Investment - an economic paradigm for liberals

Liberals need an economic philosophy other than "take money from the rich and give it to the poor." We used to have a great one: it was called "a rising tide lifts all boats." Many smart liberals still use the latter (Clinton, for example), and it really gets results.

I've argued many times that the modern version of this workable liberal economics is to focus on investment. People need to save their money for the future. The government needs to invest in public goods like infrastructure and research. For almost 30 years, the Republicans have been the party of consumption - giving people tax cuts and telling them to "go shopping." The Democrats have told people to work hard and think of the children, while the Republicans have told people to party and burn the furniture.

And if there's one good thing about this financial crisis, it's that it'll force people and the government to stop borrowing-and-consuming and start investing. If there's another good thing, it's that it might put an end to the "conservative" economic philosophy of borrow-and-spend. And if there's a third good thing, it's that it might force liberals to forget about wealth redistribution and go back to boosting sustainable economic growth through investment.

Fareed Zakaria agrees:

In the short term, all the solutions to the current crisis require that governments take on more debts and larger obligations. This is inevitable and necessary. But that doesn't mean we should, as some noted economists advocate, stimulate the economy with more tax cuts. That would be only one more way to keep the party going artificially—like asking a drunk to go to AA next year, but in the meantime to have even more whisky. A far better stimulus would be to announce and expedite major infrastructure and energy projects, which are investments, not consumption, and therefore have a much different effect on the country's fiscal fortunes. (They are not listed separately in the federal budget, but that's just bad accounting.)

In the medium and long term, we have to get back to basics. Households, for instance, should save more. Governments should put incentives in place that make such savings more likely. The U.S. government offers enormous incentives to consume (the deduction of mortgage interest being the best example), and it works. We have the biggest houses in the world, the thinnest flat-screen TVs and the most cars. If we were to tax consumption and encourage savings, that would also work. Regulations on credit-card debt should be revised to ensure that people understand the risks and costs of these instruments. Moving in this direction would be good for families and for the government as well.

There's basically no chance that Republicans will go along with a program like this. They're too focused on winning the short-term election cycle, handing people another bottle of whiskey. If there's a fourth good thing about this financial crisis, it's that it might get rid of a whole lot of Republicans.