarytorestoresoundfiscalpolicy,movingonamultiyearpathtoasustainablefiscalposition.Thispaperelaboratesontheeconomicchallengesandtherecommendedpolicyresponses.Itconsidersthecommonlyheldviewthatpromotingeconomicgrowth,broad-basedparticipationingrowth,andeconomicsecuritymaybecontradictorypolicyobjectives,butfindsinsteadthattheseob-jectivescanbemutuallyreinforcing.Itarguesthatwhilefreemarketsarethecornerstoneofeconomicgrowth,thereisanecessaryroleforrobustgovernmentactiontosupportandsupplementmarketforcesandtohelpsharethegainsofgrowthmorebroadly.Inanefforttoadvanceinnovativeideasabouthowtoinvestinournation’sfutureprosperityandtoenhancefamilies’economicsecurity,TheHamiltonProjecthasreleasedstrategypapersofferingabroadvisionforpolicyinarangeofareas,aswellasdozensofdiscussionpapersonawidevarietyoftopics.Thesetopicsincludeeducation,healthcare,incomesecurity,scienceandtechnology,taxpolicy,climatechange,energysecurity,infrastruc-ture,workforcetraining,housingandfinancialmarkets,andpovertyreduction,amongothers.Thesepapershaveallbeenwrittenby leadingscholarsandgrounded inreal-worldevidenceaboutwhatworks,notideologyanddoctrine.Thispaperdrawsonthisbodyofworktoofferavisionforhowtoachieveopportunity,prosperity,andstrong,broad-basedeconomicgrowth.

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Introduction

TheHamiltonProjecthasforthepasttwoandahalfyearsputforthanoverarchingeconomicstrategy,andpolicyoptions consistentwith that strategy,

for promoting strong economic growth, broad-basedparticipation in that growth, and increased economicsecurity.Theproject’sproposalsandpolicydiscussionsspanawiderangeofpolicyareasrelated toachievingstrongeconomicgrowthandhelpingthegainsofthatprosperitytobemorebroadlyshared—education,healthcare,incomesecurity,scienceandtechnology,taxpolicy,climate change, energy security, infrastructure, work-forcetraining,housingandfinancialmarkets,andpov-ertyreduction,amongothers.Theproposalsadvancedhavecomefromleadingacadem-ics, practitioners, and policy analysts fromacross the nation, taking cutting-edge andevidence-based ideas fromeconomists andothersandbringingthemtobearonpolicydebatesinarelevant,accessible,andaction-ableway.Eachideaisofferedasapotential-ly innovative step in therightdirection toupgradethecountry’spolicies,thoughtheyarenotcollectivelyacomprehensive“solution” to thenation’s challenges. Rather, they are intended to pro-vokethoughtanddiscussionandserveasaportfolioofoptionsfromwhichpolicymakersmaychoose.Indeed,at timeswehavereleasedseveraldifferentapproachesto address the same problem, such as how to achieveuniversalhealthcoverage(AndersonandWaters2007;Butler2007;EmanuelandFuchs2007;Gruber2008).

Americanshavelongbelievedthatwitheducationandhardwork,eachgenerationcandobetterthantheonebeforeandthatwhereonestartsinlifeshouldnotdeter-

minewhereoneendsup.Thisbroad-basedopportunityfor individualadvancementhasprovidedan incentiveforentrepreneurship,education,andhardwork—con-tributing to the economic growth that the UnitedStateshasenjoyed.Consistentwith thispromise,oureconomic performance should be measured by howwelleconomicgrowthisraisingthelivingstandardsofallAmericans.WhilepolicymakersarefondofrecitingJohnF.Kennedy’sfamousphrase,a“risingtideliftsallboats,” that is not inevitable. It ismore an aspirationthananaphorism,andinrecentyearsthataspirationhasnotbeenfulfilled(Sperling2007).

Today,toomanyAmericansarenotfullysharinginthenation’sprosperity.Between1947and1973,productivityandrealmedianfamilyincomebothgrewby2.8percentayear.Since1973,however,productivityhasgrownby1.8percentayearwhilerealmedianfamilyincomehasrisenbylessthanhalfofthat.1Thedisconnectbetweenaggregateeconomicgrowthandtheincomeoftypicalfamiliesisaccompaniedbyalargeincreaseininequal-ity.Since1979theshareofincomegoingtothetop1percenthasrisenby8percentagepointswhiletheshareofincomegoingtothebottom80percenthasfallenby

1. EstimatesbasedonBureauofLaborStatisticsproductivitydataandU.S.CensusBureauincomedata.

Our economic performance should be measured by how well economic growth is raising the living standards of all Americans.

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thesameamount(CBO2006;PickettyandSaez2007).Toprovidesomeperspectiveonthescaleoftheincomeshiftthathasoccurred,considerthattofullyoffsettheincomeshiftin2005wouldhaverequiredtransferring$884billionfromthetop1percentofhouseholdstothebottom80percent—theequivalentofnearly$800,000fromeveryhouseholdinthetop1percentand$10,000toeachhouseholdinthebottom80percent.2Noone

wouldsuggestthis is feasibleorevendesirable,but itprovidesausefulbenchmarkforgaugingthemagnitudeofthepublicpolicyinterventionsthatwouldbeneces-sarytofosterbroad-basedparticipationingrowth.

Atthesametimethatmedianrealwageshavestagnatedandinequalityhasgoneup,changesintheeconomythathavebroughtbenefitshavealsobroughtnewrisksandinsecurities. Structural changes in the economy haveloweredtheunemploymentrate,butatthesametime,theranksofthelong-termunemployedhaverisen.Theincreasedtechnologicalsophisticationofmedicinehasbroughtlongerandhealthierlives,butthehighercostshave also led to a fraying of the employer-sponsoredinsurance system. The shift to defined contributionpensionplans like401(k)sgivesmoreworkersanop-portunitytoparticipateinthegrowthofthemarketbuthasalsoledtonewrisksfacingworkers,particularlytheriskthattheywillfailtoenrollinaplan.

Inresponsetothestagnationofincomesandtheriseininequalityandinsecurity,weneedtoactnowonthreefronts.First,ournationmustmaketherightlong-terminvestmentstopromoteeconomicgrowththatisbothstrongandsustainable.Second,itisnecessarytoputinplaceeconomicpoliciesthatwillbetterachievebroad-

basedparticipation in thatgrowth.Third, forgrowthtobesustainable,itisnecessarytorestoresoundfiscalpolicy,movingonamultiyearpathtoasustainablefis-calposition.

Thispaperelaboratesonthesechallengesandsuggestspolicyresponsestoaddressthem.Itconsidersthecom-monly held view that promoting economic growth,

broad-based participation in growth, andeconomic security may be contradictorypolicyobjectivesbutfindsthatthesecanbemutually reinforcing. It argues that whilefree markets are the cornerstone of eco-nomicgrowth,thereisanecessaryroleforrobust government action to support andsupplementmarketforcesandtohelpsharethegainsofgrowthmorebroadly.

Long-Term Economic Growth

Achieving strong economic growth is a key tomeetingtheeconomicchallengesweface.In-creasedeconomicoutputisnecessaryifweare

toachieverisinglivingstandardsandenhancetheeco-nomicsecurityofAmericanfamilies.Moreover,stron-gergrowthgivesustheresourcesweneedtoaddresscostlychallenges,suchasthefiscalchallengesassociatedwithanagingpopulation,risinghealthcarecosts,andclimatechange.Theimportanceofgrowthgoesbeyonditsmaterialdividends.AsHarvardeconomistBenjaminFriedmanarguedinhisrecentbookThe Moral Conse-quences of Economic Growth(2005),providingfortheeco-nomicwell-beingofthevastmajorityofpeopleencour-agessocialprogressoutsideofstrictlyeconomicgains,specifically“greateropportunity,toleranceofdiversity,socialmobility,commitmenttofairness,anddedicationtodemocracy”(p.4).

Today,America’slong-termeconomicgrowthisimper-iledbecausewearenotmakingtherightlong-termin-vestments:aschoolsystemthatprovidesstudentswithaworld-classeducation,ahealthcaresystemthatpro-videsallourpeoplewithcoverageforasustainablecost,

Today, America’s long-term economic growth is imperiled because we are not making the right long-term investments.

2. Authors’estimatesbasedondatafromtheCBO,“Appendix:DetailedTablesfor1979to2005”(www.cbo.gov/ftpdocs.88xx/doc8885/Appendix_tablestoc.xls[February6,2008]).

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physicalandtechnologicalinfrastructurethatcanmeetthedemandsofthetwenty-firstcentury,supportforba-sicresearchandinnovation,oranationalenergypolicythatmitigatesclimatechangeandenhancesournationalsecurity.Tobesure,theeconomyfacesextremelyseri-ouschallengesatpresentbutevenaswerespondtothecrisis inourfinancial system,wecannot lose sightofthesignificantinvestmentsweneedtomaketopromotegrowthgoingforward.

Aswe invest inournation’s future, it is critically im-portant thatwealso restorefiscal responsibility,bothto increase economic growth and to make it moresustainable. Large budget deficits are especiallyproblematic given the nation’s low private savingrate and large current account deficit (which itselfis partly caused by the budget deficit). As of early2008, a variety of independent projections suggest-ed the deficit will total more than $5.1 trillion overthe next ten years, or approximately 2.8 percent ofcumulativeGDP(Auerbach,Furman,andGale2008).Giventherecenteconomicdownturnandgovernmentresponse,thatfigureissignificantlyhighertoday.Here-after,asthebabyboomersincreasinglyreachretirementage and claim Social Security and Medicare benefits,governmentdeficits anddebtare likely togrowevenmoresharply.

Mainstreameconomicanalysesofsustainedbudgetdeficitsunderscoretheadverseim-pact of deficits on long-term economicgrowth (Rubin, Orszag, and Sinai 2004).3Underthisconventionalview,ongoingbud-getdeficitsdecreasenationalsaving,whichreducesdomesticinvestmentandincreasesborrowingfromabroad.Theexternalbor-rowing that helps to finance the budgetdeficit is reflected in a larger current account deficit.The reduction indomestic investment (which lowersproductivitygrowth)andtheincreaseinthecurrentac-countdeficit(whichrequiresthatmoreofthereturnsfrom the domestic capital stock accrue to foreigners)bothreducefuturenationalincome,withthelossinin-comesteadilygrowing.

Underthemainstreamview,thecostsimposedbysus-taineddeficitstendtobuildgradually,butinfacttheymayoccurmoresuddenlythantheconventionalanalysissuggests.Substantialdeficitsprojectedfarintothefuturecan cause a fundamental shift in market expectationsandarelatedlossofbusinessandconsumerconfidencebothathomeandabroad,includingalossofconfidenceintheeconomiccompetenceofgovernment.Theun-favorabledynamiceffectsthatcouldensuearelargely,ifnotentirely,excludedfromtheconventionalanalysisofbudgetdeficits.Thisomissionisunderstandableandappropriateinthecontextofdeficitsthataresmallandtemporary;itisincreasinglyuntenable,however,inanenvironment where deficits are large and permanent.Substantialongoingdeficitsmayseverelyandadverselyaffectexpectationsandconfidence,which in turncangeneratea self-reinforcingnegativecycle in thefiscaldeficit,financialmarkets,andtherealeconomy.

Broad-Based Participation in Growth

Strongandsustainablegrowthisanecessary,butnotsufficient,conditiontoincreasepeople’swell-being.Todate, toomanyAmericanshavefailed

to benefit from our nation’s prosperity. This lack ofbroadly-sharedgrowthisnotonlyinconsistentwiththeprinciplethatallAmericansshouldhavetheopportu-

nitytocontributetoandbenefitfromeconomicgrowthbutalsoinconsistentwithhistoricalexperienceinthiscountry.AsBenjaminFriedmanexplains:

Broad-basedeconomicgrowthinAmericawasnotamyth.NorisittruethatthegrowthAmericansenjoyedintheearlypostwardecadeswasmerelyanaberrationtowhichwenonethelessbecameac-

As we invest in our nation’s future, it is critically important that we restore fiscal responsibility, both to increase economic growth and to make it more sustainable.

3. SeealsoCBO,“TheLong-TermEconomicEffectsofSomeAlternativeBudgetPolicies,”lettertotheHonorablePaulRyan,Washington,May19,2008(www.cbo.gov/ftpdocs/92xx/doc9216/LongtermBudget_Letter-to-Ryan.pdf).

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customed.Thepaceofincreaseinlivingstandardsinthoseyearswaslittlemorethanwhatthenationhadexperiencedonaverageduringthepreviouscenturyandahalf.Itisinsteadourownera,datingfromtheearly1970s,thatstandsoutasexception-al.Arisingstandardoflivingforthegreatmajor-ityofourcitizenshasinfactbeentheAmericannorm,anditiswe,today,whoarefailingtoachieveit(Friedman2005,pp.435–36).

Part of the way to promote broader participation ineconomic growth is to put in place policies that willhelppreparepeopletosucceed,forexample,byinvest-inginkeyareassuchaseducationandscience.Higherlevelsofprivatesavingcanalsobetterpreparefamiliesto avoid economic difficulties because saving and as-setaccumulationgivefamiliesafinancialcushionwhenshockshit.

Another part of the way to achieve broadly sharedprosperityistoestablishpoliciesthatwillhelppeoplereboundiftheydoexperienceeconomicdifficultiesbystrengtheningoursocialinsurancesystem.Forexample,universalhealthinsurancewouldmitigatetheriskoffi-nancialdistressduringillness,andwage-lossinsurancecouldbeconsideredinordertosoftentheblowofjoblossforthosewhoarereemployedatalowerwage.

Inaddition,onedirectwaytosharethegainsofgrowthmorebroadly iswithprogressivetaxation.Giventhatprogressive taxation is justifiedby adesire for“equalsacrifice” andby themore fortunate’sgreater“abilitytopay,”thentotheextentthattheshareofthenation’sincomeaccruingtothoseatthetopincreases,theirabil-itytopayshouldincreaseaswell.Thusrisinginequalitystrengthensthecaseforprogressivetaxation.

Economic Growth and Economic Security

Many policymakers and analysts have beentrainedtobelievethatthetwopolicygoalsdiscussed above—promoting strong and

sustainable economic growth, and securing broad-basedparticipation in thatgrowth—arecontradictory

objectives.HarvardeconomistandformerchairmanofPresidentReagan’sCouncilofEconomicAdvisorsMar-tinFeldstein,forexample,hassaidthatsocialinsuranceprograms“have substantial undesirable effects on in-centivesandthereforeoneconomicperformance.Un-employmentinsuranceprogramsraiseunemployment.Retirementpensionsinduceearlierretirementandde-press saving.Andhealth insuranceprograms increasemedicalcosts”(Feldstein2005,p.1).

Tobesure,thistraditionalviewoffersanimportantcau-tionarynote,anditisimportanttobemindfulofwhateconomistscall“moralhazard”whendesigningpublicprograms.Butthistraditionalviewalsomissesanothersalient point about the modern economy: while eco-nomicgrowthcanclearly increaseeconomic security,economicsecuritycanalsoincreaseeconomicgrowth.

For example, a basic level of security frees people totaketherisks—likestartingabusiness,investingintheirowneducation,or trying anunconventional career—thatleadtoeconomicgrowth(Sinn1995).4Withinad-equateprotectionagainstdownsiderisk,peopletendtobeovercautious,“fearingtoventureoutintotherapidswhererealachievementispossible,”asRobertShillerofYalehasargued.“Brilliantcareersgountriedbecauseofthefearofeconomicsetback”(Shiller2003,p.8).

Similarly,ifhardshipdoesoccur,somedegreeofassis-tancecanprovidetheresourcestohelpafamilythriveagain.Familieswithaccesstosomeformoffinancialas-sistance,educationalandtrainingopportunities,andba-sichealthcarearelesslikelytobepermanentlyharmedbythetemporarysetbacksthatareaninevitablepartofadynamic economy.For families experiencing short-termdifficulties,asafetynetcanthusbeaspringboardtoabetterfuture.

Inaddition,increasingeconomicsecurityisimportantto help more of America’s families and communitiesshare in thebenefitsofglobalization andgrowth-en-hancing policies (Bordoff and Furman 2008). Glo-balization offers substantial aggregate economic ben-efits. One study, for example, found a benefit to the

4. Empiricalevidencealsosuggeststhatgenerouspersonalbankruptcylawsareassociatedwithhigherlevelsofventurecapital;thatworkerswhoarehighlyfearfuloflosingtheirjobsinvestlessintheirjobsandjobskillsthanthosewhoaremoresecure;andthatinvestmentineducationandjobskillsishigherwhenworkershavekeyriskprotections.SeeArmourandCumming(2004);Osberg(1998);Esteves-Abe,Iverson,andSoskice(1999);Mocetti(2004).

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U.S.economyofroughly$1trillionayear(Bradford,Grieco,andHufbauer2005).AsNobelPrize–winningeconomistPaulSamuelson(2005)put itafteranaca-demicpaperhewrotewasmisunderstoodassupportingprotectionism,“Economic history and best economictheorytogetherpersuademethatleavingorcompro-misingfreetradepolicieswillmostlikelyreducegrowthinwellbeinginboththeadvancedandlessproductiveregionsoftheworld.Protectionismbreedsmonopoly,cronycapitalism,andsloth”(p.242).Notonlyisitun-wisetoturninwardandshutouttheforcesofglobal-ization,itisalsounrealisticgiventhesubstantialcross-borderconnectionsthatalreadyexist.Thequestionisnotwhetherglobaleconomicintegrationwillprogressrapidlybutwhether theUnitedStateswillbepartofthatprocessandreaptheresultingbenefits.Moreover,trade drives economic growth throughout the world,particularlyinthedevelopingworld,liftinghundredsofmillionsofpeopleoutofpov-erty(Bhagwati2007;DollarandKraay2002;Collier2007).

Despitetheaggregatebenefits,manywork-ersandcommunitiesarehurtbythedisloca-tionsandrisingincomeinequalityassociatedwithglobalization.Manymorehavelosttheconfidencethattheywillbeabletosucceedinaglobaleconomy.Freetradeadvocateshavelongargued,correctly,thattoincreaseAmerica’spro-ductivityandrestoreconfidence,workersneedthetoolstosucceedthroughgreaterinvestmentineducationandworkforce training.Suchpolicy changes are criticallyimportant,but it is increasinglyevident that theyareinadequatetoaddresstherealchallengesglobalizationposesforAmericanfamilies.Globalizationisundoubt-edlyoneofthefactorsresponsibleforrisinginequalityandinsecurity,togetherwithtechnologicalchangethatincreasingly rewards skilled workers and institutionalchanges(Autor,Katz,andKearney2008;LevyandTe-min2007;Lawrence2008).Infact,Americanworkersperceivethatglobalizationisthekeyculprit(Andersonand Gascon 2007).Yale political scientist Kenneth F.ScheveandDartmoutheconomistMatthewJ.Slaugh-ter, a formermemberofPresidentBush’sCouncil ofEconomicAdvisers,recentlyexplainedtherelationship

betweenincomegrowthandprotectionismthiswayinForeign Affairs (2007):“U.S.policy is becomingmoreprotectionistbecausetheAmericanpublicisbecomingmoreprotectionist,andthisshiftinattitudesisaresultofstagnantorfallingincomes.Publicsupportforen-gagementwiththeworldeconomyisstronglylinkedtolabor-marketperformance,andformostworkerslabor-marketperformancehasbeenpoor”(pp.34-35).

Supportersoftrademustmuchmoreforcefullyadvo-cateforpolicyreformstostrengthenthesafetynetandhelpmakesurethatAmerica’sprosperityismorebroad-lysharedthanhasbeenthecaseinrecentyears,bothbecauseitistherightthingtodoandalsobecauseitwillhavetheindirectbenefitofhelpingtosustainsupportforcontinuedglobalization.Universalhealthinsurance,enhanced retirement security, a reformed unemploy-

ment insurance system, and possibly wage insurancewould all help ease dislocations and cushion incomeshocks.Inaddition,moreprogressivetaxpolicywouldbeanefficient, immediate,well-targeted,andscalablepolicytooltohelpmaximizethenumberofwinnersandminimizethenumberoflosers.TheAmericanbusinesscommunitymaybebeginningtorecognize,aswell,therealitythatcontinuedsupportfortradeandglobaliza-tion,inwhichbusinessinterestshaveanevergrowingstake,iscontingentonpoliciestospreadthebenefitsofglobaleconomicintegrationmorebroadly.5

Inshort,economicgrowthwillultimatelybestrongerandmoresustainableifallAmericanshavetheoppor-tunity to contribute to andbenefit from it. Inpoliti-calterms,excludingsignificantpartsofthepopulationfromthefruitsofeconomicgrowthalsorisksabacklash

government policies that are targeted to those most in need should be well designed, based on evidence and real-world experience about what works.

5. Infact,aJune2007bipartisanreportcommissionedbytheFinancialServicesForumreachedpreciselythatconclusion(Aldonas,Lawrence,andSlaughter2007).

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thatcanthreatenprosperity.AsformerFederalReservechairmanAlanGreenspanputit,“Anincreasedconcen-tration of income . . . is not the type of thing whicha democratic society, a capitalist democratic societycanreallyacceptwithoutaddressing”(JointEconomicCommittee2005,p.10).

Effective Government Can Enhance Economic Growth

Markets are the cornerstone of economicgrowth,but soundpublicpolicyandeffec-tive government are also critical to a suc-

cessfuleconomy.Markets themselvescannot functioneffectively without a government to enforce the ruleof law and provide basic regulations. Market forces,whilepotent,willnotbythemselvesgenerateadequateinvestments ineducationand training.Norwillmar-ketsgeneratesufficientinvestmentsinscienceandin-frastructure—such as the type of government-funded“bluesky”researchwithnoimmediatelyapparentcom-mercialviabilitythatledtotheInternet’screation—thatarecrucialtoeconomicgrowth.Marketsalsomayfailtoprovideindividualswiththetoolstomanageeconomicrisk,whichnecessitatessocialinsuranceprogramslikeunemploymentinsurance.Suchgovernmentprogramshelpindividualstoshareinournation’sprosperitybybetterweatheringeconomicstorms.Similarly,marketsdonotsufficientlyprovidemeritgoods,likeeducationorhealthcare,whichcanhelppeople realize theop-portunitiesofamarket-basedeconomy.

Givenourlargefiscalchallengeandscarceresources,itisimportantthatgovernmentpoliciesbetargetedtothosemostinneedandbewelldesigned,basedonevidenceand real-world experience about what works. Spend-ingonineffectiveprogramsorinpoorlytargetedwaysnotonlysquandersscarceresources,italsounderminespublicfaithingovernmentefficacy.Insomecases,evi-dencesupportslargergovernmentinvestments,suchasinearlychildhoodeducation(LudwigandSawhill2007).Inmanyothers,however,governmentresourcescanbebettertargetedthantheyaretoday.Forexample,whilecollegecostshaverisensharply,sohavethereturnsoncollegeattendance.Thusitmaynotbethemosteffec-tiveuseofgovernmentresourcestosubsidizethecostofcollegeforthemanyindividualswhowillmorethanrecouptheirinvestment.Instead,somehaveproposed

thatthegovernmentbettertargetitsresourcestoassistthosewhofallsignificantlyshortofthoseaveragefutureearningsbyexpandingtheavailabilityofincome-con-tingentloans(Moss2007).Althoughthereturnstocol-legeeducationhaveincreased,theyarealsomorevar-ied,sotheinvestmentinacollegeeducationisagreaterriskthanitusedtobe.Theuseofincome-contingentloansallowsthegovernmenttofocuslimitedresourcesonthosewithparticularlylowincomesinagivenyearratherthanprovidelessassistancetoalargernumberofpeople,formanyofwhomtheinvestmentinhighered-ucationpaysoffhandsomely.Similarly,theduplicativeandoftenpoorlydesignedspendingandtaxprogramstosubsidizecollegemaybemuchmoreeffectiveiftheywerecombinedintoasingle,streamlinedprogram(Dy-narskiandScott-Clayton2007).Intheareaofclimatechange,governmentfundscanlikewisebebettertarget-ed.Indeed,thegovernmentcouldmorethandoubletheexistingresearchbudgetforclimatechangeandenergysecurityjustbyredirectingfundsthatarecurrentlyusedforcounterproductiveorunnecessaryenergyprograms(Furmanandothers2007).

Policies to Promote Broad-Based Growth

In an effort to advance innovative ideas about howtoinvestinournation’sfutureprosperityandtoen-hance families’ economic security, The Hamilton

Project has released strategy papers offering a broadvisionforpolicyinarangeofareas,aswellasdozensofdiscussionpapersonawidevarietyoftopicsrelatedtopromotingmorebroad-basedgrowth.Thesediscus-sion papers have all been written by leading scholarsandgroundedinreal-worldevidenceaboutwhatworks,notideologyanddoctrine.

Perhapsthemostimportanttopicishealthcare.Inaddi-tiontothe47millionuninsuredAmericans,thetypicalinsuredfamilypays,directlyandindirectly,morethanone-sixthofitsincomeforhealthcare.Andthisexpen-sivecareisfarlesseffectivethanitshouldbe.Providinguniversal, effective, andaffordablehealth insurance isnotjustamajorsocialobjectivebutalsoaneconomicimperativeforatleastfourreasons:first,rapidlyrisingpremiumsputastrainonbusiness,wages,andjobs;sec-ond,ineffectivecareresultsinalessproductivework-force;third,therapidincreaseinpublichealthspendingisakeycauseoftheseriouslong-termfiscalchallenges

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wefaceforMedicareandMedicaid;andfourth,Amer-ica’spatchwork,incompletesystemofhealthinsuranceisasourceofeconomicinsecurityforAmericanfamiliesandimpedestheflexibilityofoureconomy,forexample,throughtheproblemof“joblock”thatprecludesem-ployeesfromswitchingemployersforfearoflosingtheirhealthinsurance.AseriesofHamiltonProjectpapershaveaddressedhealthcareissuesspecifically,providingalternativeapproachesforachievinguniversalcoveragealongwithpolicyproposalstoincreaseaffordabilityandimprovequality.

Addressingclimatechangeandpromotingenergysecu-rityareothercriticallyimportantissues.Estimatesindi-catethatadoublingofgreenhousegasconcentrationswouldreduceGDPby1 to1.5percent indevelopedcountries,andbymuchmoreinagriculture-dependentdevelopingcountries.Theeconomyisvulnerabletooilpriceshocks,whichhaveplayedamajorroleinnineofthetenU.S.recessionssinceWorldWarII.Finally,therearegeopoliticalconcernswithourdependenceonoil,whichoftensupportsauthoritariangovernmentsandcontributestotheU.S.militarypresenceintheMiddleEast.

Ourabilitytoaddressthesechallengesinacost-effective manner will not only deter-minehowmuchGDPgrowthisaffectedbyclimatepoliciesbutalsohowmuchindividualfamiliesareburdened—particularlylow-incomefamilies,whichspend14percentoftheirincomeonenergybills(com-pared to the national average of 3.5 percent) (DOE2006).Economists across the political spectrum agreethat the most effective policy is the use of a marketmechanismtoplaceapriceoncarbonemissions,whichwillinducedemandreductionsandfuelsubstitutionbymakingenergymoreexpensive.Yetunlike thehigherprices we are experiencing today, the increased costwill not accrue toOPECcountriesbut rather to theU.S.government,whichcanthenreturnthemoneytofamiliestooffsetthebiteofhigherenergyprices.TheHamiltonProjecthasreleaseddiscussionpapersoffer-ingpolicyproposalstopricecarbon,throughacarbontaxorcap-and-tradesystem,alongwithproposals forwell-targetedgovernmentinvestmentsinenergytech-

nologyandastrategyforengagingthemajoremittingnationsinaninternationalresponsetoclimatechange.

High quality education is also essential to buildinga highly skilled workforce. America’s extraordinarygrowth in the twentieth centurywasunderpinnedbyahugeexpansionineducation.In1940fewerthan25percentofAmericansovertwenty-fiveyearsofagehadahighschooldiploma;by2000morethan80percenthadgraduatedfromhighschool,andthepercentageofAmericans over twenty-five with a bachelor’s degreerose fivefold during that period (Bauman and Graf,2003,p.4).TheincreaseineducationoftheAmericanworkforceaccountedfornearlyonequarterofthetotalgrowthinlaborproductivityfrom1915to1999(GoldinandKatz2001).Asonewell-knownstudyputit,“Edu-cationisboththeseedandtheflowerofeconomicde-velopment”(HarbisonandMyers1965,p.xi.).

Inaddition,inaneraofstagnantmedianrealwages,itismorecriticalthaneverthatallAmericanshavethetoolsthey need to become part of tomorrow’s high-skilledworkforceandshareinournation’sprosperity.Increas-ingreturnstoeducationareoneofthemajordriversofincreasinginequality(Autor,Katz,andKearney2008;Acemoglu2002).Investingineducationcanhelptooff-setthisriseininequality.Andevenworkerswhodonotreceiveanyadditionaleducationwillbenefitindirectlyasthereductioninthesupplyofless-educatedworkersdrives up their wages.The Hamilton Project has re-leasedpolicyproposalsonarangeofeducationtopics,including early childhood education, stemming sum-mer learning loss, improving teacherquality, reform-ingstudentfinancialaid,andincreasingthenumberofscientistsandengineerswegraduate.

Our future work will continue to advance innovative ideas critical to achieving opportunity, prosperity, and strong, broad-based economic growth.

10 PATH TO PROSPERITY

Healthcare,energyandeducationarejustthreeofmanyimportantgrowth-enhancinginvestmentsthatthena-tionneedstomakeinabroadrangeofareasthatTheHamiltonProjecthasaddressedtodate.Othertopicsinclude promoting income security to guard againststeepandunexpecteddropsinincomeandprovidere-tirementsecurity;reformingourtaxsystemtobemoresimple,progressiveandefficient;improvingournation’sinfrastructure;encouragingscience,technologyandin-novation;andrewardingworkandreducingpoverty.

In addition to long-term, growth-enhancing invest-ments,promotingtheeconomicsecurityofAmericanhouseholds also requires near-term responses to ourcurrenthousingcrisisthatlowertherateofforeclosureandhelpfamilieswhoarestrugglingwiththeirmort-gagepayments—particularlyastheunemploymentrateandfoodandfuelpricesrise.Morebroadly,respondingtotheseproblemswillneedtobepartofthesolutiontotherecentfinancialandcreditmarketturmoil.Weak-enedfinancialconditionsareadverselyaffectingtherealeconomy,which in turn isworseningfinancialcondi-tions, creating a vicious cycle that well-targeted andtimelypolicycanhelpmoderate.AperiodofreducedGDPgrowthisinevitable,butpolicycaninfluencetheextentanddurationofthatslowdown.Towardthatend,TheHamiltonProjectoverthepastyearhasreleasedastrategypaperabouthowtousefiscalpolicytostimulate

theeconomyandconvenednumerouspolicyforumsinwhich leadingexpertshavediscussedhowtorespondtothefinancialmarketturmoilandforeclosurecrisis,aswellashowtoavoidsuchcrisesinthefuture.

Conclusion

Todayweare indangerofbreaking thequintes-sentialAmericanpromiseofupwardmobilityforthenextgeneration,therebythreateningnotonly

America’scharacterbutalsoourfutureeconomicprog-ress—atatimewhentheUnitedStatesfacesgrowingchallengestoitscontinuedeconomicprogress,includ-ingrisinginequality,thefailuretomakecriticalinvest-ments,andanunsustainableandeconomicallydamag-inglong-termfiscalposition.Tomeetthesechallenges,the nation must be willing to make necessary invest-ments now to reap benefits later, and to adopt morerobustpoliciestosharethegainsofourprosperitymorebroadlyandenhancetheeconomicsecurityofAmeri-can families.ConsistentwithTheHamiltonProject’scommitment to identify smart, pragmatic policy op-tions,groundedinreal-worldexperienceandevidence,our future work will continue to advance innovativeideasfromleadingeconomicthinkersinarangeofareascriticaltoachievingopportunity,prosperity,andstrong,broad-basedeconomicgrowth.

T H E H A M I LT O N P R O J E C T n T H E B R O O k I N g S I N S T I T u T I O N 11

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Acknowledgments

Overthepastseveralyears,manyleadingpolicyfigureshavesharedtheirwisdom,adviceandinsightswithusaswedevelopedtheeconomicstrategythatunderliesTheHamiltonProject’sworkandthespecificpolicyproposalsthatpromotethatstrategy.Thoughtoomanytoname,wearegratefultoallfortheirgenerosity,support,andunwaver-inginsistenceonanalyticalrigor.WeareparticularlygratefultoTheHamiltonProject’sAdvisoryCouncilmembers,whohavesustainedandguidedoureffortsandwithoutwhomourpolicyworkwouldnotbepossible.TheHamiltonProjecthasbeenfortunatetoattractanexceptionallytalentedcadreofstaffmembersovertheyearswhohavehelpedbringourpolicyproposalstofruition,andwethankofallthemfortheirinspiredworkanddedicationtoourmis-sion.TheHamiltonProjecthasalsobenefitedenormouslyfrommakingitshomewithinoneofthenation’smostrespectedthinktanks,andweareverygratefultotheleadershipandstaffoftheBrookingsInstitutionfortheircon-tinuedsupportandencouragement.Finally,wewishtothankthemanyleadingacademicsandanalystswhosharedtheirinnovativeideasforpolicyreformwithusanddrewontheirvastexpertiseandempiricalresearchtodevelopthoseideasintoHamiltonProjectdiscussionpapers.

T H E H A M I LT O N P R O J E C T n T H E B R O O k I N g S I N S T I T u T I O N 1�

Authors

ROGERC.ALTMAN

RogerC.Altmanhasservedsince1996aschairmanandchiefexecutiveofficerofEvercorePartners,currentlythemostactiveinvestmentbankingboutiqueintheworld.AltmanservedtwotoursofdutyintheU.S.TreasuryDepart-ment,initiallyunderPresidentCarterasassistantsecretaryfordomesticfinanceandlaterunderPresidentClintonasdeputysecretary.PreviouslyhewasvicechairmanoftheBlackstoneGroupandresponsibleforitsinvestmentbankingbusiness.AltmanisaTrusteeofNewYork-PresbyterianHospital,servingonitsInvestmentCommittee,andalsoisViceChairmanofTheBoardofTheAmericanMuseumofNaturalHistory.HeisaTrusteeofNewVisionsforPublicSchoolsandisamemberofTheCouncilonForeignRelations.HereceivedanA.B.fromGeorgetownUniversityandanM.B.A.fromtheUniversityofChicago.

JASONE.BORDOFF

JasonBordoffisPolicyDirectoroftheHamiltonProject.Bordoffhaswrittenonabroadrangeofeconomicpolicymatters,particularlyincomesecurityandinequality,taxpolicy,andclimatechangeandenergy.BordoffisalsoatermmemberoftheCouncilonForeignRelationsandservesontheboardoftheAssociationofMarshallScholars.HepreviouslyservedasanadvisortoDeputySecretaryStuartE.EizenstatattheU.S.TreasuryDepartmentandworkedasaconsultantforMcKinsey&Co.HegraduatedwithhonorsfromHarvardLawSchool,wherehewastreasurerandaneditoroftheHarvardLawReview,andclerkedontheU.S.CourtofAppealsfortheD.C.Circuit.HealsoholdsanMLittdegreefromOxfordUniversity,wherehestudiedasaMarshallScholar,andaB.A.magnacumlaudeandPhiBetaKappafromBrownUniversity.

JASONFURMAN

JasonFurmanisaseniorfellowattheBrookingsInstitution(currentlyonleave).Hehasconductedresearchandpolicyworkinawiderangeofeconomicpolicyareas,includingfiscalpolicy,taxpolicy,healtheconomics,SocialSecu-rity,andmonetarypolicy.In2005,CQnamedhimoneofthefiveSocialSecurityanalystswho“exertmoreinfluenceovertheSocialSecuritydebatethananyotherindividualsoutsidegovernment.”FurmanpreviouslyservedasdirectorofTheHamiltonProject.FurmanhasbeenavisitinglectureratColumbiaandYaleUniversitiesandatNewYorkUniversity’sWagnerSchoolofPublicService.HereceivedhisPh.D.ineconomicsfromHarvardUniversity.

ROBERTE.RUBIN

RobertE.Rubinhasbeeninvolvedwithfinancialmarketsandournation’spublicpolicydebatesallofhisprofessionallife.Mr.RubinbeganhiscareerinfinanceatGoldman,Sachs&CompanyinNewYorkCityin1966andservedasCo-SeniorPartnerandCo-Chairmanfrom1990-1992.LongactiveinbothnationalandNewYorkCity’spublicaffairs,hejoinedtheClintonAdministrationin1993asAssistanttothePresidentforEconomicPolicyandthefirstDirectoroftheNationalEconomicCouncil.HeservedastheseventiethSecretaryoftheTreasuryfromJanuary1995untilJuly1999.Mr.RubinjoinedCitigroupin1999wherehecurrentlyservesasaDirectorandSeniorCounselor.HealsoservesaschairmanoftheboardoftheLocalInitiativesSupportCorporation,thenation’sleadingcommunitydevelopmentsupportorganization,aswellasontheboardoftrusteesofMountSinai–NYUHealthandasamemberoftheHarvardCorporation.InJune2007Rubinwasnamedco-chairoftheCouncilonForeignRelations.

HAMILTONTHE

PROJECT

Advancing Opportunity, Prosperity and Growth

GeorGe A. Akerlofkoshland Professor of economics, University of California, Berkeley and 2001 Nobel laureate in economics

roGer C. AltmANChairman, evercore Partners

HowArd P. Berkowitzmanaging director, Blackrock Chief executive officer, Blackrock HPB management

AlAN S. BliNderGordon S. rentschler memorial Professor of economics, Princeton University

timotHy C. ColliNSSenior managing director and Chief executive officer, ripplewood Holdings, llC

roBert e. CUmByProfessor of economics, School of foreign Service, Georgetown University

Peter A. diAmoNdinstitute Professor, massachusetts institute of technology

JoHN doerrPartner, kleiner Perkins Caufield & Byers

CHriStoPHer edley, Jr.dean and Professor, Boalt School of law – University of California, Berkeley

BlAir w. effroNPartner, Centerview Partners, llC

HArold ford, JrVice Chairman, merrill lynch

mArk t. GAlloGlymanaging Principal, Centerbridge Partners

miCHAel d. GrANoffChief executive officer, Pomona Capital

GleNN H. HUtCHiNSfounder and managing director, Silver lake Partners

JAmeS A. JoHNSoNVice Chairman, Perseus, llC and former Chair, Brookings Board of trustees

NANCy killeferSenior director, mckinsey & Co.

Advisory CounCil

JACoB J. lewmanaging director and Chief operating officer, Citigroup Global wealth management

eriC miNdiCHChief executive officer, eton Park Capital management

SUzANNe NorA JoHNSoNSenior director and former Vice Chairman the Goldman Sachs Group, inc.

riCHArd PerryChief executive officer, Perry Capital

SteVeN rAttNermanaging Principal, Quadrangle Group, llC

roBert reiSCHAUerPresident, Urban institute

AliCe m. riVliNSenior fellow, the Brookings institution and director of the Brookings washington research Program

CeCiliA e. roUSeProfessor of economics and Public Affairs, Princeton University

roBert e. rUBiNdirector and Senior Counselor, Citigroup inc.

rAlPH l. SCHloSSteiNPresident, Blackrock, inc.

GeNe SPerliNGSenior fellow for economic Policy, Center for American Progress

tHomAS f. SteyerSenior managing Partner, farallon Capital management

lAwreNCe H. SUmmerSCharles w. eliot University Professor, Harvard University

lAUrA tySoNProfessor, Haas School of Business, University of California, Berkeley

dANiel B. zwirNmanaging Partner, d.B. zwirn & Co.

doUGlAS w. elmeNdorfdirector

The Brookings Institution1775 Massachusetts Ave., NW, Washington, DC 20036(202) 797-6279 n www.hamiltonproject.orgHAMILTON

THE

PROJECT

Advancing Opportunity, Prosperity and Growth