Why are US economic gains are going to the rich

[GangBang]

In 1993, mere months into the Clinton era, the new administration went to war with itself. Liberals in the Cabinet argued that the central problem of the U.S. economy was the vast middle class that was not seeing its income improve--a problem, they said, that could only be addressed through massive public investment. Moderates, including Robert Rubin, then the chairman of the National Economic Council, replied that the central problem was restoring economic growth, which could only come about by slashing the budget deficit. The moderates won. Their triumph was chronicled memorably in Bob Woodward's The Agenda and bitterly mourned in Locked in the Cabinet, the memoir of liberal Labor Secretary Robert Reich. President Clinton's first major economic address "mentions education, and job skills," lamented Reich, "but the real heart of the message is the importance of reducing the deficit."

By the end of the Clinton years, the centrist ideology that emerged victorious from this skirmish came to be known as "Rubinomics," a moniker that took hold after Rubin was elevated to Treasury secretary and became the ideology's most prominent advocate. This economic vision encompassed several elements: fiscal responsibility married to controlled progressive investment, a belief in the importance of cultivating Wall Street's confidence, and a suspicion of populism. But, at its deepest level, it reflected an assumption that economic growth could be harnessed to the benefit of all Americans, not just the rich.

When Clinton left office, the Rubinites looked like prophets. Everything they hoped for had come true. Businesses invested more. Incomes grew, and not just for the rich. Families at the middle of the income distribution saw their incomes grow by more than $7,000. The poverty rate fell by one-quarter, and the typical black family saw its income grow by one-third. Even in the early Bush years, the victory of Rubinomics within the Democratic Party seemed complete. Democrats arguing against George W. Bush's tax cuts insisted that they preferred to use the money not on social spending but on debt-reduction.

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.



For 25 years after World War II, widespread prosperity was a bedrock assumption among liberals. The Port Huron Statement, issued by the Students for a Democratic Society in 1962, famously began, "We are people of this generation, bred in at least modest comfort... ." There was good reason for such economic optimism: From 1947 to 1973, the median family income more than doubled. And so, with the middle class flourishing, economic liberalism concerned itself with the plight of those left behind--inner-city minorities, the rural poor, and so on. Since the economic pie was growing on its own, liberals' chief concern was ensuring it was divvied up fairly.

But, starting with the oil price shock of 1973, the spectacular postwar boom ground to a halt. For the next two decades, living standards barely rose at all. Wages would grow during an expansion, but only enough to recapture the ground that had been lost during the previous recession. Illustration by David Cowles(This period was neatly captured by the title of Paul Krugman's 1990 book on the subject, The Age of Diminished Expectations.) The reason everything went bad all at once could be boiled down to a single word: productivity. Productivity, which is a measure of how much workers produce per hour, is the essential ingredient for higher material living standards. After all, the two ways to create more wealth are to work more hours or to be more productive in the hours we work--whether through technological advances, improved skills, organizational streamlining, or whatever. Since the number of hours in a day is finite--and, anyway, few people want to spend every waking hour slaving away--the only way for a society to enjoy greater material comfort over the long run is to increase productivity. As Krugman wrote, "Productivity isn't everything, but in the long run, it is almost everything."

During the postwar boom, productivity surged at an average rate of 2.5 percent a year. But from 1973 to 1995, by contrast, it grew at a paltry 1.5 percent. The economic pie had stopped growing, and slicing it up more fairly was no longer enough. So a generation of liberals, and especially moderate liberals, began focusing on how to restore rising productivity and get the pie growing again. This was one reason the Clinton administration made it a priority to reduce the budget deficit, which drained savings that could otherwise be tapped by business for investments in new plants and equipment that could raise productivity. "The whole focus was on growth," Rubin recalled in an interview with The Nation's William Greider last June. The focus on growth worked. Starting in 1995, productivity began to climb rapidly once again. And, just as they had after World War II, wages rose up and down the income ladder.

This is what has made the current economic expansion--which began after the brief 2001 recession--such a mystery. On one level, it resembles the expansion of the '90s--high growth, high productivity gains, low unemployment. But, on another level, it resembles the Age of Diminished Expectations: The median income has not grown at all. Workers are helping create enormous fortunes, but not sharing in them. The average hourly wage has actually declined 2 percent since 2003. The crisis of scarcity has been solved, only to be replaced by a crisis of maldistribution.



This seems to run in the face of economic theory. If workers grow more productive, logic suggests, they're making more money for their employers, which means businesses will find it profitable to hire more of them. The more workers get hired, the more businesses have to bid up their price to hire them, which means that their wages will rise. Yet that final step is not happening. The vast new wealth being created by U.S. business is going to owners of capital and nobody else.

In a widely noted 2005 paper, Northwestern economists Robert Gordon and Ian Dew-Becker concluded that, for some time now, productivity gains have gone entirely to the top one-tenth of the workforce. "A basic tenet of economic science is that productivity growth is the source of growth in real income per capita," they wrote. "But our results raise doubts, that we find surprising and even shocking, about the validity of that ancient economic paradigm." Ever since the Gordon and Dew-Becker paper, economists--especially those on the left--have been obsessed with the phenomenon, discussing it in the mystified tones astronomers might use for a previously undetected black hole in our region of space. "Part of the answer is, we don't really know," confesses Peter Orszag, a former Clinton economic adviser.

The full weight of what is happening, in other words, has not yet sunk in. Before the current expansion, it had always seemed to be the case that growth translated into higher living standards for most workers. For that reason, those who follow the economy had, understandably, gotten into the habit of treating top-line economic numbers as a good gauge of broader economic health. Since the current state of affairs (with rapid growth sitting alongside stagnant incomes for most workers) is so unprecedented, economic journalists have had little idea how to treat it. The general reaction has been to puzzle at the public's sour disposition. A recent story in the Associated Press is typical:

Overall, the economy grew at a 2.6 percent pace from April through June, compared with a 5.6 percent pace over the first three months of the year, which was the strongest spurt in 21⁄2 years. Still, voters remain uneasy even though gasoline prices have started dropping, the stock market is hitting record highs, and interest rates on credit cards and adjustable mortgages are leveling off.

Just this week, The New York Times published a story on the front page of the business section marveling at voters' inexplicably downbeat assessment of the economy. "Republican candidates do not seem to be getting any traction from the glowing economic statistics with midterm elections just two weeks away," reported the Times. The author proceeded to puzzle at length about why this could be, without ever considering the possibility that, for most people, the economy was not doing well.

Conservatives, for their part, have grown enraged that the public does not adequately appreciate the economic bounty it is enjoying under Bush. The Wall Street Journal editorial page dubbed the current recovery the "Dangerfield economy" (meaning it gets "no respect") and speculated that people only believe the economy is bad because they have been fed misleading reports by the biased liberal press. Columnist George F. Will has fulminated against the "economic hypochondria" of the ungrateful masses. Conservative commentator Larry Kudlow has endlessly touted the Bush boom as "the greatest story never told."

It is certainly true that the economy is performing well by traditional standards. But it ought to be apparent that, in this case, traditional standards are not the most relevant ones. Fast economic growth, after all, is a means to an end--namely, higher living standards for most people. By any decent moral calculation, an economy that does not produce higher living standards for most people is not a good one.

The most obvious mystery is: Why is this happening now? What makes this economic cycle so different from the ones that came before it?

One convenient answer is that Bill Clinton was president during the last expansion, and George W. Bush is president during this one. It's an appealing theory for Democrats. The problem is that nobody can point to any specific policies Bush has put into place that could have had such a massive effect. Bush's tax cuts--which disproportionately benefit the rich--have, of course, aggravated the situation. But the change that economists have trouble explaining is what's happening to before-tax incomes. Bush simply hasn't done enough to account for the huge difference between this economy and the Clinton economy. "I wish I could say Bill Clinton was the reason everything was better in the 1990s," Jason Furman, a Clinton economic adviser, confessed to me. Alas, he conceded, it's not true.

Some economists point out that the unemployment rate is deceptively low: If you look at other measures, like the share of the population who are not working (a measure that takes into account retirees and people not actively looking for work), you can see that the job market is not quite as tight as it seems. There's also the fact that rising health care costs have gobbled up some of the money that should be going to wages. But none of these factors explain all, or even most, of the huge gap between productivity and wages.

And so, in setting about to unravel the mystery, economists (especially those on the center left) have looked closely at a deeper trend, one that has been going on much longer than the current administration: rising inequality. Although the post-1973 decline in productivity growth was long considered the primary economic problem facing the nation, lurking in the background was a more or less concurrent trend of widening inequality. Put simply, the fortunes of the very rich and the fortunes of everybody else have been diverging sharply. Over the last quarter century, the portion of the national income accruing to the richest 1 percent of Americans has doubled. The share going to the richest one-tenth of 1 percent has tripled, and the share going to the richest one-hundredth of 1 percent has quadrupled.

During the last half of the Clinton administration, the issue of inequality receded somewhat. In part, this was due to the particularly beneficent conditions of the moment. With workers of all income levels enjoying rising incomes, the fact that some workers enjoyed higher gains than others seemed less crucial. In light of present circumstances, though, the 1990s boom seems more like a fluke. We enjoyed cheap gasoline, peace and prosperity, and a temporary lull in rising health care costs, thanks to the spread of health maintenance organizations. Operating under near-perfect conditions, the job market heated up and workers reaped the benefit. In retrospect, those halcyon days seem like more of a historical blip--one that temporarily obscured the massive, continuing undertow of rising inequality.



There is a second reason that inequality has commanded renewed attention in recent years. The more we learn about its causes, the more pernicious it seems, and the more it seems to require radical solutions.

For a long time, economists have had a hard time pinning down why the rich have pulled so far away from the rest of us. The leading theory initially put forward by economists was something called "skill-biased technological change." The theory, in a nutshell, is that the development of new technologies, especially computers, has made mental skills more important. In the old industrial economy, there was high demand for brawn, which pumped up the wages of blue-collar workers. The new economy puts a premium on education. Therefore, the theory goes, workers with college educations have thrived, and those without have suffered. It's a nice theory, and one that seems intuitively correct. It also vindicates the basic free-market model, in which rising wages for those at the top are simply a natural reflection of their rising relative economic value.

But confounding evidence has piled up in recent years. First, Europe, which is exposed to the same changes in global trade and technology, has not seen anything like the increase in inequality found in the United States. Second, the salaries of those workers who ought to be best positioned to gain from technological change have not risen much at all. From 1989 to 1997, occupations related to math and computer science saw only modest income growth (4.8 percent), while the income of engineers actually dropped slightly. During that time, however, CEO compensation doubled. Third, the whole pattern of rising inequality does not suggest a split between the educated and the uneducated. The rise in inequality isn't between the top one-fifth and everybody else; it's between the top one-hundredth and everybody else. As a matter of fact, over the last five years, college graduates have watched their wages drop, while high school graduates' wages have held steady.

If the skill-biased technological change theory were true, then the answer to rising inequality would be to make your workers more skilled. That is exactly what the Clinton administration did, devoting billions of dollars to re-train blue-collar workers in the hope of making them more competitive for the global economy. And, despite mounting evidence to the contrary, that continues to be the Bush administration's answer to inequality. Whenever economists associated with the administration are asked about the rising gap between the very rich and the not very rich, they inevitably cite skill-biased technological change, offer up some anodyne musings about the need for education, and quickly change the subject.



If, on the other hand, you reject the theory of skill-biased technological change, you are left with an altogether more discomfiting explanation. Rising inequality must not be the logical outcome of the free market, the invisible hand working its magic. Instead, it must reflect the rising social, economic, or political power of the rich.

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.

It would be an exaggeration to say that the Rubinites have acceded to the labor-liberal worldview. But there are a lot of straws in the wind. Take Alan Blinder, a Princeton economist. Blinder is the very embodiment of technocratic moderate liberalism. He is a former governor at the Federal Reserve and a confirmed critic of economic populism. Yet, last spring, Blinder wrote a much-discussed essay in Foreign Affairs predicting that tens of millions of U.S. jobs could be outsourced in the coming years and pondering the potentially devastating implications.

The Democratic Leadership Council--once thought of as labor's arch-foe within the Democratic Party--has embraced the idea of a "card-check" system to make it easier for workers to form unions. And moderate liberal economists have, in sundry ways, tempered their enthusiasm for free trade with deeper worries about the dislocating effects of trade. A recent paper by the Hamilton Project, a Rubin-led group that is ground zero for former Clintonite economists, offered up a far more measured endorsement of free trade than would have been on display a dozen years ago, conceding, "International trade also has slightly exacerbated the underlying trend in the United States to greater income inequality and increased levels of income volatility." Former Clinton economic adviser Gene Sperling wrote last year that his fellow moderates should admit that "accelerated market opening in nations with weak safety nets and poor labor rights can at least temporarily exacerbate inequity." More anecdotally, Jared Bernstein, a liberal economist with the Economic Policy Institute, told me that the Hamilton Project requested 20 copies of his latest book.

Even Rubin himself has begun saying some highly unRubin-like things. In his interview with The Nation last summer, he mused about the "global convergence of wages"--a favorite phrase of labor liberals that refers to the ways global trade can bring down incomes for unskilled workers in advanced economies. He cited John Kenneth Galbraith's observation that a true labor market does not exist when business acquires too much power in setting wages. He brought up the idea again, unprompted, in an interview with me. "I'm not sure where that leads you," he admitted.

I'm not sure either, but the overall direction seems clear. Since the outset of the Clinton administration, the party's economic populist wing has been on the defensive. Democrats have fought against the most plutocratic and fiscally irresponsible Republican plans, but they have done so from a standpoint of resolute centrism. They had strong confidence in an economic model that was, at its core, conservative: unfettered free trade, fiscal restraint. They believed these ideas would benefit all Americans, and they did. But something has changed in the way the U.S. economy works. And, even if it's not yet entirely clear what has happened or how we can best address it, the intellectual balance of power in Democratic circles is already shifting. Today, all the confidence is on the populist side, and it is the centrists who aren't quite sure what to make of the world around them.

Discuss. Especially economic types.

[JC]

God damn that was a long post

I must confess I skimmed. I will risk sounding like a broken record. I know that the answer is organization and I know that the rich are rich because the poor allow them to be. I also know that we "the working poor" lose when we play by their rules "the rich and powerful" because they have had the time and resources to stack the deck against us. So I propose we operate by our own playbook ane what we want. Or just quit working, just quit producing and see what happens. I must also point out that the rich and powerful cant be trusted to do the right thing so how would that money make it from there hands to ours when its just as easy to stuff it in their own pockets.