Economist's View: Reich: An Introduction to Economic Populism

リンク: Economist's View: Reich: An Introduction to Economic Populism.

Robert Rubin and Rubinomics are popular topics today. While Paul Krugman is advising Democrats to abandon Rubinomics in the post below this one, in this post Robert Reich says Robert Rubin will soon become a populist if recent trends in inequality continue:

An Introduction to Economic Populism, by Robert Reich: I keep hearing from Dems in Washington, including a few newly-elected ones, who want to know what kind of economics they ought to be supporting. They're worried about what's happened to the jobs and wages of most Americans, but don't know where to turn.

I'm reminded of a philosophical conversation I had several years ago with my good friend and cabinet colleague Bob Rubin... It started as a discussion of a particular policy then being debated inside the Clinton White House but then became more theoretical. It came down to two simple questions. Suppose a proposed policy will increase the incomes of some people without decreasing the incomes of any others. Should it be implemented? Bob and I agreed it should. But suppose the people whose incomes will rise are already wealthier than everyone else. Although no one will lose ground, inequality will widen. Should it still be implemented? I won’t tell you where he and I came out on that second question. But we agreed that people who don’t share in such gains feel relatively poorer. Widening inequality also further tips the balance of political power in favor of the wealthy.

That conversation occurred a decade ago. Inequality is far more worrisome now. The ... philosophical debate is coming up all the time these days, and it helps explain the new economic populism. Consider, for example, the Bush [tax] cuts. They’ve mainly benefited the top fifth of taxpayers. Supply-siders argue the cuts ... pay for themselves so they haven’t enlarged the budget deficit. That’s debatable but let’s make the heroic assumption the supply-siders are correct and no one has been made worse off. Yet ... Real median wages have barely budged since they were enacted. So the underlying question is whether they’re justified by the fact that rich Americans have gained from them while no one has lost ground. The answer is no. They’ve widened inequality.

Or consider trade-opening agreements. They give Americans access to more low-cost products and services from abroad. This makes Americans’ dollars go further. But the agreements especially benefit the rich, who spend more ... because they have more income to spend. The agreements also typically impose a burden on working-class Americans who... lose their jobs to foreigners. These job losers get new jobs, but studies show the new jobs pay 10 to 15 percent less... Even if you assume that access to cheaper goods from abroad adds about 10 to 15 percent to their purchasing power, these working-class wage earners come out about even, at best. That means the overall result of most trade agreements is to widen inequality. Do the efficiency benefits of trade outweigh this result? Maybe a decade ago when inequality was less pronounced. Probably not, now.

Immigration raises the same underlying question. Low-skilled immigrants reduce the cost of all sorts of services... This stretches the dollars of every American but also depresses the wages of many low-wage American workers... Even assuming their increased purchasing power more than cancels out their wages losses, low-wage Americans don’t gain nearly as much from immigration as higher-wage Americans do. The result is widening inequality among native-born Americans. Do the lower labor costs make up for this widening inequality? Unlikely, unless you include the new immigrants in the calculus. After all, once they’ve come here they’re usually much better off economically than before they arrived.

If all these policies promoted economic growth and if all Americans had an equal chance to benefit from the growth, the case for them would be stronger. But relatively poorer Americans are less upwardly mobile today than they were a decade ago. To equalize opportunity, all Americans would need access to far better schools and more affordable health care. All would need extended unemployment insurance and wage insurance. All would need affordable access to post-secondary education. And to pay for all of this, and guarantee upward mobility, the tax system would have to be made far more progressive than it is today...

As inequalities of income and wealth continue to widen, the social cost of adding to them will continue to grow. Even if you are not an economic populist now, if present trends continue eventually you will be – including my good friend, Bob.

Although Robert Reich says "I won’t tell you where he and I came out on that second question," I think I have some idea where he stands. But let me add one point here. There is only so much time, so much energy, so much goodwill, etc., that an administration has to work with so the polices that it can enact are limited. There is a "budget constraint" to take account of. If the choice to pursue one type of policy crowds out the pursuit of another with different distributional consequences, then it is not clear to me that pursuing one policy over another can be defended just because it makes some people better off and nobody else worse off. There may be an alternative policy that makes a different set of people better off and leaves nobody else worse off, and any proposed policy has to be weighed against such alternatives. There's always an opportunity cost.

Posted by Mark Thoma on December 22, 2006 at 01:05 PM in Economics, Income Distribution, Policy | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/t/trackback/7254240

Listed below are links to weblogs that reference Reich: An Introduction to Economic Populism:

Comments

Aren't housing and health care the biggest expenses. What good Cheap Goods these?

Posted by: ken melvin | Dec 22, 2006 2:26:03 PM

Interestingly you can flip the question around.

If you have a policy that will lift the incomes of millions while potentially lowering the income of tens of thousands should it be implemented?

This one does not I think have a general solution. You would have to quantify both the income increases and decreases as well as the relative balance between winners and losers. Yet the Economic Right insists that in the case of the minimum wage we accept that the general solution is 'No'. Loss of jobs is supposed to outweigh any distributive gain.

This is what I call the Jimmy the Stockboy Fallacy. "We would love to give everyone a raise but that would mean laying off poor Jimmy." Well the answer to this question is how much raise and how many jobs lost. Yet you rarely have this effect quantified in discussions of minimum wage, instead it is cartoon economics:
'Minimum wage increases means lost jobs'.
Well how many jobs? and Where? Like a lot of these issues more numbers and less theory would help a good deal. The Pozen Plan sounded good until they ran numbers through it.

Posted by: Bruce Webb | Dec 22, 2006 2:53:08 PM

Rubinomics and populism? It must be for wussies. Here's what the Democrats should push, real populism:

(1) Pass Grassley-Baucus, pronto. I mean, how dare those Chinese sell Americans low-priced, high-quality goods. The cheek! Slap 27.5, make that 47.5% tariffs on their cursed exports;

(2) Put up a full-length wall on the US-Mexico border. America is for Americans, etc. [Feel free to add your favorite Buchananisms and Dobbsisms here; while you're at it, sign up for the Minuteman Project];

(3) Add labor, environmental, and human rights issues to trade issues. You know, some countries aren't playing fair; we need a "level playing field" here.

Dang, this sounds good. Maybe I should run for office with this agenda. Call it my "Reclaim the American Dream" program. All aboard the isolationist xenophobia train!

Posted by: Emmanuel | Dec 22, 2006 3:25:29 PM

"Supply-siders argue the cuts ... pay for themselves so they haven’t enlarged the budget deficit. That’s debatable"

No it's not. Anybody who says the Bush tax cuts pay for themselves is ignorant, lying, or both.

Posted by: dogfacegeorge | Dec 22, 2006 3:37:40 PM

Yeah, I was trying to figure out what drugs he was taking when he labeled the supply-side argument "debatable."

Well, okay, the "flat Earth" theory is also "debatable." So the idea that we're in a supply-side region of the tax code is "debatable" in that sense, I guess.

Posted by: James Killus | Dec 22, 2006 3:52:18 PM

I see Emmanuel busy out-sourcing our jobs already with that self-congratulating

Dang, this sounds good.

And Jimminey it does, but give your fellow posters a chance to slap you on the back before you wear your own arms out. Dang it all, Emmanuel doesn't have the trademark on dangin.
Dang that sounds better.
I see df George is not willing to entertain the slightest bit of understatement. No, the next person to say "that's debatable" will be drawn and quartered.
We mean business.

Posted by: calmo | Dec 22, 2006 7:04:35 PM

Would it be good for the country to implement a policy that made the rich poorer, but didn't make anyone else richer in the service of greater equality? Would the poor feel any better? If they did, would that make it a good policy?
Inequality within the US has worsened, but the US progress in average living standards has steadily outpaced that of Europe during the past fifteen years of open immigration and trade globalization here. Would it be more just if we equalized more with Europe? They might feel better, but should we care?

Posted by: mrrunangun | Dec 22, 2006 7:25:27 PM

"Supply-siders argue the cuts ... pay for themselves so they haven’t enlarged the budget deficit. That’s debatable"

And it is. No one knows what tax receipts would have been without the tax cuts. We might be stuck in Great Depression II.

But it's doubtful. The truth is, though, there was never any reason to think that growth would be so much higher with the cuts that they would pay for themselves within a half-dozen years. The relevant time frame is decades. Would they pay for themselves over that time frame, or is the NPV (with respect to tax receipts) of the tax cuts permanently negative? That's debatable.

Of course, you could avoid the debate by realizing that maximizing tax revenue is not actually the proper function of tax policy. I would.

Posted by: Morgan | Dec 22, 2006 7:28:31 PM

Of course, you could avoid the debate by realizing that maximizing tax revenue is not actually the proper function of tax policy.

As an unabashed liberal I agree - and I'm prepared to vote to pay more taxes to effect the policy I think the country needs. Given that mission it is then proper to fund it adequately & fairly as is possible.

But I find it doubly disingenuous to cut taxes, especially on the richest, then simultaneously expand the mission & subsequent cost of gov't dramatically - which is exactly what Bush & his administration did with the support of the GOP congress.

Hopefully - and at this stage it is only a hope - that divided gov't will put an end to the worst of this.

Posted by: dryfly | Dec 22, 2006 7:44:55 PM

I find it doubly disingenuous to cut taxes, especially on the richest, then simultaneously expand the mission & subsequent cost of gov't dramatically - which is exactly what Bush & his administration did with the support of the GOP congress.

I agree. Especially because you don't really know what impact tax cuts will have on revenues, committing to open-ended expenditures when you make cuts is foolish.

And the official budget forecasts were absurdly optimistic (at least in retrospect). That's true even net of Aghanistan and Iraq. We're supposed to be in surplus as of 2005. Whether we are or not is debatable.

I'm still waiting to be drawn and quartered.

Posted by: Morgan | Dec 22, 2006 8:06:08 PM

Monetary wealth represents a claim on resources and labor. To the extent that some resources are intrinsically limited (and exhaustable), or that people may not wish to have influence over large numbers of people concentrated in a few hands, then reducing the wealth of the waalthiest, if it could happen without a downward shift in the wealth and income of those with less access to the money river, that would indeed be a better thing for the latter group.

Alternately, you could believe that wealth conveys wisdom and moral superiority. In which case, the rest of us should just do as we're told.

Posted by: James Killus | Dec 22, 2006 9:11:29 PM

No doubt about Morgan wanting a debate, but...whatizit with this post that blows up in my face before I can reach for The Whip?
Morgan, masochist beyond ordinary rehabilitation, and presumably as careful a poster as he/she is logical,

do you mean (given the "absurdly optimistic official budget forecasts" showing among other things "a surplus in 2005") that whether we are (currently? perhaps debatably making a miraculous about-face in the last 10 minutes...) or not is ("not"? just missing a little modifier, so human and beyond spell-check) debatable?

Get the Rack ready boys...

Posted by: calmo | Dec 22, 2006 9:16:48 PM

Nobel Prize for Poetry (ok, maybe just the moustest poetic phrase in the thread) goes to James for this:

the wealth of the waalthiest,

I don't care if James's finger was just draggin...it was obliteratingly good. [As in: what the hell did he say after that knocked you on your ass?]
I must check. Oh yes, that altogether we are well-behaved if we are granted some access (by our magnanimous moral and cultural superiors)[those wealthy scumbags] to the money river.

Posted by: calmo | Dec 23, 2006 12:07:41 AM

Underlying much of this debate is the assumption that government can - given the advice of adequately credentialed and properly motivated economists - make us all fat, rich, and happy. People, how many angels can dance on the head of a pin?

Posted by: Tom Schofield | Dec 23, 2006 4:09:57 AM