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Debunking America’s populist narrative on the economy

Brad DeLong, professor of economics | April 4, 2016

One does not need to be particularly good at hearing to decipher the dog whistles being used during this year’s election campaign in the United States. Listen even briefly, and you will understand that Mexicans and Chinese are working with Wall Street to forge lousy trade deals that rob American workers of their rightful jobs, and that Muslims want to blow everyone up.

container ship on water

Is globalization the culprit behind wage stagnation in the U.S.? (Photo by Buonasera via Wikimedia Commons)

All of this fear mongering is scarier than the usual election-year fare. It is frightening to people in foreign countries, who can conclude only that voters in the world’s only superpower have become dangerously unbalanced. And it is frightening to Americans, who until recently believed – or perhaps hoped – that they were living in a republic based on the traditions established by George Washington, Abraham Lincoln, and Teddy and Franklin Roosevelt.

But what is even more unsettling is the political reality this rhetoric reflects. There can be no comparing Democratic presidential candidate Bernie Sanders’s policy-oriented critique of neoliberalism to the incoherent bluster of Donald Trump or Ted Cruz on the Republican side. And yet, on both the right and the left, a common narrative is emerging – one that seeks to explain why the incomes of working- and middle-class Americans have stagnated over the past generation.

Unfortunately, this narrative, if used as a basis for policymaking, will benefit neither the U.S. nor the rest of the world; worse, it has yet to be seriously challenged. For decades, senior Republican politicians and intellectuals have been uninterested in educating the American people about the realities of economic policy. And Democratic frontrunner Hillary Clinton has been too busy trying to fend off Sanders’s challenge.

Broadly, the narrative goes something like this. American middle- and working-class wages have stagnated because Wall Street pressed companies to outsource the valuable jobs that made up America’s manufacturing base, first to low-wage Mexicans and then to the Chinese. Moreover, this was a bipartisan effort, with both parties unified behind financial deregulation and trade deals that undermined the US economy. First, the North American Free Trade Agreement (NAFTA) led to the export of high-quality manufacturing jobs to Mexico. Then the U.S. established permanent normal trade relations with China and refused to brand its government a currency manipulator.

The reason this narrative is wrong is simple. There are good reasons why the U.S. adopted policies that encouraged poorer countries to grow rapidly through export-led industrialization. In helping Mexico, China, and other developing countries grow, the US is gaining richer trading partners. Furthermore, there is a strong case that US national security will be improved if, 50 years from now, schoolchildren around the world learn how America helped their countries prosper, rather than trying to keep them as poor as possible for as long as possible.

book coverIt was not globalization that caused incomes to stagnate. Trade with countries like China and Mexico is just one factor affecting income distribution in the US, and it is by no means the most important one. The reason that incomes have stagnated is that American politicians have failed to implement policies to manage globalization’s effects.

As Steve Cohen and I argue in our book Concrete Economics, macroeconomic management requires the government to do what it always did before 1980: pragmatically adopt policies that promote equitable growth.

There were good reasons for the US to offload industries that required low wages to be globally competitive. But there was little reason for the US to offload industries that had become important “technology drivers.” Nor were there good reasons for a lot of other bad decisions, such as allowing the financial industry to profit by convincing investors to bear risks they should not and allowing health-care providers to profit from administration at the expense of the care and treatment of the sick. Other bad decisions include incarcerating 2% of the country’s young men and concluding that America’s economic problems would be solved if only the rich could keep more of their money.

It is not difficult to see where the blame lies. As Mark Kleiman of NYU’s Marron Institute points out, the Republican Party’s rigid and die-hard ideological opposition to ‘taxing the rich [has] destroyed, on a practical level, the theoretical basis for believing that free trade benefits everyone.” It is difficult to argue for redistributing the benefits of globalization when you believe that the market channels gains to those who deserve them. Nor can you ameliorate the painful effects of globalization if you believe that social-insurance programs turn their beneficiaries into lethargic “takers.”

It is not globalization, poor negotiation tactics, low-wage Mexicans workers, or the overly clever Chinese that bear responsibility for what is ailing America. The responsibility lies instead with politicians peddling ideology over practicality – and thus with the citizens who elect them, as well as those who don’t bother to vote at all.

Crossposted from Project Syndicate.

Comments to “Debunking America’s populist narrative on the economy

  1. Professor, do I need to purchase your book in order to see detailed economic arguments for the assertions you make in this post? If I buy your book will I find them?

  2. Brad –

    I would be interested in hearing your ideas about how to provide the following to the American workforce:

    Jobs that:

    1. Plentiful, AND
    2. Pay Middle-Class wages, AND
    3. Do not require a college degree

    After the Second World War, jobs that met all three of those requirements were in the manufacturing sector. Centrist Democrats have talked for years about retraining workers for the 21st century economy, but, unless that training is something other than college (more on that in a sec) then you’re never going to get there.

    There is this idea among college-educated Democrats that it is possible to build an economy of where the bulk of the workforce does the kind of office-type work that typically requires a college degree to even get in the door – various levels of management, marketing and analytics, software development, enterprise-level sales, and so on.

    I guess the idea has to do with an international “division of labor” as it were – as other countries take over manufacturing and other lower-skilled jobs, the United States will do the higher-end, more-educated tasks.

    This isn’t realistic.

    If you use any reasonable proxy for the maximum possible percentage of Americans who can get a 4-year college degree, it is not much above 50% of the workforce, and that assumes an absolutely best-case scenario – lots of social expectations to go to college, financial means to pay for it, and so on. It is worth remembering that, purely as a mathematical truth, half the population is below-median intelligence.

    So, nearly half the workforce (and again, that’s absolute best-case to the point of being unrealistic) is not going to be able to participate gainfully in this 21st century economy, and will be effectively consigned to a life where a significant fraction will be living lives that are a constant, low-grade economic emergency.

    Everyone can’t be upper-middle-class. Public policy needs to address this.

    Any political party that is instrumental in providing jobs that meet the previously-mentioned criteria – plentiful, good-paying, and don’t require a degree – will do rather well nationally, I expect.

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