Now it's time to focus on growing the economy

Recent economic news has been broadly reassuring. Retail sales are strong, November saw the best job gains in three years, the federal deficit is shrinking, the stock market is robust, and the Fed is expressing enough faith in the economy that an interest rate bump next year is considered a certainty.

Yet the public remains unconvinced. This is partly because perceptions haven’t caught up to reality. For many middle- and lower-class families, economic circumstances have not changed very much. Average wages, adjusted for inflation, have not risen in keeping with the good economic news. The median net worth of households is actually a bit less than it was in 2010, just after the official end of the recession — and the gap between the wealthy and the rest of us is wider than ever.

Strong numbers do, however, offer one unambiguous piece of good news: The pressure on policy makers to focus on near-term or immediate problems has eased, which means they can now focus on the fundamental question of economic growth. That’s where their attention should turn.

A strong economy that is growing for everyone, not just the people at the top, offers many benefits. The quality of people’s lives improves. Political problems become more manageable. More people have greater economic opportunity. There’s more social mobility and more tolerance of diversity.

Because the economy is always at or near the top of voters’ concerns, the temptation for the policy-maker is to support another tax cut or the next move to stimulate the economy in the short term. Now is the time for policy-makers to resist this and try to understand the large forces — technology, automation, globalization — that drive our economy. As Princeton economist Alan Blinder, political strategist Al From and others have pointed out, the key is to concentrate on creating the environment in the country for sustained, non-inflationary economic growth.

To begin with, we have a chance to get our fiscal house in order and pursue long-term deficit reduction. This is a crucial early step for government to take in creating a sound environment for economic growth.

This means modernizing entitlement spending and shaping a tax-reform package that focuses on investments to boost productivity and help the economy to grow for everyone, through research and development, job training, upgrading skills as well as technology, and reducing outsourcing.

At the same time, it means eliminating public subsidies to individual enterprises. That money can be spent on boosting the economic skills of ordinary Americans through education and training. Policies aimed at strengthening our education system from pre-kindergarten to graduate school, and at promoting lifelong learning and a workforce capable of upgrading its skills to meet changing needs, will have a far more salutary effect on our economy than singling out politically connected enterprises for tax and other benefits.

There are other steps government policy-makers can take to improve broad economic growth. We need to expand trade through open markets and simplify the regulatory structure so that it protects Americans without burdening companies beyond reason. And we must address our nation’s deferred infrastructure needs, which hinder the smooth functioning of every business that relies on transporting its goods.

The same applies to reforming government itself. A government that does not work well — that wastes money, fails its regulatory responsibilities, and cannot make timely decisions — undermines economic growth. You can see this, for instance, in our current inability to pass comprehensive immigration reform: We cannot increase economic growth without the people our labor force needs, from mathematicians and engineers to migrant farm workers.

Finally, policy-makers need to remember that economic growth means providing a ladder out of poverty for the truly needy. Providing opportunity for low-income Americans through the Earned Income Tax Credit and programs to upgrade their skills is vital. No one who works full time should be poor in this country.

Free, competitive markets are the best way to deliver goods and services to Americans. Government must not get in the way of that system. Nor should it stand idle. The right response by government to our economic challenges is not to focus on the immediate economic problems of the day, but to invest in economic growth for all.

Lee Hamilton is director of the Center on Congress at Indiana University. He was a member of the U.S. House of Representatives for 34 years.