Commentary Type

It's Time to Found a New Republic

Daron Acemoglu (Massachusetts Institute of Technology) and Simon Johnson (PIIE)


Most Americans tend to believe that they've lived under the same form of government, more or less, since the country was founded in late 1700s. They're mistaken.

It's true that there have been important continuities. The American conception of what government should and should not do is deeply rooted in clear thinking at the start of the republic; the country has long preferred limited government and effective constraints on capricious executive action. But this persistence of core ideas (and the consistent use of the same buildings in Washington, DC) obscures the dramatic changes that have taken place within the governing institutions themselves.

In fact, formidable challenges at the end of the 19th century were met by fashioning a transformation so thorough it could effectively be deemed a "Second Republic." This new republic came with significantly different economic and political rules—and, as a result, enabled the American system to survive and even thrive for another century. Today, faced with serious economic and political dysfunction, we are in need of another round of deep institutional renewal: a Third Republic.

The conditions that brought about the first transformation of American society are strikingly similar to those we see today. At the root of the problems confronting the United States by 1900 was a wave of innovation that sped up growth. The direct benefits of these new technologies accrued to a few, while many others became more uncertain about their economic future.

Early in the 21st century, we have reached a similar phase; the latest technology enables the offshoring of many of the manufacturing jobs that had previously been the mainstay of the middle class, or automates them out of existence. And we witness newly extreme concentrations of economic power, which are again making our politics less genuinely democratic.

There are differences too, of course. The modification of the American republic early in the 20th century would not have been feasible, for instance, without the Civil War, which tore down slavery. Still, there are lessons to be learned.

The prime driver of reform at the end of the 19th century was the progressive movement, itself a reaction to the accelerating technological change and the rise of oligarchs. If America as we know it—or, even better, a renewed, reinvigorated version of it—is to survive for yet another century, it will have to replicate the progressives' achievements. The first task will be to understand the degree of improvisation which accounted for those successes.

* * *

The American Revolution took place in a largely agrarian economy, with a few pockets of commercial activity on the East Coast. Through the 1850s, population growth continued and economic change was undeniable—but the opportunities provided by existing technology would, for the most part, be quite recognizable to the Americans who had fought the British. This would soon change.

Immediately before the Civil War it took at least three weeks to cross the United States, an impressive achievement but also an arduous journey that few would seek to make on a routine basis. In the decades that followed, however, the development of the world's greatest railroad network added 150,000 miles of track and lowered this travel time to less than four days, creating vast new possibilities for moving crops, manufactured goods, and people. The emergence of a unified national market, spanning a continent, made the growth of large companies not just feasible, but actually irresistible across a wide range of industries. Small companies were bought up—or forced out of business—by well-financed competitors. By the 1890s, some railroad companies employed over 100,000 people—much larger than any previous private enterprise, and significantly bigger than the size of the US military.

With great increases in productivity come great opportunities—not just for prosperity, but also for market power and predatory pricing.

With great increases in productivity come great opportunities—not just for prosperity, but also for market power and predatory pricing. In the mid-1860s John D. Rockefeller was a regional player with one refinery in Cleveland and many competitors. By the early 1880s, Rockefeller and the myriad affiliates of Standard Oil controlled around 90 percent of oil refining facilities and pipelines in the country. In other industries too, new forms of monopolies, cartels, and "trusts" were on the rise, creating extraordinary wealth for their owners across a wide range of sectors such as steel, shipping, and tobacco.

The entrepreneurs—derisively called robber barons by their opponents—quickly came to dominate American politics. New money supported candidates and promoted policies at local, state, and national levels. The Senate became known as a millionaires' club, and for good reason. Policies pursued by the country's leaders further promoted, for the most part, even greater concentration of wealth.

Confrontation and conflict resulted as citizens and workers resisted this dominance and demanded a fairer share, including higher wages and fewer required hours of work. Strikes involving hundreds of thousands of workers became commonplace: the Great Railroad Strike of 1877, the Great Southwest railroad strike of 1886, the Carnegie Steel strike of 1892, the 1894 Pullman Strike, and the anthracite coal strike of 1902, to name just a few.

The progressives were a loose alliance of urban reformers who wanted cities to run better—with less corruption and fewer people in poverty—and state-level politicians focused on the power and abuses of big business. Iconic figures who came to represent the progressive movement included Theodore Roosevelt, the high-profile head of the New York City police who later became state governor and U.S. president; Jane Addams, who led reform efforts on education, housing, and health care in Chicago; and Sen. Robert La Follette of Wisconsin, who made a national political name for himself by opposing the domination of big corporations and railroads.

Change to the constitutional fabric of the republic during the Progressive Era did not come easily, or even according to any strategic plan. There were many confused and even noxious ideas that came under the progressive banner, such as eugenics, anti-immigrant hatred, and the prohibition of alcohol. And the fact that the progressive agenda added up to something coherent and effective also owed something to luck: There was no unified grand vision at work.

And yet, something on a grand scale was achieved nonetheless. The progressives' lasting success was the natural result of fighting for detailed changes, often in specific cases or at the local level, adding up to an impressive but also improvised set of adjustments in what government was allowed to do—and what top elected officials tried to implement.

Legal actions against trusts are a good example. The Sherman Antitrust Act of 1890, which disallowed some forms of collusion, was likely intended more to be used against trade unions than against business monopolies—and this was consistent with the earliest interpretation by courts. But in 1902 President Theodore Roosevelt used the legal authority of the Sherman Act to initiate the breakup of Northern Securities, a powerful railroad trust backed by J.P. Morgan. Subsequent cases and supporting legislation established the idea that government should and would confront potential abuses of market power, a major new idea in American public policy.

By 1914, the country had chosen a completely different path from what had seemed likely two decades prior. This included putting in place what once was the ultimate progressive pipe dream: a federal income tax that could serve as the basis for redistribution from rich to poor. The fight over creating that tax was brutal and lasted for decades. It was fought in the courts, in Congress, and at the ballot box. But eventually the matter was settled in the most decisive manner possible: the Sixteenth Amendment to the Constitution of the United States.

Almost as important was the creation of the Federal Reserve—the country's first genuine central bank—in 1913. Under President Woodrow Wilson, the government took on a broader responsibility for avoiding financial crashes and for maintaining a high level of employment. This was not a system that worked smoothly at first, partly due to the impact of World War I and its international aftermath, but also due to largely self-imposed limitations on what the Fed was willing to do. But following a substantial redesign—and consequent expansion of its toolkit—during the Great Depression, the Federal Reserve became a mainstay of the American economy.

The progressives understood, through bitter experience, that politics could not be separated from economics. Their response to the economic ills created by the concentrated power of business was to demand not just economic reform, but political reform—on critical issues going so far as to amend the Constitution.

The Seventeenth Amendment, which was adopted in 1913, required the direct election of US senators by popular vote; this was a major adjustment in the structure of democratic power. The Nineteenth Amendment, ratified in 1920, granted all American women the right to vote.

The progressives succeeded in fundamentally restructuring US political institutions, creating a new place for constructive government policy that aimed to boost growth, create jobs, and redistribute income. The government could now break up monopolies, reduce the impact of financial crises, and impose taxes on very rich people. And, when hard-pressed as in the early 1930s, the government could create jobs directly. Nothing about the expanded role of government during the New Deal would have been remotely possible before the progressives.

* * *

American growth in the decades that followed World War II was based on remarkable new technologies that went back to the 1930s, but whose main effects were not felt until after the war, such as electricity, the internal combustion engine, new drugs and chemicals, air travel, plastics, new communication technologies (including the telephone and fax machine), new entertainment technologies (radio, movies, and television), and countless process innovations that increased manufacturing productivity.

These technologies transformed what we consume, how we work, and where we live. They disrupted organizations and destroyed jobs, but also helped create many millions more jobs and lifted almost all economic boats. The United States has never had an equal society by international standards, but post-1945 growth significantly boosted incomes both at the top and at the bottom of the income distribution.

The US economy also became more globalized during these decades, in the sense that imports from other countries increased—and so did our exports to those places. Helping countries rebuild after World War II created larger markets for American appliances, cars, planes, and movies. American goods became cultural icons around the world.

By the start of the 1980s, however, this world had begun to change. Other countries, such as Japan, had figured out how to make high-quality manufacturing products. American consumers wanted cheaper goods—such as textiles, clothing, furniture, and electronics—and falling transportation costs made it easy for American companies to establish global supply chains running across borders.

People could see "their" jobs leaving local communities and reappearing in distant places, often controlled by the same managers.

People could see "their" jobs leaving local communities and reappearing in distant places, often controlled by the same managers. At the same time, spectacular improvements in the silicon chip and the falling cost of computer technology made possible a new age of automation, in which increasingly sophisticated machines took over tasks previously performed by labor.

Initially, this seemed no different from what had happened in the 1950s and 1960s. But the intensity of this computer-assisted wave of automation in manufacturing and some services—first for low-skill jobs and then for medium-skill jobs—amounted to a profound departure from the pre-1980 pattern. Workers displaced from good jobs found it increasingly hard to be reemployed with similar wages and benefits.

The days in which technological progress lifted the incomes of all Americans seemed to be gone. Instead, productivity gains translated into high incomes for people who owned companies and highly educated workers who were already well-paid. For most of the population, there has been very little growth in inflation-adjusted incomes since the 1980s. And the system of personal income tax is much less effective at redistributing income today than it was in the 1950s and 1960s.

Globalizing firms also found it increasingly straightforward to reduce their corporate income taxes. The bigger and more international a company's operations, the easier it has become for them to formally own patents and other intellectual property in low-tax jurisdictions. Today the effective corporate tax rate on an immensely profitable company like Apple, for example, is allegedly negligible.

Just like at the end of the 19th century, this economic dysfunction has produced political dissatisfaction and a turn against the status quo. The election of Donald Trump as president can be traced to multiple factors, but one defining element is the perception by many voters that they have been left behind in recent decades. Productivity has increased on average, but many feel that their economic future has become much less certain—a remarkably similar situation to what prevailed in the 1890s.

As in the 1890s, the established political system, on either side of the aisle, is not producing solutions to our current predicaments. Some of this is lack of foresight. Some of it is directly because money and influence have permeated every contour of our political system in a way unseen since at least the age of the robber barons. At the turn of the 20th century, the wealthy resisted higher taxes, putting up a fierce struggle against the Sixteenth Amendment. Presidents Roosevelt, Taft, and Wilson were opposed at every turn when they tried to impose restrictions on what powerful business people wanted to do. It is no different today.

* * *

We need to coalesce around how best to create shared prosperity. This necessitates increasing productivity—the growth of which has been weak of late—and creating more well-paid jobs as well as finding better ways of redistributing the gains from new technologies and globalization in the fairer way. Like the progressives, we can't hope to agree on a complete road map forward, but that does not mean that we cannot begin. We should start with egregious economic problems and then address the political structures that resist attempts to improve the situation. The world is very different from what it was in 1900, but there are definite parallels in terms of what we need.

Three major economic changes will help.

Redesign antitrust for the era of big data: The role of large, dominant corporations in the US economy has reached alarming proportions. This is not just because of Google, Apple, Microsoft, and the like in the tech sector. Even in other parts of the economy, a handful of firms across a broad range of sectors—such as mobile phones, air travel, beer brewing, and hospitals—have increased their market shares and profits at the expense of other companies and of the consumer. Just as it was for the progressives, the first order of business is to reduce the power of these corporations by antitrust and other regulations.

But we need more than the existing tools and perspectives to achieve this. Market power in the age of railroads was based on building a bigger network, and owning key routes between major hubs. Market power for the future is increasingly based on controlling large amounts of data, because it is more, better quality, digitized information that lets you train machine-learning algorithms effectively.

The robots are coming, just like the movies have warned, but the real power—for good and ill—is in software and increasing returns to data. If one self-driving car company does well initially, it will be able to collect more data—and then further improve its algorithm. Other companies will not be able to catch up.

The conventional commercial doctrine is that data are proprietary to the companies that collect them. This needs to change profoundly and completely since the playing field can only be leveled by making data available to all potential competitors. One way of achieving this is to ensure data belong to the people who generate the information, i.e., to individuals who drive cars, surf the internet, and buy goods. Enforcing this principle will ensure that data can be accessed by all, but also that individuals are compensated for the activities that generate information, at the same time as receiving a strong degree of privacy protection.

Rethink education—and rebuild social safety as a trampoline, not a net: The progressive movement was made possible by, and then gave a further impetus to, free high school education for everyone—a revolutionary or even preposterous idea when first proposed, which in retrospect greatly increased the productivity of workers in manufacturing and more broadly.

Today we need a complete rethinking of education, from preschool through post-college, including much more emphasis on acquiring flexible skills. People need to become capable of working with all kinds of new technology and dealing with the computer programs that are under development. Most importantly, more people need to develop skills that will be complementary to what new machines can do.

Artificial intelligence will destroy some lines of work completely—as it has already started to do in finance, accounting, and inventory control. For example, Amazon's warehouses already have an incredibly high degree of automation, and that company's virtual assistant Alexa (and its descendants) threatens to massively reduce the number of people working as customer service representatives. But in other occupations, artificial intelligence will simply increase the potential productivity and effectiveness of the workforce.

New technology will also help create entirely new tasks and occupations that can generate jobs for the next generation. For instance, cybersecurity, an entirely new field, will not only deploy algorithms to detect threats and attacks, but will generate employment for engineers to design the products, experts to examine algorithmically identified threats, and people to work on infrastructural investments.

We can see these changes only in broad contours at this time, but they clearly imply a need not only for a major expansion of higher education across all kinds of skills, but also an urgent and complete restructuring of US schools towards providing a broader and more flexible bundle of skills.

At the same time, the country's social safety net, which was never truly comprehensive, has become further frayed—precisely because the emphasis has been just on catching people when they fall, that is, limiting the severity of their poverty.

At the same time, the country's social safety net, which was never truly comprehensive, has become further frayed—precisely because the emphasis has been just on catching people when they fall, that is, limiting the severity of their poverty. The focus instead needs to be on helping people bounce back into the labor force and rise higher through being able to get a better job. People must be better able to get ahead through hard work, whatever their family background, and to withstand all kinds of adverse shocks—from globalization, technology, or any other source, and must be able to do so without their families suffering undue hardship.

This is an essential part of sharing the prosperity that will come from higher productivity. A basic income guarantee for everybody might help, but such proposals are neither sufficient nor properly targeted. Giving $1,000 to everyone will not have much effect on middle- and high-income families. A smarter safety net would provide more assistance for people making transitions from one job to another.

Making high-quality education free for everyone would be a step in the right direction in this context. Technology can help with this, including through all kinds of on-line instruction. Loading up on student debt does not really help anyone—or our nation—prepare for what comes next in the world economy.

Leveling the playing field for labor: The tax cost to the employer of paying a worker $50,000 is about $5,000. And if spending on machines reduces corporate taxes—as is often the case—this encourages the firm to employ less labor. At the same time, the existing US tax system also provides a big tax break for debt-financed investment—that is, the sort of investment a company would make when buying, say, a bunch of shiny new robots.

In effect, the tax system subsidizes and encourages investment in machines. If we lived in the world of the 1950s, this would not be so bad, because most of the new machines then complemented workers in tasks they were already performing. But today the subsidies go to robotics and artificial intelligence algorithms that are directly replacing workers.

The economy needs a fundamental restructuring of the tax code to lower the taxation on labor and remove all of the subsidies to machines so that the playing field is leveled for labor. We should not fear robots that can increase productivity and benefit us all—but we would be ill-advised to subsidize their deployment when this comes at the direct expense of workers.

The same principle applies to offshoring and outsourcing. Globalization, too, can be turned into a force for shared prosperity, but not when companies are subsidized for shifting jobs abroad because it reduces their tax bills or enables them to sidestep regulations. A genuinely comprehensive tax reform must be a central part of efforts to level the playing field for labor against both capital and offshoring.

* * *

The progressives understood that their economic reforms required change in the political system. This is no less true today. The three broad reform areas outlined above won't get off the ground in the existing political system and, even if they did, they would likely be implemented in a half-hearted manner and duly reversed.

Just as in the time of robber barons, we need political reform that strengthens democracy by reducing the power of special, moneyed interests on the political process and unaccountable politicians.

Bringing sunlight to influence activities: A first step in strengthening US democracy would be reducing the amount of money in politics. Campaign finance reform is one oft-emphasized area, and rightly so. The huge resources necessary for running a campaign not only make political candidates turn to individuals and corporations with big pockets, but practically shut off the ability of regular citizens to have their voices heard.

But campaign finance is the tip of a much nastier iceberg. Money calls the shots in Washington not just because of campaign financing, but because of lobbying and the broader influence industry. Lobbies have traditionally been much harder to regulate, because much of their work is performed behind closed doors (as opposed to campaign financing, which is more clearly visible). The only way of neutralizing the effects of lobbies is by creating greater transparency.

In this, technology can help. Artificial intelligence and big data analytics can be used to track everything that happens in the political sphere—automatically raising flags when they detect frequent meetings with certain networks of individuals or excessive amount of resources being expended relative to what is normal or regarded as acceptable. Crucially, this information will not be collected and guarded by a government agency, but will be made available to the entire public.

All elected politicians and their aides will need to agree to forgo a substantial amount of privacy in their public lives in order for this system to work. Some people may, as a result, choose not to subject themselves to this transparency and decline to go into the realm of public policy. But do you really want shadowy characters controlling the nation's future?

Ending gerrymandering: Gerrymandering—changing the boundaries around congressional districts to ensure a particular outcome—makes a mockery of democracy. It reduces representativeness and thus exacerbates the political fault lines. Technology can help here as well. A constitutional amendment could easily require a fair and automatic redrawing of boundaries as population shifts, where the parameters of how such redistricting will take place are specified in advance and transparently to avoid the temptation for political manipulation.

Strengthening the judiciary: Democracy is not an elective dictatorship. It functions well only when its constituent institutions are strong; this includes an independent judiciary and an independent civil service. But the US political system makes these important bulwarks subservient to the elected president. Another important step for strengthening our democracy is a constitutional amendment to increase the independence of the judiciary and the civil service, removing the power of the president to appoint judges (except Supreme Court justices) and prosecutors, and strengthening the role of career civil servants.

For example, not only can the president remove prosecutors who may be investigating those close to the administration, but the political appointment process often paves the way to secret settlements agreements with powerful people and organizations—and judges bless these deals. Elections for judges and prosecutors is not a better solution either.

But professional appointments by peers, supervised by the Senate, can go a long way in ensuring non-partisanship if it is done in a transparent manner. Here, too, technology can help by making it public whether candidates have questionable links and their record of partisan behavior. Similarly, reducing the extent of political appointments in the bureaucracy can create greater continuity and professionalism in core departments, while reducing the ability of politicians to manipulate the bureaucracy.

* * *

The progressive movement cleaned up the streets of large cities and took care of the trash (literally). Today, it offers us useful lessons: American institutions have undergone large-scale, transformative change before; and they can do so again. The American Third Republic needs to clean up the influence industry and strengthen the institutional foundations of our democracy. Democracy has had a rough decade, prompting many to doubt its future or vibrancy. The problem today, just as at the beginning of the 20th century, is not too much democracy, but too little of it. We can and must revitalize our democracy by utilizing all the tools at our disposal. But to do so, we must begin.

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