Saturday, March 17, 2007

Economic growth not equal to prosperity

In many of my previous posts on the subject of the economy, I've mentioned the possibility of economic expansion for the US not bringing wealth into the hands of the masses, but into the hands of a wealthy minority. I found an interesting article in The New Republic that discusses this phenomenon in greater detail. What's really interesting is that previously, it was taken for granted by economists from the right and the moderate Dems that overall economic growth automatically brought higher wages for workers across the board.

Today, however, the Rubinites have been thrown into doubt. It is not that their policies have failed. (They have been abandoned: Clinton's economic policies meant fiscal responsibility combined with downward redistribution, while Bush has embraced fiscal irresponsibility and upward redistribution.) Rather, what has been shaken is something even deeper: their faith in the possibilities of economic growth.

The cause of their doubt is the disturbing performance of the U.S. economy over the last five years. What's happening is very simple: The economy is growing smartly, but, essentially, all the gains are going to the rich. It is almost a dystopian Marxist vision come to life. Corporate profits have soared, incomes at the very top have shot through the stratosphere, and, yet, the vast majority of Americans have not seen their living standards rise at all. This development does not offer much of an intellectual challenge to either the right (which is not particularly troubled) or the left (which is not particularly surprised). But the center is both troubled and surprised. And, for the Rubinites, figuring 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.

If you read any news or magazine article or book that talks about the state of the US economy from the last decade, it surely will mention that since the early 70s, income inequality has been rising and the real wages of American workers have fallen, whether the economy did well or poorly, and that wealth has increasingly become concentrated in the hands of the extremely wealthy. The dilemma for Democrats, which Jonathan Chait doesn't explicitly state in this article, is that if their beliefs in moderate, market-based solutions to income inequality don't work, they have to embrace the more liberal economic ideas of their further left comrades (like the guys at the Economic Policy Institute). The political problems with that are apparent, and I'm sure as soon as a whiff of liberal economics is detected in the air in Congress, cries of "Marxism!" are soon to follow. That doesn't mean, of course, that liberal economic policies aren't the right way to go. The problem is getting people to understand that conventional wisdom is wrong and that we need to approach the problem differently.

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. In the late '70s, when inequality first began to explode, a minimum-wage worker made well over one-third as much per hour as the average worker. That figure has crept slowly lower and is currently less than 25 percent. 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.

These last two factors represent terra nueva for the Rubinites. Until recently, the ideological fissure between the economic left and the center left has always been over the question of at what point the government should step in to redress inequality. Moderates--that is, policy types associated with the Clinton administration, the Brookings Institution, or most university economics departments--believe that the market is generally the most efficient mechanism for distributing wealth. Government should redress inequality, but it should usually do so only after the fact--let the market work, then tax the rich and use some of the proceeds to help the poor. Moderate liberals have historically been restrained in their enthusiasm for the minimum wage and unions, and they have been downright hostile to any limits on international trade.

Economists from the liberal wing of the Democratic Party (those associated with labor unions, say, or groups like the Economic Policy Institute) have always attacked the moderates' prescriptions as naïve. If the rich control a growing share of the national income, they will turn their financial power into political power to protect their holdings. Untrammeled economic inequality will inevitably lock itself into place as the rich buy political influence and propagate policies that safeguard their wealth. And so, the liberals have always argued, government must foster greater levels of equality before the fact, not merely after.

I think that's a fair assessment. The entire history of humans since the market arose has been one of those with greater wealth seeking to lock themselves in positions of greater power and wealth. If the free market worked, it would have worked 500 years ago and peasants wouldn't have been dirt poor in all parts of the world where there were stratified societies, whose existence alone defies the logic of market imperatives. Not that aspects of the free market don't work. After all, I can go to the store and choose whichever brand of laundry detergent I choose, and I can pay either $3.48 or $5.99 (actual prices I saw at the store today).

We have never had a truly free market, and thus proponents can argue that if we did, everything would be fine and dandy. Of course, most of the time, proponents of the free market assume we do already have one, and that everything is fine and dandy. That's patently false, but here we are still talking about it. The plain and simple truth is that the majority of Americans are in more debt than ever, make less than ever, and have less of an ability to better their own situation than ever before. It's time to do something about it, and even though it seems no one can give a clear answer as to why it has happened, we can't sit around pretending it hasn't.

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