Productive investments and social spending are essential to a healthy advanced society. Yet US president Barack Obama’s proposal to cut Social Security benefits and the bipartisan idea that social programs are “crowding out” investment set up a false choice between the two.
If we look at the federal budget in isolation, it appears that the government is growing in size. In the context of the US economy, however, the government is playing a role that large corporations have abandoned. The private sector has shed responsibility for both productive investments in areas like research and training and in providing social benefits to workers. To compensate, the government needs to be bigger than before. We cannot set an arbitrary limit on government spending without looking at the broader historical picture.
A generation ago, large corporations formed the backbone of the industrial economy. Many of these corporations were “vertically integrated,” in which they controlled all stages of production from more basic research through commercial development into marketable products. Companies had their own internal research labs, such as AT&T with Bell Labs and Xerox with PARC. While the research they conducted did not show up as government spending, it provided an important public benefit in spurring innovation that drove growth throughout the economy. These corporations also provided widespread on-the-job training to unskilled workers that led to stable employment and middle-class wages.
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