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.