Economist's View: The Rise of Populism

リンク: Economist's View: The Rise of Populism.

Jonathon Chait explains the recent rise of populism within the Democratic Party:

Were Clintonites Wrong About the Economy?, Freakoutonomics, by Jonathan Chait, New Republic: In 1993, mere months into the Clinton era, the new administration went to war with itself. Liberals in the Cabinet argued that the central problem of the U.S. economy was the vast middle class that was not seeing its income improve--a problem, they said, that could only be addressed through massive public investment. Moderates, including Robert Rubin, then the chairman of the National Economic Council, replied that the central problem was restoring economic growth, which could only come about by slashing the budget deficit. The moderates won. Their triumph was ... bitterly mourned in Locked in the Cabinet, the memoir of liberal Labor Secretary Robert Reich. President Clinton's first major economic address "mentions education, and job skills," lamented Reich, "but the real heart of the message is the importance of reducing the deficit."

By the end of the Clinton years, the centrist ideology that emerged victorious from this skirmish came to be known as "Rubinomics" ... This economic vision encompassed several elements: fiscal responsibility married to controlled progressive investment, a belief in the importance of cultivating Wall Street's confidence, and a suspicion of populism. But, at its deepest level, it reflected an assumption that economic growth could be harnessed to the benefit of all Americans, not just the rich.

When Clinton left office, the Rubinites looked like prophets. Everything they hoped for had come true. Businesses invested more. Incomes grew, and not just for the rich. Families at the middle of the income distribution saw their incomes grow... The poverty rate fell...

Today, however, the Rubinites have been thrown into doubt. ... The economy is growing ..., but, essentially, all the gains are going to the rich. ... ...[F]iguring out just why this is happening, and what to do about it, has begun to unravel their confidence in the moderate remedies that not long ago seemed unassailable. ...

Conservatives, for their part, have grown enraged that the public does not adequately appreciate the economic bounty it is enjoying under Bush. The Wall Street Journal editorial page dubbed the current recovery the "Dangerfield economy" (meaning it gets "no respect") and speculated that people only believe the economy is bad because they have been fed misleading reports by the biased liberal press. ...

The most obvious mystery is: Why is this happening now? ... For a long time, ... the ... leading theory ... was something called "skill-biased technological change." The theory, in a nutshell, is that the development of new technologies, especially computers, has made mental skills more important. ... Therefore, the theory goes, workers with college educations have thrived, and those without have suffered. It's a nice theory, and one that seems intuitively correct. It also vindicates the basic free-market model, in which rising wages for those at the top are simply a natural reflection of their rising relative economic value.

But confounding evidence has piled up in recent years. First, Europe, which is exposed to the same changes in global trade and technology, has not seen anything like the increase in inequality found in the United States. Second, the salaries of those workers who ought to be best positioned to gain from technological change have not risen much at all. ... Third, the whole pattern of rising inequality does not suggest a split between the educated and the uneducated. The rise in inequality isn't between the top one-fifth and everybody else; it's between the top one-hundredth and everybody else. As a matter of fact, over the last five years, college graduates have watched their wages drop...

If the skill-biased technological change theory were true, then the answer to rising inequality would be to make your workers more skilled. That is exactly what the Clinton administration did... And ... that continues to be the Bush administration's answer to inequality. Whenever economists associated with the administration are asked about the rising gap between the very rich and the not very rich, they inevitably cite skill-biased technological change, offer up some anodyne musings about the need for education, and quickly change the subject.

If, on the other hand, you reject the theory of skill-biased technological change, you are left with an altogether more discomfiting explanation. Rising inequality must not be the logical outcome of the free market, the invisible hand working its magic. Instead, it must reflect the rising social, economic, or political power of the rich.

Economists, especially those on the center left, have lately been paying renewed attention to explanations for rising inequality that center around the lack of bargaining power for labor. First, the purchasing power of the minimum wage has withered away, reducing wages for workers at or near the bottom. ... Second, labor unions have shriveled. Less than 8 percent of the private-sector workforce belongs to a union, down from more than 20 percent three decades ago. And, third, globalization has thrown much of the workforce into competition with low-paid overseas labor. ...

It would be an exaggeration to say that the Rubinites have acceded to the labor-liberal worldview. But there are a lot of straws in the wind. ... The Democratic Leadership Council--once thought of as labor's arch-foe within the Democratic Party--has embraced the idea of a "card-check" system to make it easier for workers to form unions. And moderate liberal economists have, in sundry ways, tempered their enthusiasm for free trade with deeper worries about the dislocating effects of trade. ...

Even Rubin himself has begun saying some highly unRubin-like things. In his interview with The Nation last summer, he mused about the ... ways global trade can bring down incomes for unskilled workers in advanced economies. ...

Since the outset of the Clinton administration, the party's economic populist wing has been on the defensive. Democrats have fought against the most plutocratic and fiscally irresponsible Republican plans, but they have done so from a standpoint of resolute centrism. They had strong confidence in an economic model that was, at its core, conservative: unfettered free trade, fiscal restraint. They believed these ideas would benefit all Americans, and they did. But something has changed in the way the U.S. economy works. And, even if it's not yet entirely clear what has happened or how we can best address it, the intellectual balance of power in Democratic circles is already shifting ...[to] the populist side...

I'm wary of the populist path, but have nothing better to offer, and that's the problem. Paul Krugman called for:

smart, bold populism. All we need now are some smart, bold populist politicians.

But Brad DeLong worries:

What populist policies that we can think of would be smart? And how can we make our high politicians allergic to populist policies that are stupid?

We can't, but even if there are no populist policies at all, politicians will still find a way to implement stupid policies. That's what they do. Are stupid populist polices worse than stupid non-populist policies? I don't know. Maybe, maybe not. But unless economists can come up with something better, and so far we haven't, rising inequality "provides as good an argument as you could possibly want for a smart, bold populism."

Posted by Mark Thoma on November 1, 2006 at 02:19 AM in Economics, Income Distribution, Policy, Politics | Permalink

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Comments

Chait: "But, at its deepest level, it reflected an assumption that economic growth could be harnessed to the benefit of all Americans, not just the rich."

This is Rubinomics? That by "trusting Wall Street" and "reducing the deficit", America would spur economic growth thereby benefitting ALL Americans? The trickle-down effect?

Rubin would be amazed, I suggest. When 80% of the wealth generated by the US economy goes to only 20% of the population (of which, I am sure, Rubin belongs), how is the "American public" served?

By reducing unemployment a couple of points? That's peanuts compared to the capital value the economy is creating destined for the upper levels. It is the proverbial "sop for the masses".

The distortion of wealth creation is so endemic, so wide spread, so unfair that only a real taxation of the rich (and redistribution of the revenues) will produce a more fair American society.

(The data is glaring: Infant mortality rates highest, access to basic medical care lowest, access to free university schooling (and therefore opportunity) lowest, etc., etc., etc. - ad nauseam.)

Posted by: Lafayette | Nov 1, 2006 3:11:44 AM

There is a huge amount of "reserve" for public works and infrastructure.

It is the the $3.3 Trillion of the federal debt held as intragovernmental assets.

This money was collected for the future of SS and from fees and taxes which were for infrastructure and the needs were delayed to keep from going to the T Bill farm or taxes for cash.

The deficit reduction team from Rubin through Snow have used this to cover federal cash needs and keep interest rates down and not crowd out.

The fallacy is that most of the economy is growing in imports. Imports crowd out our labor.

It is time to look at the supply of T Bills and recognize that it is wrong to pay interest to people who should be paying taxes.

The supply of T bills improves the wealth of the few.

And the wealth of the many is suffering through ignoring the infrastructure and the propaganda that conflates all federal finance problems from profligrate debt financing to SS and medicare in the same breath (see 31 Oct WSJ editorial propoaganda).

Posted by: ilsm | Nov 1, 2006 3:50:21 AM

Who's afraid of populism?

I know that the word populism has a specific historical context, and this is why we all think it is a bad bad thing. But so did the words conservative and liberal before they became neo-conservative and neo-liberal. Perhaps in any of these cases we are obliged to examine the policies proposed rather than the -ism printed on the banner, without prejudicing the question in advance by wondering how stupid these policies might turn out to be.

What if we took populism in a simpler sense: as doing things that directly benefit most people. Would, as an earlier poster suggests, cleaning up the mafia state then count as populism? And how about my favorite populist platform plank -- a 100% inheritance tax for everything above $200,000, that is then divided and equally distributed (not spent) by the government. This sounds like populism to me, though somebody will perhaps tell me how stupid the idea is.

Posted by: cuerposinorganos | Nov 1, 2006 4:34:22 AM

"If, on the other hand, you reject the theory of skill-biased technological change, you are left with an altogether more discomfiting explanation. Rising inequality must not be the logical outcome of the free market, the invisible hand working its magic. Instead, it must reflect the rising social, economic, or political power of the rich."

Much as I sympathize with the sentiment, this statement is simply not true. "If it isn't A it must be B" is only true in a system in which there are only two possible causes. We have no reason to believe that is the case in the US economy. Chait doesn't help himself, his readers, or the effort to consider whether the exercise of power is at the root of greater disparity in wealth and income, by writing nonsense like this.

Posted by: kharris | Nov 1, 2006 5:28:16 AM

More retirees are losing their health care every day, and pensions are melting away.

How long do you think the voters are going to put up with this?

Paulson now has formed a shadow government to roll back investor protections.

What is next?

Posted by: save_the_rustbelt | Nov 1, 2006 5:42:03 AM

cuerposinorganos: "What if we took populism in a simpler sense: as doing things that directly benefit most people."

Well, then, might we not find the original concept of democracy as the founding fathers had intended?

Don't forget, their perspective was an aristocratic landed gentry that benefitted most whilst the lower classes did all the work (sometimes as indentured servitude). In fact, they were all mostly landed gentry. (So, it is somewhat a mystery thier concern for liberty ... after all, their lot was a great deal better than most. However, that they found a colonial population willing to rebel against King George was somewhat of an amazing feat.)

The difference between that and the 80/20 rule that I mentioned is ... er, what? And, especially when a Latino (who's Spanish is perfect but English is faulty) is treated like scum by his/her multi-billionaire employer?

cuerposinorganos: "Would, as an earlier poster suggests, cleaning up the mafia state then count as populism?"

It is insufficient to throw names at the problem. A state that spends its money not the way you would want is not necessarily a Mafia.

After all, who elected the "crooks"? And, reelected them. If you don't like the way an administration functions, you change it. Look at the make-up of the House of Representatives and how many millionaires are there. It would amaze you. What care, concern or understanding can they possibly have of anyone who is below the lower middle class level?

"And how about my favorite populist platform plank -- a 100% inheritance tax for everything above $200,000, that is then divided and equally distributed (not spent) by the government."

Why shouldn't it be spent? Do you think US infant mortality is going to correct itself if we "give" the poor more money. No, they'll simply spend it on the next Robbie Williams album.

Chances are, a mother that is better educated will understand neonatal care if instructed. But, who will give that instruction if the state does not provide it?

The state must provide base services: Security (of the community and the nation); Justice (state and federal); Health (basic services); Education (primary/secondary schooling but also higher-level).

Consider one insidious fact: Who are dieing in Iraq? Typically the black and white poor who joined the Army that promised them, in the bargain, an education. Instead they got ... well, you get the idea.

Had the education been free, the nerds in the White House might have thought twice before launching themselves into the neo-conservative war? Probably not. Autocrats rarely give a damn for the "poor slobs" who labor below them. Law of the jungle.

Posted by: Lafayette | Nov 1, 2006 6:06:42 AM