By focusing on supply, economists and policymakers have lost sight of the fact that driving down wages destroys demand.

For a few decades now, American economic policy has focused on keeping inflation low, assuming that the natural rate of unemployment is fairly high. In general, that has led to stagnating wages. Family income today is at 1990s levels. Adjusted for inflation, hourly wages are at levels they last reached in the 1960s. The wage share has been falling.

Some economists claim inequality is the bigger issue due to runaway income at the top. My own view is that a better way to understand America's dilemma to focus on stagnation for the broad middle and bottom. As I note in my latest piece for the New York Review of Books, the incomes at the top, which account for most of the inequality, are made in finance -- much of which is a game Wall Street plays with itself. For this brief piece, I will put that issue aside.

It is time to talk about the importance of high wages to sustainable growth in America and Europe -- indeed, in most countries around the world. The precarious circumstances in the eurozone today are widely understood, as was the U.S. financial crisis, as a problem of fiscal and financial discipline. In fact, I'd argue they were mostly a product of economic models based on low wages that were not sustainable.

Both Germany and China had models that depended on low wages. I'd also argue that the U.S. had a low wage policy to fight inflation, which had become public enemy number one in the minds of even the most sophisticated economists since the 1970s. These economists persistently over-estimated the so-called natural rate of unemployment, which gave the Federal Reserve justification to keep rates up to suppress inflation. In practical fact, the Fed under Alan Greenspan was mostly appeasing bond markets, which Greenspan watched very closely as the signal of inflationary expectations.

We can now focus our attention on wage deficiency. You might be surprised to think Europe or even American financial distress is a wage problem, not a financial discipline problem. But it is time to think this through clearly. We are told too often that disciplined Germany must bail out undisciplined Greece, that America is angry at China's currency manipulation and China at America's profligate government deficits. We might almost believe this is the heart of the matter.

But at the center of the issue are low wage shares and inequality. And one reason the world's policymakers, technocrats, and economists don't think about it clearly enough is that they focus too much on "supply" as the principal source of economic growth -- of machinery, ideas, technology, resources, and human capital quality labor. They focus far too little on "demand" as a source of economic growth.

So here is the brief version of this case. To simplify, aggregate demand must be strong enough to utilize the full productive capacity of a nation in order to optimize growth and keep unemployment down. Demand is largely consumption, which in turn is mostly a product of salaries and wages. In other words, wages must be high enough to support demand for goods and services.

Already we start with an over-simplification. Higher demand, for example, can itself increase productive capacity by promoting investment. On the other hand, higher wages can undermine profits and dampen growth. New School professor Lance Taylor tells us America's economy is profit-led rather than demand-led. I am a little skeptical of this argument, but Taylor readily admits conditions may change. Servaas Storm, the Dutch economist, who has models similar to Taylor's, believes that is exactly what is happening.

If wages are too low, then, there won't be enough demand to support growth. Similarly, if inequality is too high, demand will be insufficient because high-end consumers usually save far more than the rest -- there will be a dearth of consumption. The International Labor Organization is now arguing along these lines.

There are basically two ways to increase demand, and they are at the center of the current financial crises. One is to export much more than one imports. Germany and China are the classic examples of this. Wages are relatively low in Germany and very low on a world basis in China, however hard China is trying to raise them. Low wages and low currency values keep their exports competitive. The other model is to borrow to pay for consumption. The U.S., where wages are also low as we noted earlier, is the classic example of this.

The main point is that neither of these economic models of growth is sustainable.  There is no longer any doubt about the American debt-led model. It collapsed dramatically in 2008 with damaging implications for the U.S. and the rest of the world.

But many seem to believe that the export model can last forever. Indeed, Germany is cited as a model of rectitude for its moderate wages and discipline. It is now called on to bail out the profligate Greeks, and maybe the Italians, the Spaniards, and the Portuguese. There is a moralistic and sometimes I think ethnically prejudiced subtext for this simple diagnosis -- a diagnosis the media repeats carelessly.

Sign up to have the Daily Digest, a witty take on the morning’s key headlines, delivered straight to your inbox.

The export model, however, is not sustainable because Germany and China are increasingly dependent on borrowing nations (or relatively high-wage but less export-competitive nations) to buy all those goods. If Germany suddenly left the eurozone, for example, a new deutsch mark would likely rise sharply in value and put its exports at a disadvantage. Then what? One wonders how carefully some of the anti-bailout German economists have thought this through.

In fact, Germany and China are as dependent on those who buy their goods as those who now over-borrowed may be dependent on Germany and China to bail them out. As suppliers of careless debt, their institutions also bear heavy responsibility for their debtors. Thus, both Germany and China have moral obligations to support a bailout.

I'd like to say that we should not ascribe blame. But some shifting of blame back to Germany and China is necessary if only to balance responsibility for corrective action now. The euro is priced too low for Germany, giving it a great advantage, and China manipulates its currency downward.

The world requires rebalancing. The answer is to raise wages and wage share and reduce inequality. America would then need to borrow less, and China and Germany would need to export less. Current account balances -- big surpluses for Germany and China and big deficits for the U.S. and much of the rest of the eurozone -- would move closer to balance.

One way to start would be immediate coordinated fiscal stimulus. If all provide stimulus, the leak from deficit nations due to the high propensity to import would be mitigated. Similarly, looser monetary policies in the rich nations are required, even as America addresses its so-called zero bound problem. Germany should lead a stimulative fiscal charge in Europe.

Nations, however, are generally doing just the opposite. Germany is mildly stimulative, but austerity economics is tragically in vogue in countries like France. Those within the eurozone, because they cannot cut the value of their currencies, see lower wages as the only recourse to make their exports competitive and generate growth. On the contrary, it will of course bring on slow growth or recession. This has become a vicious circle.

While I don't advocate ending the euro, the single currency makes it difficult for those within the eurozone to adjust currencies. But ideally, China's currency should rise, which has of course been widely discussed in the U.S. and Congress. (Keep in mind, this may provide more advantage to China's even lower-wage rivals, like India, Bangladesh, and Indonesia, than the U.S. and some economists currently consider.) There should be continuing pressure to make this happen.

China needs a strong domestic market to make growth sustainable, but it is not clear that Germany fully understands that it does as well. The European Central Bank has also been especially destructive. Its obsession with low inflation has damaged Europe for a couple of decades. Now, its narrow view that it should not be a lender of last resort could do the euro in.  One wonders whether these technocrats are any better than first year doctorate students who believe all the rudimentary theory they are taught.

Aggressive short-term, medium-term, and long-term strategies are also needed to raise wages in the U.S. On an after-tax basis, policies are a little easier to coordinate. In the U.S., where the top one percent of earners make almost 20 percent of the income, higher taxes should be levied on the wealthy and then distributed as transfers to the rest -- or used to reduce deficits to keep the deficit hawks quiet.

But the more significant task for the U.S., and the more difficult one, would be to fix the broken jobs machine in America and generally raise wages before taxes. Job growth was very slow before the Great Recession, as was wage growth. Such policies could include direct hiring by the federal government, persistent large infrastructure and energy investment programs, a living wage policy, and a higher minimum wage.

In sum, there seems to be a deep and potentially tragic misunderstanding of the sources of today's problems. Internationally, as I note, we should stress how important it is that wages rise in China. Germany must also learn as a nation that its low-wage, export oriented policies are beggar-thy-neighbor policies that cannot last forever, and that it played a part in the financial distress in peripheral eurozone nations.

And the U.S. should get over its own obsession with low inflation, born with the general acceptance of a natural rate of unemployment in the 1970s that no one could forecast but many pretended they could. Keeping wage growth suppressed was a direct outcome of this inflation focus. Compounding the problem is cultural acceptance of low wages and the powerful and widespread influence of Wall Street, which rewards CEOs with stock options that are only valuable with high short-term profits, encouraging them to lay off workers and keep labor costs down.

I plan to write a longer and more nuanced take on this argument, but in light of widespread misinterpretations and possibly calamitous developments in Europe, I thought it important to make this point clear: "It's wages, stupid."

Roosevelt Institute Senior Fellow Jeff Madrick is the author of Age of Greed.

Encouraging free trade was one part of the Roosevelt administration's broader effort to revive the global economy and create good jobs for all Americans.

The recent activity in the U.S. Senate on trade -- including the passage of three long-awaited trade bills on Wednesday and the passage of the Currency Exchange Rate Oversight Reform Act on Tuesday -- has revived a longstanding economic debate between the advocates of freer trade versus those who favor protectionism. Not surprisingly, with the United States suffering its worst economic crisis since the Great Depression and with unemployment still hovering at 9 percent, an increasing number of Democrats and Republicans, especially those representing manufacturing states, have come out in favor of protectionism. The fact that the passage of the three trade agreements -- with South Korea, Columbia, and Panama -- was linked to an extension of the Trade Adjustment Assistance program (a 50-year-old measure designed to provide assistance to workers displaced by foreign trade agreements) is but one indication of the increasingly protectionist mood in Congress.

A far more significant indication of the strength of protectionist sentiment can be seen in the broad bipartisan support for Tuesday's legislation aimed at punishing China for currency manipulation. Both Republican Senator Jeff Sessions and Democratic Senator Chuck Schumer, for example, have emerged as key champions of the bill. But other Republicans and Democrats have expressed strong reservations about the measure, noting that one possible outcome of the bill might be a trade war with China. In a recent editorial in the Wall Street Journal, Senator Robert Corker even went so far as to liken the bill with the passage of the 1930 Smoot-Hawley Tariff, which he argued resulted in a "deeper depression and a decade of increased joblessness."

Corker's reference to damage wrought by Smoot-Hawley is accurate. The passage of Smoot-Hawley did indeed touch off strong counter-measures among our trading partners, leading to the establishment -- among other things -- of the 1932 British system of Imperial Preference, which allowed goods within the British Empire to be traded with little or no tariff restriction, locking out American goods and commodities and in the process weakening the U.S. economy. What is missing from Senator Corker's warning is any reference to the tremendous effort that emerged during the Roosevelt administration to do away with protectionism; an effort that would ultimately not only break down the Smoot-Hawley Tariff, but which would also pave the way for the creation of the multilateral global economy we live in today.

The driving force behind this effort was FDR's Secretary of State, Cordell Hull, who considered the passage of Smoot-Hawley an unmitigated disaster. Hull had been arguing in favor of freer trade for decades, both as a Democratic congressman and later senator from Tennessee. Given the long-standing protectionist tendencies of Congress -- which reached their zenith with the passage of Smoot-Hawley, the highest tariff in U.S. history -- Hull faced an uphill struggle to accomplish this task. He also had to overcome FDR's initial reluctance to embrace his ideas, as the president preferred the policies of the "economic nationalists" within his administration during his first year in office. By 1934, however, FDR's attitude began to change, and in March of that year the president threw his support behind Hull's proposed Reciprocal Trade Agreements Act -- a landmark piece of legislation that fundamentally altered the way in which the United States carried out foreign economic policy.

Convinced that the country was not ready for a truly multilateral approach to freer trade, Hull's legislation sought to establish a system of bilateral agreements through which the United States would seek reciprocal reductions in the duties imposed on specific commodities with other interested governments. These reductions would then be generalized by the application of the most-favored-nation principle, with the result that the reduction accorded to a commodity from one country would then be accorded to the same commodity when imported from other countries. Well aware of the lingering resistance to tariff reduction that remained in Congress, Hull insisted that the power to make these agreements must rest with the president alone, without the necessity of submitting them to the Senate for approval. Under the act, the president would be granted the power to decrease or increase existing rates by as much as 50 percent in return for reciprocal trade concessions granted by the other country.

Sign up to have the Daily Digest, a witty take on the morning’s news, delivered straight to your inbox.

The 1934 Act granted the president this authority for three years, but it was renewed in 1937 and 1940, and over the course of this period the United States negotiated 22 reciprocal trade agreements. Of these, the two most consequential were the agreements with Canada, signed in 1935, and Great Britain, signed in 1938, in part because they signaled a move away from Imperial Preference and hence protectionism, and in part because they were regarded as indicative of growing solidarity among the Atlantic powers on the eve of the Second World War. It is also important to note that Hull, like many of his contemporaries, including FDR, regarded protectionism as antithetical to the average worker -- first, because in Hull's view high tariffs shifted the burden of financing the government from the rich to the poor, and secondly, because Hull believed that high tariffs concentrated wealth in the hands of the industrial elite, who, as a consequence, wielded an undue or even corrupting influence in Washington. As such, both FDR and Hull saw the opening up of the world's economy as a positive measure that would help alleviate global poverty, improve the lives of workers, reduce tensions among nations, and help usher in a new age of peace and prosperity. Indeed, by the time the U.S. entered the war, this conviction had intensified to the point where the two men concluded that the root cause of the war was economic depravity.

Inspired by this sentiment, Congress renewed the RTAA again in 1943 and 1945. The U.S. would also champion the 1944 Bretton Woods Accords, which set up the International Monetary Fund and World Bank, and after the war, Hull's RTAA would go on to serve as the model for the negotiation of the 1947 General Agreement on Tariff and Trade (GATT), the critical institution upon which the modern global economy stands and the precursor to the World Trade Organization (WTO) established in 1995. Hence, it was U.S. reciprocal trade policy -- a policy that had changed little since its inception during the New Deal -- combined with a newfound determination to play a leading role in world affairs, that guided U.S. policymakers in the mid-1940s towards a new post-war international economic order -- an economic order still largely in operation to this day.

Of course, it is important to remember that the Roosevelt administration's efforts to expand world trade were accompanied by such critical pieces of legislation as the National Labor Relations Act and Fair Labor Standards Act, which vastly strengthened the place of unions in American life. The 1930s and '40s were also years in which the government engaged in an unprecedented level of investment in America's infrastructure and industry -- largely through deficit spending -- that helped vastly expand our manufacturing base and render the United States the most powerful industrialized country in the world. Our efforts to expand trade and do away with protection were only part of a broader effort to reform the U.S. economy in such a way as to provide what FDR liked to call "economic security" for every American.

This comprehensive approach, though not always pretty and sometimes contradictory, was nevertheless based on the simple principle that it is a fundamental responsibility of government -- even a liberal capitalist government -- to ensure that the free market is managed in such a way as to produce the greatest good for the greatest number of people, not the other way around. With 16 million Americans under- or unemployed, one would think that any moves to endorse freer international trade would be accompanied by an even stronger effort to create jobs here at home, but based on the Senate's recent rejection of President Obama's jobs bill, it seems highly unlikely that this will be the case.

David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute. He is currently writing a book on U.S.-UK economic relations in the 1930s, entitled Cordell Hull, Anthony Eden and the Search for Anglo-American Cooperation, 1933-1938.

The serious, disciplined Germans who want to punish the rest of Europe should remember how America lent them a helping hand after World War II.

There is a general idea around that the euro is bound to fail because you can’t get 17 countries to agree on a single fiscally oriented rescue policy. Christine Lagarde, the new IMF director and the most refreshing economic voice in Europe, has said so. Countless commentators have said so. It is now widely accepted that the end of the euro is inevitable because of this.

There is little doubt that even to expand the EU bailout fund is a laborious and unwieldy process. But other measures can be taken, including pressure on the European Central Bank to expand credit and buy the debt of the nations on the brink as well as extra-mural efforts to borrow against the rescue fund.

In fact, to save the European Monetary Union requires only one nation’s assent, not 17. Yes, Finland and the Netherlands are resisting helping Greece and others. But in truth, Europe will do whatever Germany wants it to do. Germany has the trade surplus, the assets, and the confidence; Finland and the Netherlands, though financially strong, will not likely buck the Germans if the Germans mean it.

The Germans seem convinced they have made their economy stronger than all others due to their manufacturing, innovation, and self-discipline. Preaching with a kind of moral authority, they want others, namely Greece, to take their medicine. In a huff, prestigious Germans are leaving international institutions because the miscreants of the rest of Europe are trying to get away with their profligacy.

Germany did not succeed economically alone, however. It did so in good part because a single currency, the euro, underpriced its exports to most of the other EMU nations. Let it be said loud and clear that without substantial demand from others, the export models of the world, like Germany's and China's today and Japan’s before them, would not work. The U.S. has long enabled the growth of Japan and China because of its high level of consumption, based self-destructively on rising consumer debt. The same is partly true for Germany as well, but most of their trade is with the EU. And China, recognizing this, has gone to some lengths to pump up its domestic market.

Now, Germany is a remarkable economy nonetheless, as was the Japan of Toyota and Sony and as China is today. It is a champion of manufacturing focus, from which America could learn a lot. But while the world cannot believe what the Tea Party is doing to America, it had better pay attention to what a certain kind of German economist (not all by any means) is doing to the world. These educated and seemingly somber men argue that fiscal probity is almost everything, that the ECB better not buy sovereign debt of other nations, and that Germany had better not put more money into a rescue fund to help Greece restructure and ward off similar failures in Italy and perhaps Spain (whose government was not profligate). They apparently will not back a Eurobond, which is badly needed -- a bond guaranteed by all members of the EU. They are so far opposing expansion of the rescue fund. And they will not insist their private sector share some losses.

Sign up to have the Daily Digest, a witty take on the morning’s key headlines, delivered straight to your inbox.

There is little empirical evidence to back Germany's intransigence, despite the erudition of some of the nation’s chief intransigents. Walter Bagehot, an early editor of The Economist, the American historian Charles Kindlberger, and the far-seeing economist Hyman Minsky are agreed that there is no easy way out in a fiscal crisis. But there is a general rule: act early and act big. If not, odds are the crisis will deepen, spread, and become harder to manage.

Germany is incapable of learning this lesson. They are in the “don’t throw good money after bad” school of thought. It is a gut feeling, not a theory based on thought, history, or statistical evidence. And it usually goes hand in hand with austerity economics.

Many forgive Germany their current narrowness and seeming self-concern because of the punishing early history with runaway inflation. I would urge them to remember a different lesson. After World War II, when the Germans were down and out, due clearly to their own doing, many Americans did not want to support them. But the American government wisely launched the Marshall Plan and opened its border to European imports. Those were gestures -- not perfect but generous by current European standards -- that led to 25 years of prosperity.

Germans should recall that part of their history and not demand that a people like Greece’s abide cruel austerity, even if it had to do with irresponsible government policies, to satisfy a policy based on a gut feeling rather than serious thinking.

Tim Geithner is now preaching such a lesson to Europe: act big and act fast. He is proud of TARP and the expansive Federal Reserve policy that more than reinforced it. He is proud of the Obama stimulus of early 2009. To an extent -- but only to an extent -- he should be. Compared to what the Europeans are doing today, he should be.

Of course, America still has a long way to go. TARP did not force private bondholders to share losses. It did not force banks to reorganize. It did not force them to restructure household debt the way Geithner would like Europe to restructure Greece. In sum, it did not force banks to lend. America needs stimulus and it needs mortgage debt restructuring. Nevertheless, America did much better than Europe is now doing in its hour of crisis, despite political bumps in the preceding 100 years. Establishing the Federal Reserve was no easy matter, requiring the 1907 financial crisis to give it momentum — the one that J.P. Morgan basically managed privately. Its ability to create fiat money was challenged in the Supreme Court in the 1970s.

The point is this: Europe has it in its grasp to solve the problem. Plow money into a restructured Greek economy and then try to get these economies to grow. This means foreswearing austerity -- look how poorly Greece, Portugal, and England are now doing with their austerity budgets (though Geithner praised England's).

What's needed instead is serious stimulus in Germany and elsewhere to generate growth. But we are fighting economic ignorance in the guise of educated, articulate, ever-so-serious men in nice suits. This happened before in the 1930s. These are really tough guys with strong gut feelings that the weak or disadvantaged just better get a grip. And maybe there is a bit of prejudice towards those in their southern rim -- or if not prejudice, a rather remarkable lack of compassion. To them, we can only say: Remember America in its finer moments after World War II… please.

Roosevelt Institute Senior Fellow Jeff Madrick is the author of Age of Greed.

If the U.S. wants to tackle climate change and stay competitive in the global economy, it needs to stop playing by the old rules and start making new ones.

The looming global warming catastrophe could be worse, in the long term, than any war, social collapse, or single famine in human history. We need to scale up renewable technologies as quickly as possible -- by any means necessary. And that is exactly what the Chinese are doing. According to Steven Lacey at Climate Progress, while world solar cell manufacturing capacity was only 100 MW in 2000, it is now 50,000 MW –- and China by itself accounts for 57 percent. But this puts Americans, including Lacey and other environmentalists, in a peculiar position. On the one hand, we desperately want more solar and other renewable technologies. But on the other hand, by scaling up so fast, the Chinese might wipe out the American solar panel industry. Instead of trying to stop the Chinese from doing what they are doing, the U.S. needs to learn from them.

The environmental community has tended to contradict itself when it comes to rolling out renewable technologies. On the one hand, leaders such as Al Gore and my personal favorite global visionary, Lester Brown, call for a World War II-style mobilization to quickly convert our civilization so that we can avert ecological calamity. But the means advocated, such as putting a price on carbon, are not up to the task. We can't afford to wait to see if the market will do what is necessary.

The Chinese are not putting a price on carbon. In fact, they won't even negotiate a target for how much carbon they will output by 2020 or any other date. But they are doing something much more important: They are showing the world how you scale up a technology with a World War II type of effort. Some call it “cheating,” but if this is cheating, let's have much more. What are the Chinese doing right?

First, China has a five-year plan. In the U.S., corporations have five-year plans, and so does the Department of Defense. But imagine a president giving a State of the Union address announcing such a plan. There would be cries of “socialism!” I say, socialism, shmocialism, whatever works. The longer the time range, the better. Congress is now debating a multi-year transportation bill; the same should be done for the entire energy sector.

Sign up to have the Daily Digest, a witty take on the morning’s key headlines, delivered straight to your inbox.

Second, many Chinese “banks," if you want to call them that, make money virtually free, and often don't even get their “loans” back. The government gives companies land –- which, by the way, Lincoln and the Republicans gave to railroads when obstructionist Southern Democrats were out of the way during the Civil War. Where would the U.S. be today if the railroad industry hadn't received a huge boost at the dawn of the industrial era, or if the Internet hadn't received a similar boost 100 years later?

Third, the Chinese import foreign technology and require foreign companies that set up factories in China to train Chinese engineers. Ever since the British tried to prohibit their engineers from traveling at the beginning of the Industrial Revolution so that Britain could maintain its dominance, other countries have been trying obtain -- or, as the originating country calls it, steal -- new technology. In a way this, is all part of a 1,000-year cycle, as the West gained many important technologies like the compass, printing, and gunpowder from the Chinese, who are now borrowing technology back.

Fourth, the Chinese are producing hundreds of thousands of engineers for their expanding manufacturing economy. Forty percent of the engineers in the U.S. are involved with manufacturing, according to a New York Times piece by Louis Uchitelle. Uchitelle reports that the Chinese manufacturing sector has either just grown larger than the American one or will shortly do so. As manufacturing declines here, it becomes much less attractive to have a career as an engineer. In China, on the other hand, being an engineer is a clear way to make it into the good life.

The point is not to idolize China. Far from it -- China is in a race to see whether it can switch to clean technologies before its dirty ones overwhelm its ecosystem and cause its economy to collapse, and its currency is much too low. But nations have always learned from other nations. Sometimes, the “teachers” cry “unfair!” when the “students” don't play by the rules. One hundred years ago, the British complained that the Americans were always copying their inventions.

But innovation is not simply a matter of technology; it is also a matter of policy. If something works, use it, even if it offends conventional wisdom. In fact, particularly if it offends conventional wisdom. That's what happened during the New Deal era of the 1930s, when the old policies were clearly failing and new ones had to be put in place (for instance, instead of tinkering with market rules in order to develop the Tennessee Valley, the TVA rebuilt the whole area). With global warming and other environmental problems, such as the end of cheap oil, threatening civilization, we need policy innovations even more than we need technological ones.

Jon Rynn is the author of the book Manufacturing Green Prosperity: The power to rebuild the American middle class, available from Praeger Press. He holds a Ph.D. in political science and is a Visiting Scholar at the CUNY Institute for Urban Systems.