October 28, 2006
I can't recommend Jon Chait's new article on the failure of pro-growth economics highly enough. It's not merely the best, but possibly the only, primer on why the current economic moment seems so unsettled, the once-discredited labor-liberals so ascendant, and the Clinton crowd so quiet.
What Chait does is tell the economic history of the past 30 years. It's something a fair number of wonks could rattle off to you, but wouldn't actually be allowed to write for anyone -- too boring, with too little new information. The magazine industry is biased against context. Chait's genius was to peg it to the retreat of Clintonomics, thus giving it the sexy, and guaranteeing it a place in the feature well of The New Republic.
In short, here's the story: As you all know, in the late 70's, wages begin to stagnate. The ostensible reason for this is slow growth and plummeting productivity. During the post-war period, productivity averaged 2.5% a year. From 1973 to 1995, it was 1.5%. Since wages have always tracked productivity, smart lefties began focusing on how to reinvigorate productivity. They did that through Clintonomics: Fiscal responsibility combined with mild downward redistribution. The deficit reduction freed up money for the private sector to invest (when the government runs a high deficit, it pushes up the price of loans by sucking up so much money itself -- economists call this "crowding out"), and worked like a charm. Helped along by the tech boom, productivity shoots up, as does growth, and both metrics have remained healthy and robust ever since (well, till this quarter).
The hitch: Wages didn't track. Productivity and growth went up, but they weren't distributed across the economy. Wages increased somewhat throughout the mid-to-late 90s, but as the supercharged growth gave way to the robust numbers of the past few years, the rich began sucking up the gains (if you've been reading this blog, you already know that. For a refresher, go here). The left has tried to explain this away as a consequence of Bush's fiscal policy. Sadly, the trends show up in pretax income also. The right has tried to explain this accelerating inequality as an unstoppable structural feature of the new economy: It's the meritocracy, or computers, or benefits, or global trade. Unfortunately, those explanations are largely bullshit. Europe also has computers, and trade, and mobility, and benefits, and has easily avoided the widening chasm we've seen. So what makes us different?
In a word, power. Or the distribution of it. Europe has strong unions and active governments; countervailing powers that wrest a portion of the pie for their constituencies. We don't. This is a point I made in my riposte to Jacob Hacker this week, but it can't be said often enough. There is a tectonic shift in liberal thinking underway. We used to think the country's economic problems were about economics. At times, that's been true, It isn't now. Now, they're about power. And that's a conversation the Clintonites are very grudgingly, very awkwardly, coming to accept.
"Helped along by the tech boom, productivity shoots up, as does growth, and both metrics have remained healthy and robust ever since ... The hitch: Wages didn't track."
Wages increased quite nicely during the Clinton administration.
Posted by: Petey | Oct 28, 2006 1:32:53 PM
They didn't track productivity or growth however, not for most Americans. Wages did well, and they certainly went up more than they had recently (some of the first real growth since the 70s), but it was in context of the most powerful economic boom we've seen in decades. And it didn't last. Even if you're talking pretax incomes -- which wouldn't much be affected by Bush -- wages are down. It can't be that the only time incomes exhibit strong growth is during historic expansions.
Posted by: Ezra | Oct 28, 2006 1:58:48 PM
He said "track", not "increase".
I don't think anyone thinks Clinton was bad. The question is whether the answer to traditional liberal problems right now is Clintonism or something else (or perhaps, given that Clintonism was never one thing, whether there's a form of it that works better than another thing).
The question of the redistribution of institutional power is a big one right now, and it's not one - to the best of my knowledge - that fits as a major goal within most understandings of Clintonism.
Posted by: DivGuy | Oct 28, 2006 1:59:05 PM
In a word, power.
Yes, but power in whose hands? Power in the hands of the people?: of course. Power in the hands of money-grubbing, empire-promoting, economic royalists?: hell no.
The pendulum has swung way way too far to the right. It probably needs to swing way too far to the left to restore a balanced view of the common good. Let's cut the power of those multi-national corporations back with a populist weed-whacker for a generation or so. Damn, I'd sure like to see a 1933-1936 FDR pounding on the economic royalists again for a while.
For out of this modern civilization economic royalists carved new dynasties. New kingdoms were built upon concentration of control over material things. Through new uses of corporations, banks and securities, new machinery of industry and agriculture, of labor and capital-all undreamed of by the fathers-the whole structure of modern life was impressed into this royal service.
There was no place among this royalty for our many thousands of small business men and merchants who sought to make a worthy use of the American system of initiative and profit. They were no more free than the worker or the farmer. Even honest and progressive-minded men of wealth, aware of their obligation to their generation, could never know just where they fitted into this dynastic scheme of things.
It was natural and perhaps human that the privileged princes of these new economic dynasties, thirsting for power, reached out for control over Government itself. They created a new despotism and wrapped it in the robes of legal sanction. In its service new mercenaries sought to regiment the people, their labor, and their property. And as a result the average man once more confronts the problem that faced the Minute Man.
The hours men and women worked, the wages they received, the conditions of their labor-these had passed beyond the control of the people, and were imposed by this new industrial dictatorship. The savings of the average family, the capital of the small business man, the investments set aside for old age-other people's money-these were tools which the new economic royalty used to dig itself in.
Today we stand committed to the proposition that freedom is no half-and-half affair. If the average citizen is guaranteed equal opportunity in the polling place, he must have equal opportunity in the market place. (emphasis added)
These economic royalists complain that we seek to overthrow the institutions of America. What they really complain of is that we seek to take away their power. Our allegiance to American institutions requires the overthrow of this kind of power. In vain they seek to hide behind the Flag and the Constitution. In their blindness they forget what the Flag and the Constitution stand for. Now, as always, they stand for democracy, not tyranny; for freedom, not subjection; and against a dictatorship by mob rule and the over-privileged alike. Today we stand committed to the proposition that freedom is no half-and-half affair. If the average citizen is guaranteed equal opportunity in the polling place, he must have equal opportunity in the market place.
These economic royalists complain that we seek to overthrow the institutions of America. What they really complain of is that we seek to take away their power. Our allegiance to American institutions requires the overthrow of this kind of power. In vain they seek to hide behind the Flag and the Constitution. In their blindness they forget what the Flag and the Constitution stand for. Now, as always, they stand for democracy, not tyranny; for freedom, not subjection; and against a dictatorship by mob rule and the over-privileged alike.
There's the vision for a new deal, taken directly from FDR's mouth.
The Reaganist-CorpCons-NeoConservative-Religious Theocons have over-played their hands and spoiled the poker game and stunk up the house with their noxious weed-smoking. Time for a New Deal again.
Posted by: JimPortlandOR | Oct 28, 2006 2:19:20 PM
Hey Ezra, it's not 'metric', but 'matrix'.
Who would I believe, a freshly minted graduate of a west coast liberal University, or the President of the United States?
Posted by: gregor | Oct 28, 2006 3:04:42 PM
If the average citizen is guaranteed equal opportunity in the polling place, he must have equal opportunity in the market place.
a conundrum since resolved by the expedient of PRIVATIZING the polling place and thereby rescinding the guarantee of equal political opportunity, rather than democratizing the marketplace, thereby eliminating the underlying inequities that prevent equal economic opportunity...
Posted by: konopelli/wgg | Oct 28, 2006 3:08:00 PM
If you have ever negotiated a deal of any kind in the private sector, everything you just said would be considered common sense. The relative bargaining power of the players always matters. I am surprised that this wasn't clear to you macro people until now since nearly every business deal, de facto, is a reflection of the bargaining power. One of the lawyers I trained under earlier in my career would say "not a penny more on the table than I am required to give, and, if the other guy blinks, I am going to take that penny too." What I really hear when I read someone write about productivity and how they expect it to increase wages is that they believe that businesses operate on good will. My mentor's quote sums up the truth.
Posted by: akaison | Oct 28, 2006 3:17:05 PM
but it was in context of the most powerful economic boom we've seen in decades. And it didn't last. Even if you're talking pretax incomes -- which wouldn't much be affected by Bush -- wages are down. It can't be that the only time incomes exhibit strong growth is during historic expansions.
Not to sound DickArmeyish, heaven forfend, but aren't you a bit static in the parsing here? Couldn't it be that wage growth and gap closing themselves contributed at the historical margin of that growth? And I don't mean that in a chicken-eggy way.
Posted by: QuentinCompson | Oct 28, 2006 3:19:29 PM
Who would I believe, a freshly minted graduate of a west coast liberal University, or the President of the United States?
Whichever you prefer-- it's a free country-- but if you want to avoid looking like a blithering idiot you should probably go with the former, at least until 2009.
Posted by: latts | Oct 28, 2006 3:23:31 PM
The real problem is that eventually we will all have to pay more in taxes for less benefits. Name one politician charismatic enough to win on that platform.
Its just like the farm subsidies. Everyone knows they are bad, but how can you win the Iowa caucus if you support taking them away? our only hope is punishment from the WTO if we don't fix things.
Republicans claim to hate federal spending, but they know if they bring home the pork, they'll get re-elected.
In order to get campaign financing, politicans put the interests of certain corporations/industries in front of the best interests of the future of the nation.
We all already know all this.
Its like if you were a kid who got to choose a parent. Would you choose the one that disciplined you and made you get good grades? Or the one that gives you ice cream for dinner and lets you stay up as late as you want watching TV?
We need someone to force us to take our medicine, and democracy just doesn't really allow for that. The best we can hope for is someone to lie to us with promises that will never come, then force us to take the baby steps we need to take. I'm no fan of Reagan or H.W. Bush, but their tax raises are a decent example of such a bait & switch.
Theoretically this shouldn't be out of the question since we almost expect politicians to lie to us anyway, but baby steps won't cut it when our problems are mastering the long jump.
Posted by: Nylund | Oct 28, 2006 3:39:01 PM
John Kenneth Galbraith talked about this, and I was made to read his stuff as a freshly hatched economist egg. But that was in Europe.
The religion of free markets in the U.S. has muddied the waters badly. I can see it from the comments I get to any posts on economics; there is a belief that ALL markets are free markets, that ALL markets are solely driven by supply and demand curves, and this belief is applied to something like the energy industry or the automobile industry, both oligopolistic markets. And there is very little discussion of market power in general, except within college classrooms.
And I don't see labor economists coming out of the ivory towers and writing actual explanations of all the different reasons why real wages have stagnated so badly.
Posted by: Echidne | Oct 28, 2006 4:54:16 PM
Posted by: akaison | Oct 28, 2006 12:17:05 PM I am surprised that this wasn't clear to you macro people until now since nearly every business deal, de facto, is a reflection of the bargaining power. ... What I really hear when I read someone write about productivity and how they expect it to increase wages is that they believe that businesses operate on good will. My mentor's quote sums up the truth.
What is really behind the presumption that productivity automatically feeds into wages is the economic model that explicitly or implicitly assumes full employment as the natural state of the economy, together with a more or less competitive private sector. Combine those two, and you have a sufficiently strong bargaining position on the side of individual workers and a sufficiently weak bargaining position on the side of all of those small employers that wages are pushed up toward the maximum ability to pay, which is to say the commercial benefit of hiring that additional person.
The American Institutionalist which was at its zenith during the New Deal never included either of those as assumptions in its model of the economy. And so, when, for example, John Commons considered the economic power conferred by ownership unions, aka private corporations, he argued that there had to be a right to organize worker unions to counterbalance that economic power.
And that is the quibble that I have with the main post ... since the wage story is about the different balance in economic, or bargaining power in Europe and the US, in what sense is it not about economics? Unless you ascribe to the article of faith of the traditional marginalist economists that defines "economics" as any question that can be addressed with the marginalist toolkit.
Posted by: BruceMcF | Oct 28, 2006 4:58:12 PM
"The real problem is that eventually we will all have to pay more in taxes for less benefits. Name one politician charismatic enough to win on that platform."
Not all should have to pay more in taxes.
Not all should get less benefits.
Not merely "soak the rich", but steeply graduated high marginal rates that hit the upper middle class, like 70% for anything over 250k. 90% for over a million.
Folks, that was the 40s-70s, and it is not about redistributing wealth, it is about the redistribution of power. Bill Gates and the Waltons aren't the biggest problem, there aren't very many of them and there are limits to how much they can spend. It is the millions of millionaires and aspirational 4th quintile that forms a voting block.
Having said that I would like to think a little more about the problem. Inflation targeting by the fed, rather than following its legal mandate of balancing inflation and employment, may be a problem. Other stuff.
Simply including assets, stocks, bonds, real estate in the CPI might have an effect on distribution.
Posted by: bob mcmanus | Oct 28, 2006 5:00:58 PM
sorry, but this stuff grinds my ass... anybody who's been using their alloted complement of brain cells could have easily seen that the whole GODDAM THING has ALWAYS been about power... power controls who gets the money... sharing power with unions or employee groups is anathema to the super-rich and holders of capital because it means cutting back on the volume of the rivers of cash flowing into their pockets...
i admire you, ezra, but your unabashed admiration and praise for jonathan chait for figuring this out and getting it in print, for me, is a day late and a dollar short...
Posted by: profmarcus | Oct 28, 2006 5:04:39 PM
Bruce McF is of course correct, it is all economics. It is not about using political power to gain economic ends, but about creating economic incentives to gain political ends. A corporation has to have an economic reason to negotiate or raise wages.
Usually that involved shutting the business down, or the threat.
Posted by: bob mcmanus | Oct 28, 2006 5:08:59 PM
"power controls who gets the money"
No, dammit it is not so trivial or obvious. There are an awful lot of people in the top three quintiles who think that incentives, talent, hard work, determination, and risk-taking have something to do with the distribution of rewards. Many, many economists also believe that bullshit.
Posted by: bob mcmanus | Oct 28, 2006 5:15:03 PM
it's obvious to anyone who runs a business and has to negotiate against a bigger company versus someone who has negotiated against a smaller company. wallmarket versus mom and pop operations. these all the same lesson with different words being used the say teh same thing: power.
Posted by: akaison | Oct 28, 2006 5:40:32 PM
One thing I really like about this move, as shown from the comments, is that it's allowed the real Left to show itself as part of the Democratic party. Chait's line is what should be the institutional center-left. The real left is a critical, historically conscious socialism, informed by late- and post-marxist critiques. (There's a lotta Foucault in this thread, for instance, and obviously heaping piles of Marx.)
This is good stuff.
Posted by: DivGuy | Oct 28, 2006 5:52:16 PM
bob mcmanus, the tax rates you suggest - 90% on income over a million dollars? hello? - have been tried before, for instance in the UK. They lead inevitably to a) a boom industry in tax shelters and b) over-reacting tax revolts which lead to the present state of affairs where the wealthy are taxed too little. If you want to energize the true GOP base - the wealthy - then your 'punish the rich' plan is just the ticket.
Posted by: r€nato | Oct 28, 2006 5:53:09 PM
"Who would I believe, a freshly minted graduate of a west coast liberal University, or the President of the United States?"
By all means, believe the graduate of an East Coast liberal university instead!
Questions of economics do not come down to "who do I believe?" If that's all you've got, then you bring nothing to the discussion.
Posted by: RickD | Oct 28, 2006 6:00:10 PM
If you want to energize the true GOP base - the wealthy - then your 'punish the rich' plan is just the ticket.
There's like a million of them. Fuck 'em. Who cares if they're energized? They're rounding error, and they're already Republicans.
If you're going to make an electoral tactics argument, I recommend choosing a different group to claim the Dems would lose.
Posted by: DivGuy | Oct 28, 2006 6:28:17 PM
...Helped along by the tech boom, productivity shoots up, as does growth...
This is about it. Clinton was in the right place at the right time when the tech boom hit. We had good times in spite of Clintonomics.
Posted by: Fred Jones | Oct 28, 2006 6:40:56 PM
Div- Making a critique is not the same thing as being leaning in a solution. Political philisophers make me itch.
Posted by: akaison | Oct 28, 2006 6:44:35 PM
So, Fred, you don't see any economic advantage of balancing the budget, carefully targeted incentives and other Clinton policies? You prefer predictable deficits and stimulus thrown at the rich as though that were efficient?
Posted by: Sanpete | Oct 28, 2006 6:47:16 PM
that should read "creating a solution" rather than "being leaning in" the perils of wring fast
Posted by: akaison | Oct 28, 2006 6:50:55 PM
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