Saturday, July 22, 2006

Can Democrats bring the noise on the economy?

This article discusses the state of the economy from the point of view of attacking it as a weak point of the Republican platform. In all honesty, it's tanking from the viewpoint of the common person, despite the fact that it's still growing at a nice clip and making the rich that much richer. Can the Democrats use that effectively? I'm not sure, and I invite someone else to take that question up (Adam, that's your cue). My issue is with the economy itself and how to fix it. The author brings up some ideas that he disagrees with and some he agrees with.

After months without a domestic agenda to capitalize on Bush administration unpopularity, Democrats are moving -- haltingly, disjointedly, belatedly -- toward embracing the mother of all electoral issues: the failure of robust top-line growth in the U.S. economy to filter into the wallets of Americans below the top of the pyramid.

[...]No amount of chaff can hide the failure of our remarkable productivity surge (and the accompanying robust growth of the overall economy) to meaningfully boost average wages, which have barely grown with inflation. Separated by income level, the picture is more dismal. From 2000 to 2005, for example, average weekly wages for the bottom 10% dropped by 2.7% (after adjustment for inflation), while those of the top 10% rose by 5.3%.

That's bad news whatever way you cut it. Bush has explicitly stated that tax cuts would help the American economy, including all income spectrums. While he could theoretically attach reduced taxes to the growing economy, they cannot simultaneously explain lower earnings for the lowest class and higher earnings for the highest class. Besides which, that argument is completely blown out of the water by the Clinton era, which had higher taxes and higher growth. I'm not saying that taxes were responsible for that either, since the same trend in income inequality has been evident for decades.

To be sure, income inequality is not a new challenge. Over the past 25 years, the average hourly wages of high school dropouts fell by nearly 20% (after adjustment for inflation) while those of holders of advanced degrees rose by nearly 30%, according to the Economic Policy Institute.

The point is that taxes in and of themselves neither retard growth nor encourage it, except in tangential ways. The only connection I would argue exists would be that of the federal deficit and debt. Most people aren't aware that a federal budget deficit is accompanied by borrowing. A lot of that borrowed money comes from China and other nations we are only somewhat friendly with. That money that we borrow from them becomes part of the federal debt. As the debt grows, more and more tax money is spent on paying off that debt (because the US, unlike you or me, cannot default on a loan and get away with it). That money is not available for necessary programs, such as job training, scholarships, or grants. For some tax stats that I talked about before, look here.

What Democrats now need to do is to reconcile an armada of alternatives. More extreme factions argue that the centrism of the Clinton administration doesn't adequately address 21st-century fears and offer in its place statist visions of organizing economic policy around belittling American capitalism and fiscal responsibility, while trumpeting unionization and protectionism.

[...]But giving in to politically expedient demands, such as barricading our borders, would be a mistake. Trade agreements have brought American consumers better, cheaper goods and allowed the economy to grow quickly without inflation.

If it were true that free trade brings cheap goods in an absolute sense (that is, minus whatever tangential cost to the economy), then it would be a good thing. Also, the growth of the economy should always be a good thing, but obviously it's not when it's not attached to growth in jobs or wages. The idea that cheaper goods is an absolute good despite the shrinking of wages is discussed extensively in this discourse on Slate between economist Jason Furman and author Barbara Ehrenreich (famous for her study of low-wage workers in the book Nickel and Dimed). I think I can confidently state that the idea that low pay is acceptable for cheap goods is quashed by her study. Depressed wages are bad no matter how cheap the goods we get. Of course, the converse would have to be true to favor any kind of protectionism. That is, we would have to find out that more expensive goods actually cause higher wages. I'm not sure that's true either. I haven't done an extensive study of the benefits or costs of protectionism.

Moreover, two grating issues -- immigration and gas prices -- have strong links to the widening wage gap. At the least, immigration certainly puts further pressure on wages of lower-income workers whose jobs the new arrivals compete for. And the storm over gas prices -- which on an inflation-adjusted basis are still not higher than they were in the early 1980s -- has been exacerbated by the thin wallets of workers facing them at the pump.

As far as immigration, we don't have hard and fast numbers on the effects of illegal immigrants on wages. However, Eric Schlosser's book Reefer Madness has been very enlightening on the subject of illegal immigrant labor. For one thing, migrant labor is nothing new to the US. Historically, migrant Mexicans have always provided the muscle in our farming industry. The Dust Bowl era was the only time when significant numbers of Americans took to the roads looking for work on farms. In other words, whatever phenomenon can be ascribed to illegal immigrants, the simple fact of migrant labor is not new. What may be new though, is the incredibly low wages they earn because, ironically, we made them illegal. Legal immigrants who are unskilled laborers may compete for the jobs available to citizens on the American job market, but we tend to require people to have skills of some sort in order to immigrate.

Gas prices though, are definitely a problem. As he notes, adjusted for inflation gas still isn't costing as much as it was in the early 80's, but in real terms, wages have fallen since the 80's, so I wonder if put together it would turn out that gas has increased as a percentage of disposable income. You know what we need to do about that though; no embargoes or Arctic drilling, but divorcing ourselves from oil. That's definitely something the Dems should be talking about everywhere they get the chance.

A suggestion Rattner makes that I fully agree with is to boost the skills of the American worker.

Nor is waxing nostalgic about the Clinton years enough; we need to recognize that there's no easy way out and belly up to the real work, like improving education and training. That may sound like motherhood-and-apple pie talk but it is, in fact, one kind of supply-side economics that actually works.

While the drumbeat of offshoring remains undeniable, almost any CEO can confirm that U.S. companies are clamoring for skilled workers -- and are willing to pay up for them. At the same time, shrinking the pool of unskilled Americans will add upward pressure to the wages of those remaining.

Here's the thing a lot of people don't understand: even if we used protectionism of one form or another for American workers, we're not going to get those jobs back in the manufacturing sector. I believe that US companies should have to pay foreign workers the equivalent of the US minimum wage, but in real dollars that's still a huge savings. It might force them to raise wages from 25c an hour to $1, but that's still a long way from the $5.15 required for an American worker. Let's just face it, we're not getting those high-wage, low-skill manual labor jobs back. And because of that, we need to provide training and education for American workers, not just for their benefit, but for the benefit of the US business community. We have to have people who can do the job, and if we don't, we will lose on the international scene. I think education, from K to post-graduate, should be a huge part of the Democratic platform.

Of course, any sensible Democratic agenda must also include getting a grip on runaway federal spending, budget deficits and unfunded entitlement programs, all of which would be aided by rolling back President Bush's outlandish tax cuts. We shouldn't try to redistribute our way out of the widening gap, but federal tax policy should not add to the problem.

As he says, of course we have to have taxes. Taxes are good when spent wisely. If people don't trust the government with their tax money, I can understand that. All too often you get things like the Alaskan bridge to nowhere. Whoever is in power, they should spend every dollar as if it were coming out of their pocket. A lot of people forget that neither Republicans nor Democrats have provided the sort of accountability that would make people really trust the federal government. We need to reverse that.

Let's ring in a new era this time, and quit just mouthing the words about responsibility and doing the right thing. Let's just do it.


adam said...

A lot of this is addresses in the plan of action the Dems came out with a little while back, but they need to really push it hard in the months before the election.

Anonymous said...

There is a lot on your blog that I disagree with...maybe with time I will be able to come back and talk about some of those specifics. However, I want to say that your blog is a reasonable, articulate and compassionate place. If all democrats talked and thought like you, there would be more of them. If all of us, republican and democrats took on substantive policy debates with the seriousnes that your blog presents, all of us would live in a better country.

James said...

It's strange that, when companies send jobs overseas to "save money", do they ever lower their prices?

Neither side has the stranglehold on being right, and it's maybe a little too easy to point out the shortcomings of the republicans, as they are the ones in charge now, but it's important to think of the long term.
Leaders have a responsiblity to those they lead.

Nat-Wu said...

Well, in all fairness I would say that one company actually does, and that is Wal-Mart. That issue is addressed though, by Barbara Ehrenreich in the online discussion I linked and in The Bully of Bentonville. Lowering prices at the cost of wages is a horrible exchange, and we should never think it acceptable. By some accounts, Wal-Mart alone is responsible for depressing wages to their current nadir.

And thanks Anonymous, for your kind words. We do welcome debate, we just ask that it be in the same spirit of reasonableness. Oh, and we're not all Democrats, but realistically we know that Greens and other minor parties cannot affect national policy until the Democrats are in power.

Beatris said...

I'm glad you pointed out that the economy as a whole is growing, and it's important to note that unemployment is very low, below 5%. That has historically been considered full employment.

You mentioned that the wages for high school dropouts has fallen dramatically. While that is tragic, it simply underscores the importance of education. No matter how you spin it, it's not a politicians fault if a kid drops out of school. Everyone now knows that a high school degree is necessary for most modern jobs, and competition for jobs that don't require high school diplomas often included immigrants. That often drives down wages.

I'm tired of hearing people carp about Walmart on the news. If you don't like Walmart's policies, don't shop there. If someone doesn't like the benefits package at Walmart, they don't have to work there. Laws restricting Walmart are not necessary in the grand scheme of things. Free markets will take care of such problems.

Nat-Wu said...

Thanks for taking the time to read and comment. While I don't espouse communist-style controlled economy, the free-market has proven not to serve the best interests of non-wealthy individuals. Usually it's the exact opposite.

I pointed out that the economy as a whole is growing. I also pointed out that that doesn't help the average person in any way. In an older post I discussed that as well, and I'm sufficiently convinced at this point that overall economic growth isn't even relevant to the discussion of what's best for most Americans.

It may not necessarily be a politician's fault if someone drops out of high-school, but you talk as if it's always a choice that a high-school kid can make. In this country, we assume that parents have a responsibility to their children at least until 17 (and 18 in some cases). That means that if a kid drops out, it's the parents' fault, but who pays the price? The children do, so to me the point that you make isn't even relevant. More importantly though, America suffers every time a kid drops out. It does not benefit our economy and can even cost us in terms of lost productivity and in social support like welfare, medicare, and social security. Blaming people for screwing up will never benefit our country, but fixing their problems might, which is why people like you need to join with people like us in pushing for better programs not only to get more people to graduate high school but to go on for college or advanced technical training. Listen, the American businesses out there that make the economy grow depend on having a base of skilled hirees. It not only benefits the individual but those companies and the economy as a whole for the government to provide those skilled individuals. Let's quit pointing fingers and just start fixing the problems.

A lot of us choose not to shop at Wal-Mart, but that doesn't help some $7 an hour wage-slave get out of their terrible financial situation. Again, you speak as if people have the luxury of not going for jobs when these are the same people on the lowest social rung. The flaw in your thinking is "they don't have to work there". People have to work wherever someone will hire them, because not all of us (not most of us, really) can afford to go on strike or quit a job. We probably would if our source of food and shelter were guaranteed, but for most people who work at Wal-Mart, Wal-Mart is that source. What are they supposed to do, starve? And before you say they should go find another job, again these are the people with the least education. They're competing with tens of thousands of people in their local areas. When my place of employment opens up one of the lowest-paid positions (part-time too), we get hundreds of applicants, and I can bet you that a couple of dozen desperately need that money.

Can the free market take care of those problems when most of the people who work or shop there can't afford not to work or shop at Wal-Mart? I don't believe it. And I'm not a big fan of passing laws specifically against Wal-Mart. I support a higher minimum wage than most of their employees earn, but that would go for every employer in the country. I support raising the wages of foreign laborers to acceptable levels, which would make Wal-Mart raise its prices, but that would go for everyone who imports goods.

We are not naively against Wal-Mart as if the big WM is the source of all evil. It's just representative of the worst part of the workings of the free market.