Excellent assessment of America's economic outlook

The United States is in a tough spot. As we dig ourselves out from a serious financial crisis and a deep recession, our very efforts to recover are exacerbating much more fundamental problems that our country has let fester for too long. Beyond our short-term worries, and behind many of today's political debates, lurks the deeper challenge of coming to terms with America's place in the global economic order.

Our strategic situation is shaped by three inescapable realities. First is the inherent conflict between the creative destruction involved in free-market capitalism and the innate human propensity to avoid risk and change. Second is ever-increasing international competition. And third is the growing disparity in behavioral norms and social conditions between the upper and lower income strata of American society.

These realities combine to form a daunting problem. And the task of resolving it turns out not, by and large, to be a matter of foreign policy. Rather, it compels us to consider how we balance economic dynamism and growth against the unity and stability of our society. After all, we must have continuous, rapid technological and business-model innovation to grow our economy fast enough to avoid losing power to those who do not share America's values " and this innovation requires increasingly deregulated markets and fewer restrictions on behavior. But such deregulation would cause significant displacement and disruption that could seriously undermine America's social cohesion " which is not only essential to a decent and just society, but also to producing the kind of skilled and responsible citizens that free markets ultimately require. Moreover, preserving the integrity of our social fabric by minimizing the divisions that can rend society often requires government policies " to reduce inequality or ensure access to jobs, education, housing, or health care " that can in turn undercut growth and prosperity. Neither innovation nor cohesion can do without the other, but neither, it seems, can avoid undermining the other.

Reconciling these competing forces is America's great challenge in the decades ahead, but will be made far more difficult by the growing bifurcation of American society. Of course, this is not a new dilemma: It has actually undergirded most of the key political-economy debates of the past 30 years. But a dysfunctional political dynamic has prevented the nation from addressing it well, and has instead given us the worst of both worlds: a ballooning welfare state that threatens future growth, along with growing socioeconomic disparities.

Both major political parties have internal factions that sit on each side of the divide between innovation and cohesion. But broadly speaking, Republicans since Ronald Reagan have been the party of innovation, and Democrats have been the party of cohesion.

Conservatives have correctly viewed the policy agenda of the left as an attempt to undo the economic reforms of the 1980s. They have therefore, as a rhetorical and political strategy, downplayed the problems of cohesion " problems like inequality, wage stagnation, worker displacement, and disparities in educational performance " to emphasize the importance of innovation and growth. Liberals, meanwhile, have correctly identified the problem of cohesion, but have generally proposed antediluvian solutions and downplayed the necessity of innovation in a competitive world. They have noted that America's economy in the immediate wake of World War II was in many ways simultaneously more regulated, more successful, and more equitable than today's economy, but mistakenly assume that by restoring greater regulation we could re-create both the equity and prosperity of that era.

The conservative view fails to acknowledge the social costs of unrestrained economic innovation " costs that have made themselves powerfully apparent in American politics throughout our history. The liberal view, meanwhile, betrays a misunderstanding of the global economic environment.

To grasp the difficulty of this moment for America, we must see more clearly the pain involved in economic innovation, the price we would pay for stifling innovation, and the daunting social obstacles that stand in the way of balancing the two.