From his perch as a macroeconomist and longtime student of the U.S. economy (a half-century and counting), Solow discerns a troubling picture in the current economic scene: Corporate profits have roared back from the recession, and "are at or near all-time highs in the U.S. right now," and "real output, real GDP, what the economy throws off for its people per year is just about back to where it was three years ago, at the peak."
Yet the "single-most important fact about the American economy now, is that we have unused capacity to produce," he said. The economy could be generating 7 percent more in goods and services per year — in the order of a trillion dollars' worth of output — but instead there is "idle or underworked capital, as well as unemployed labor." Six million fewer people have jobs today than three years ago.
For Solow, there "is no mystery" behind this slack productivity: Demand has nosedived. Spending drives market economies, and in the United States, consumer spending is responsible for 70 percent of GDP. But wages of American workers have been "almost stationary" for the past decade, and families hit by debt in the recession and a loss in value of their homes, bonds and equity are inclined to save, not spend. In addition, the increasing inequality of income and wealth has meant "a fall in real family income near the median," placing increased burdens on middle-class consumers. To top it off, the construction industry continues to be "a disaster area in our economy," said Solow, with millions of workers idled for the foreseeable future by a surplus of housing inventory.
There is no fast fix for low productivity and high unemployment, Solow said, and recovery schemes proposed by politicians are "drivel." But there are some policies "most serious experts agree" the U.S. should pursue. While the nation must eventually embrace balanced budgets, believes Solow, first and foremost, "we should at all costs avoid further fiscal contraction — that is, reductions in public spending or increases in taxes right now, which can only weaken demand and spending further." Instead, all levels of government ought to "make useful expenditures" in such areas as construction of public facilities and in grants to states and cities to reemploy teachers, he said.
While there is "no excuse for boondoggles, for spending for its own sake, there is room for spending on useful things." With a trillion dollars of human and capital resources sitting idle, "maybe literally free to the economy," said Solow, "the problem is to get them used in a reasonable way."
This is where the energy sector comes in. While it represents only 8 percent or so of the U.S. GDP, "energy has a special importance," especially over the long run, Solow said. This is "not about the next eight to nine quarters." Technological innovation, and specifically the type of energy research sponsored by organizations such as MITEI, noted Solow, attracts capital investment, leading the way to new enterprises, industries and skilled jobs — just what is needed to pick up some of the nation's underutilized production capacity.
Another area where the energy sector could make a significant impact: helping reduce the trade deficit. Reverse the nation's addiction to foreign hydrocarbons, suggested Solow, and replace foreign oil with domestic products, whether natural gas or renewables. The energy sector "is clearly one possible gateway" to the kind of economy that sustains "a climate of continuous innovation and the creation of a labor force to match it with the skills and initiative to operate that kind of economy." Indeed, a ceaseless flow of invention and commercialization of technology, Solow suggested, is "the only prayer we have of sustaining a high-wage economy in a sea of billions of low-wage workers."
He concluded, "This is something that MIT, through the Energy Initiative, is trying to exploit, and I think that's a very important contribution to the future of the national welfare."