An economist reveals which political party will be best for the health of the new economy and why.
Which party would be better for the health of the new economy, Republican or Democratic?
Just two years after Republicans celebrated their political revolution, Democrats may well regain the House and retain the presidency. That astonishing possibility results in no small part from both parties' failure to understand the nation's new economy.
The new economy is made up of networks of small growth companies overwhelmingly located in highly developed urban environments. Those networked businesses -- ranging from metalworkers in Springfield, Mass., and Troy, Mich.; to biomedical companies in the Research Triangle of North Carolina and in San Diego; to entertainment companies in Hollywood; to computer businesses in Silicon Valley and Austin -- lead U.S. job growth, productivity, and international competitiveness. Yet both major political parties have failed to recognize the importance of such strong urban economies.
Though the Republicans recaptured Congress on a probusiness platform in 1994, they failed to address the needs of companies operating in the new economy. Instead, they focused on repealing the assault-weapons ban, securing tax breaks for large corporations and old-money interests, pushing through anti-urban spending cuts, and promoting a cultural jihad against immigrants, gays, and career women. Those initiatives clashed with the priorities of the wildly diverse, younger, and immigrant-rich workforce fostering high-wage, high-skill industries in the heart of America's urban communities.
Democrats historically also did little for the new economy even though they dominated most of the regions where America's industrial transformation took place. Transfixed by big-time Washington programs, major corporations, public-sector unions, and ethnic and class conflict, Democrats became indifferent, if not actively hostile, to the entrepreneurial companies springing up in their midst. The new economy grew in defiance of traditional Democratic ideology. If the Old Democrats -- those who are wedded to that brand of Democratic ideology -- win big this November, several troubling scenarios may unfold:
Anti-urban taxes. An Old Democratic resurgence would generate momentum for steeply progressive taxes. Major urban areas where networked companies operate, however, have much higher living costs than more conservative, less productive rural townships and small cities. In the past, "soak the rich" tax efforts did not compensate for that fact, which cost those operating in urban areas billions of dollars.
Anti-urban environmental policies. Old Democrats also historically imposed the strictest environmental constraints on heavily developed areas, putting those districts at a disadvantage relative to more conservative, peripheral regions containing much more valuable habitats. Environmentalism of that sort would once again push economic activities that belong in urban areas into mountain, forest, and desert locations. That perverse outcome would simultaneously weaken the new economy and cause ecological harm that far outweighed any benefits generated in the cities.
Bias toward large companies. Old Democrats believe that only giant companies and the public sector produce jobs that count; selfish entrepreneurs offer nothing but low, nonunion wages and dead-end careers. Utterly oblivious to the new economic realities fostering dramatic recoveries in places like California, Texas, and Michigan, in the early 1990s Old Democrats proclaimed that defense cutbacks would destroy the very possibility of life in their districts. Benign neglect is the best the new economy can expect from a future Old Democrat regime.
Mandates. Before the conservative tide stymied their ambitions, Old Democrats hatched plans to impose the most onerous age, disability, workers' compensation, and entitlement mandates on small businesses. Given the financial tightrope most entrepreneurs walk, increased federal mandates and associated litigation and compliance costs would cripple the new economy.
Network fragmentation. Consolidated business networks earning premium returns on their collective creativity are critical to a nation's economic success and social advancement. Old Democratic policies produce the opposite result by making urban business increasingly untenable and forcing businesses to scatter in more hospitable but isolated peripheral areas. That fragments the new economy, shifting industry from skill-based to price-based competition -- a suicidal outcome when anyone, anywhere can copy products, undercut prices, and put overwhelming pressure on a country's wages and jobs.
The Republicans offer a vision defined by the nation's less productive, most intolerant periphery; the Old Democrats would revert to an agenda from the 1930s with the added mix of increasingly strident class, gender, and ethnic appeals. Neither party addresses the new economy's complex social, economic, and regulatory concerns.
But there are organizations working to create better alternatives. One is a small group of business and political leaders -- many formerly active in the moderate Democratic Leadership Council -- who formed the Institute for the New California earlier this year. The institute's initial goal is to show that people in the new economy have political priorities strikingly distinct from those of the core Republican and Democratic constituencies.
Morley Winograd, cofounder of the institute, author of Taking Control: Politics in the Information Age (Henry Holt, 1996), and a former Michigan Democratic Party chair, believes it's imperative to focus on the new economy. "Most think tanks court the two major parties by producing studies that validate existing political philosophies," he says. "We want to document the needs of America's new information-based economy and show political elites that if they change their governing perspectives to address such concerns, they will be rewarded at the ballot box."
The institute is conducting a pathbreaking survey of how different work experiences -- in highly bureaucratic corporations or public agencies, in less dynamic provincial companies, and in the decentralized, rapidly changing new economy, for example -- generate distinct political attitudes. It hopes the survey will catch the eye of at least one major party, or perhaps a new party, so that growth policies consistent with the new economy will finally become a national priority.
We've had a revolution from the Republican periphery, and now we face the prospect of an Old Democratic counter-revolution. It's time for a revolution led by the new economy, the key to the nation's present prosperity and the most promising option for its future.* * *
David Friedman is a Los Angeles-based urban economist and research fellow at the MIT Japan Program.