NDN Blog

Debating the Bush Economic Record: Increasing Economic Risk

Yesterday, David Brooks published a column in the New York Times called "Inequality Myths." The main message of the column is that "the meritocracy is working almost too well. It's rewarding people based on individual talents." Therefore inequality, which he denies is increasing when he says "workers over all are not getting a smaller slice of the pie ... [w]ages and benefits have made up roughly the same share of G.D.P. for 50 years," is not a serious issue, and has nothing to do with government policy or power relationships. His solution is to implement "human capital policies ... to help them get the intangible skills."

The statistics in his column are examined by, among others, Jared Bernstein and Dean Baker, and the case Brooks makes does not hold up to closer scrutiny. However, columns and arguments like Brooks' come up often so it's worth taking a closer look at what they tell us, and what they leave out.

Much of the assessment of the relative well-being of different classes of workers is based upon the comparison of means or, when large outliers are important, medians. For instance, there has been a lot of attention devoted recently to whether workers wages are keeping up with inflation and changes in productivity, and how the difference in income between classes has changed over time.

But, as discussed here by Yale economist Jacob Hacker, a focus on means and medians misses an important element of well-being, risk. For example, would you take a job offer for $10,000 more in salary if it raised the chances of becoming unemployed by 30%? Mean income is higher if the job is taken, but taking the job does not necessarily make you better off since it also increases economic risk (the decision depends upon tolerance for risk, among other things). Thus, the relatively small increases in compensation for workers in recent years must be balanced against increases in economic risk workers face when examining whether recent economic changes have made workers and their families better or worse off.

Today, workers face increased insecurity about their own and their employer's future as competition is heightened due to globalization. There has been a decline in external buffers such as pension coverage, health care coverage, and other social programs. Workers face increased variability of returns to education due to factors such as outsourcing, and the volatility of personal income has risen since 1975. Jacob Hacker estimates that income volatility has increased 88% from 1978-2000.

These are just a few of the changes causing workers to feel increased anxiety about future economic prospects. For more on the topic of economic risk from Jacob Hacker, a leader in this area, see "There goes the rug," "Economic risk has shifted from the government and corporations to workers and their families," "Social Security as Dramamine" [alt. link], and "The Real Issue Is Risk." The point is that with risk up substantially while compensation has stagnated, it's understandable why households report dissatisfaction with economic conditions. Those who focus solely on relative income, wages, living standards and other measures of mean or median performance miss an important component of the change in well-being, rising economic risk. So long as risk is ignored by some pundits, they are likely to remain mystified as to why typical workers report dissatisfaction with the Bush economy.

This is a guest contribution as part of NDN's ongoing debate about the economy. Read our new report The Bush Economic Record here.

Explaining the Gains from Globalization

Recently, the topic of how to share the gains from globalization in order to prevent a protectionist backlash has been widely discussed. For example, the in the last few days the Financial Times has two articles on this issue, Share gains with globalisation’s losers by Martin Wolf and Global stability rests on sharing the gains by Jan Kregel and William Milberg, the New York Times has had many articles about this such as Real Wages Fail to Match a Rise in Productivity by Steven Greenhouse and David Leonhardt, and this topic has been discussed in many other forums as well including this year's Federal Reserve Symposium at Jackson Hole, Wyoming.

A common theme in these articles is that a key to political success and to staving off protectionist responses to problems perceived to be caused by globalization and technological change is to find a way to share the gains more equally without sacrificing the political support of the winners. However, Berkeley economist Brad DeLong, writing about the Martin Wolf Financial Times article, says simply redistributing the gains may not be enough:

Brad DeLong: Ben Bernanke said that the world will move forward with globalization only if policy makers "ensure that the benefits of integration are sufficiently widely shared." He is wrong: just making the benefits of integration widely shared isn't enough. After all, the benefits of globalization and increased economic integration are widely shared today--and yet forward progress on further globalization still hangs in the balance for politico-economic and politico-security reasons.

In the United States, at least, the problem is that most beneficiaries from globalization don't really know that they are beneficiaries, or how much they benefit. Feckless congressmen and congresswomen don't understand that the American economy is cushioned from their fiscal policy stupidities by the ability of the U.S. government to sell bonds internationally on a jaw-droppingly unbelievable scale. Home sellers in California don't realize that they got such a good price because of financing from across the Pacific. Walmart shoppers see the "made in China" stickers, but don't understand what a good deal they are getting because the rulers of the PRC are desperate to sell the products that their workers make at always low prices in order to stay as close as possible to full employment.

The task is primarily one of making perceptions agree with reality, and only secondarily one of changing reality.

If Brad is correct (but see Brad Setser for a counterargument to the diverse benefits, concentrated costs claim), the task before the Democratic Party is, I think, two-fold. First, there are both winners and losers from globalization and the groups that are negatively impacted cannot, and should not, be ignored. Policies such as universal health care, portable retirement packages, and other changes that reduce the cost of unemployment are a place to start. Creating the perception that the Democratic Party is strongly devoted to helping those who are hurt by globalization would be a positive step to take.

Second, the Party must do a better job of explaining how workers and their families benefit from open markets so that, as Brad DeLong put it, "perceptions agree with reality." This is not an easy task, but it is essential that Party leaders explain how globalization benefits typical households.

Paul Krugman explains the difficulty in a passage from his textbook on international trade:

[P]olicies that impose large losses in total, but small losses on any individual, may not face any effective opposition. ...[T]ake the example of the sugar import quota. This policy imposes a cost on a typical American family of approximately $25 per year. Should a consumer lobby his or her Congressperson to remove the quota? From the point of view of individual self-interest, surely not. Since one letter has only a marginal effect on the policy, the individual payoff from such a letter is probably literally not worth the paper it is written on, let alone the postage stamp. ... And yet if a million voters were to write demanding an end to the quota, it would surely be repealed, bringing benefits to consumers far exceeding the cost of sending the letters. ...[T]here is a problem of collective action: While it is in the interests of the group as a whole to press for favorable policies, it is not in any individual's interest to do so.

The problem of collective action can best be overcome when a group is small (so that each individual reaps a significant share of the benefits of favorable policies) and/or well organized (so that members of the group can be mobilized to act in their collective interest). The reason that a policy like the sugar quota can happen is that the sugar producers form a relatively small, well-organized group that is well aware of the size of the implicit subsidy members receive; while sugar consumers are a huge population that does not even perceive itself as an interest group. The problem of collective action, then, can explain why policies that not only seem to produce more costs than benefits but that also seem to hurt far more voters than they help can nonetheless be adopted...

What does this tell us? First, if Democratic Party leaders are organized and united on these issues, they have a better chance of achieving their goals. No surprise there. But more importantly, the benefits should be explained not in broad sweeping terms as is generally the case, but rather in terms of how it benefits smaller groups within the Democratic Party. The message needs to be targeted to specific groups. How does globalization benefit consumers, the poor, small businesses, and so on, and how will those who are harmed be protected? There are good answers to all of these questions, but it will require politicians to learn about and explain the answers to their constituent groups rather than caving into the loud and well-funded voices of special interests.

This is a guest contribution as part of NDN's ongoing debate about the economy. Read our new report The Bush Economic Record here.

Debating The Bush Economic Record: How Should the Democrats Respond?

Having outlined some of the problems globalization posses, and the possible reasons for these problems in the previous post, how should Democrats respond?

On the technological and globalization side, I've encountered resistance to the "education and retraining" response to the problems arising from innovations in information technology and free trade initiatives. Many middle class families, especially those who have been affected negatively by global change, feel let down by the message from the Clinton years about education and the gains from trade.

But I am not ready to give up on the education message. Education does not guarantee that a job will never be outsourced or replaced by a machine, but it gives an individual the best chance to compete in the global marketplace. There is a clear difference in wages according to educational achievement. The evidence on retraining is mixed, but that shouldn't stop us from trying to do better to help displaced workers, and there are certainly other ways to help as well.

But while education and retraining are important, it's a mistake politically, I think, to try and sell them as the solution to the problems globalization brings to some sectors of the economy, not when so many families who went to college like they were told are still unable to escape outsourcing and other consequences of recent changes in the global distribution of production.

On the public policy side of the inequality debate there is more to talk about. For instance, I believe there has been a shift in market power in wage negotiations from workers to firms due to the decline in unionization, the rise of mega-stores, the forces of globalization, and other factors. I am not a Wal-Mart basher - companies do what our laws and regulations allow them to do. If there is a problem, it is with our policies and regulations, how they are set, and the watchdog agencies that enforce them, not with those playing by the rules that have been established. Democrats can and should address the issue of unfair bargaining power and unfairness in how the rules are set, but this does not require bashing a particular firm.

I believe changes in public policy help to explain stagnating wages, falling health care coverage, changes in safety and environmental regulations, and other workplace changes that enhance the firm's bottom line at the expense of workers. Workers alone have no chance against large, global firms who can use threats such as moving to other countries to hold down worker compensation.

It is up to the Democratic Party to step in and help to balance the distorted scales that are currently distributing the gains unequally. Besides a few politicians bashing Wal-Mart, illegal immigration, and our trading partners, where is the strong voice for working America? There is a lot to be gained by simply convincing working America that the Democratic Party is working for them rather than for competing interests such as big business or large contributors.

There are other areas besides market power imbalances where Democrats could improve public policy and level the playing field. Does tax policy have to favor the rich, or could we do better at using tax policy to help struggling families instead? As we balance the budget, whose needs will be paramount? Does every child, to the extent possible, have an equal opportunity for success in life? There is much that can be done in areas such as child care and work place rules to help working parents balance the needs of work and family in their day to day lives. Democrats should not simply accept that unequal gains is the inevitable consequence of globalization. There is enough for everyone to share, but the rules and political process needs to be directed toward that outcome.

As an economist, I believe in the gains from specialization and trade. Protectionist measures are not the answer, demonizing Wal-Mart will not solve our problems, and blaming immigrants for our problems deflects responsibility for the problems of workers and their families away from the public policy arena where it ought to be directed. The rules of the globalization game matter and help to determine how the benefits from globalization are distributed. For globalization's benefits to be fully realized and shared equitably, it is essential that we do a better job of promoting and enacting policies that support this outcome.

 

This is a guest contribution as part of NDN's ongoing debate about the economy. Read our new report The Bush Economic Record here.

Debating The Bush Economic Record: The Economics and Politics of Income Inequality - Part 1

In the 1990s the Clinton administration, with the enthusiastic support of economists, strongly supported free trade and globalization initiatives. In this vision of the world, globalization would produce large gains and lift the fortunes of all involved. For those left behind or displaced by globalization, education and retraining would be used to bring these workers into the global workforce so that they too could benefit from global trade. For instance, here is Bill Clinton in support of NAFTA in 1993:

In a few moments, I will sign three agreements that will ... create a North American Free Trade Agreement. In the coming months, I will submit this pact to Congress for approval. It will be a hard fight... And though the fight will be difficult, I deeply believe we will win ... because NAFTA means jobs American jobs, and good-paying American jobs. ...

The only way we can recover the fortunes of the middle class in this country so that people who work harder and smarter can ... is to adapt to the changes which are occurring. ... [We] cannot resist the winds of change that economics and technology and information flow have imposed... Our only realistic option is to embrace these changes and create the jobs of tomorrow.

But the promises made about globalization have not been realized by all, and a growing sense of economic insecurity has been the result. As I looked through this report from the NDN on Bush's economic record, Section 2 caught my attention because it reflects the disappointment many people feel over the unrealized promises made by Democrats about the benefits of globalization. The growing inequality in income illustrated in Section 2 of the report is emerging as a political issue and many people I talk to blame globalization (and often immigration too) for stagnating worker income and the growing income gap.

Other problems, such as the decline health care coverage and growing workplace insecurity, are also attributed to globalization. In order to compete in the global marketplace, the argument goes, firms are forced to shed benefit programs for their workers and to hold wages down. But is globalization really to blame for all these problems?

It would be fair to say that economists are rethinking globalization, in particular, how the gains from trade are shared both within and across countries given the experience of the last few decades. As part of this reexamination, the source of growing inequality is a key issue. More particularly, the debate is about whether the forces of economics arising from technology and globalization are behind the unequal gains we have experienced, or whether it is public policy such as union-busting, a falling minimum wage in real terms, tax cuts, and so on that are to blame. The answer is important because it dictates how public policy ought to respond to the changes we are seeing.

Those who believe growing inequality is due to the forces of economics rather than politics cite technology, in particular skill-based technical change arising from computerization and the spread of information technology, as the cause. Under this explanation, higher skilled workers are compensated for higher productivity and thus the change in the distribution of income, while regrettable, is the consequence of a fair reward for more productive labor. The solution then is to give all workers the skills needed to compete in the global economy. Thus, education is a key component in explaining and the inequality problem, and education is also seen as the best solution.

But other economists disagree strongly with the skill-based explanation for changes in income inequality and believe it arises largely from public policy favoring some groups over others. An email from Paul Krugman explains this position. Here's a shortened version:

I think it's really important to realize that we have only a modest amount of direct evidence that technological change is driving increased income inequality. That is, while there have been a few studies showing some connection between increased use of IT and changes in the wage structure, very little of the conventional wisdom that technology is the culprit is based on those studies. ... The point is that it's all too possible that we're attributing to technology rising inequality that may be largely due to hard-to-quantify political and institutional change.

There are several reasons to think that politics plays a big role. ... So what are the mechanisms? Unions are probably top of the list; I believe that there's a qualitative difference between wage bargaining in an economy with 11 percent of workers unionized, which is what we had in the early 30s, and one with 35 percent unionization, which is what emerged from World War II. That's discontinuous change, partly driven by a change in political regime. And the process went in reverse under Reagan.

An overall climate of public scrutiny may matter too, especially at the top of the scale. And don't forget that some taxes affect the pre-personal-tax distribution of income. Taxes on corporate profits went from a minor inconvenience before FDR, to a major source of revenue under Eisenhower, and back again.

The bottom line is that the view that rising inequality reflect forces beyond the reach of politicians may sound sensible, but it's actually a supposition based on very little evidence, and there's a lot of evidence on the other side.

I should note that these explanations are not mutually excusive, i.e. both technology and public policy could be at work, the question is whether public policy has played a large role in generating inequality. I, like Krugman, believe that it has. I'll post again a little later with a discussion of possible policy responses.

This is a guest contribution as part of NDN's ongoing debate about the economy. Read our new report The Bush Economic Record here.

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