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Wednesday, July 19, 2006

Should Democrats Return to Their Clinton Era "Market-Based Global Engagement Roots"?

How should Democrats respond to increasing inequality? This writer recommends a return to the centrist approach pursued under Clinton:

The Mother of All Electoral Issues, by Steve Rattner, Commentary, WSJ:  ...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.

It's about time. ... No amount of chaff can hide the failure of our remarkable productivity surge ... to meaningfully boost average wages, which have barely grown with inflation. Separated by income level, the picture is ... 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%.

Hardly a day goes by without further reminders. Not long ago, for example, the Journal reported on its front page that tax revenues from the top 10% of Americans were growing dramatically... That's good news for the Treasury but not good news for those further down, whose taxes are not rising because their incomes are not growing.

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.

Happily, the Bush administration has occasionally acknowledged the trend. In a little-noticed first speech as head of the president's Council of Economic Advisers, Edward Lazear said: "The general picture cannot be disputed. The difference between the earnings of individuals at the top and earnings of individuals at the bottom has grown." ...

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 ... visions of ... fiscal responsibility, while trumpeting unionization and protectionism.

That's terrible policy, although it's not hard to imagine why Democrats would be tempted by a retreat from the world marketplace. Collateral damage from globalization has ... helped widen the income gap. Meanwhile, the ability to source labor worldwide has allowed companies to turn the thumbscrew on costs, swelling profits but eating into labor's share of the pie.

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... And the storm over gas prices ... has been exacerbated by the thin wallets of workers facing them at the pump.

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.

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.

Thoughtful elements of the Democratic caravan are carefully crafting solutions, anchored in the market-based global engagement roots of the Clinton years. For example, the Hamilton Project (on whose advisory council I serve) has fired an opening volley of specific new ideas ... focused on achieving broad-based and sustainable growth while bringing along Americans who have been left behind. ...

[W]e need progress on ideas like wage insurance for displaced workers and a higher minimum wage. 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.

No one can promise that centrist Democratic policies will insulate us from the effects of globalization. But with the country unhappy with the Bush administration's laissez-faire indifference, the alternative to turning government in a more promising direction may be retrogressing to an era of protectionism and heavy-handed government that we rightly left behind with the stagflation of the 1970s.

    Posted by on Wednesday, July 19, 2006 at 12:15 AM in Economics, Income Distribution, Policy, Politics | Permalink  TrackBack (0)  Comments (8)

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