The Rise of Populism

Jonathon Chait explains the recent rise of populism within the Democratic Party:

Were Clintonites Wrong About the Economy?, Freakoutonomics, by Jonathan Chait, New Republic: 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 ... 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" ... 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... The poverty rate fell...

Today, however, the Rubinites have been thrown into doubt. ... The economy is growing ..., but, essentially, all the gains are going to the rich. ... ...[F]iguring 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. ...

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. ...

The most obvious mystery is: Why is this happening now? ... For a long time, ... the ... leading theory ... 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. ... 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. ... 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...

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... And ... 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. ... 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. ...

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. ... 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. ...

Even Rubin himself has begun saying some highly unRubin-like things. In his interview with The Nation last summer, he mused about the ... ways global trade can bring down incomes for unskilled workers in advanced economies. ...

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 ...[to] the populist side...

I'm wary of the populist path, but have nothing better to offer, and that's the problem. Paul Krugman called for:

smart, bold populism. All we need now are some smart, bold populist politicians.

But Brad DeLong worries:

What populist policies that we can think of would be smart? And how can we make our high politicians allergic to populist policies that are stupid?

We can't, but even if there are no populist policies at all, politicians will still find a way to implement stupid policies. That's what they do. Are stupid populist polices worse than stupid non-populist policies? I don't know. Maybe, maybe not. But unless economists can come up with something better, and so far we haven't, rising inequality "provides as good an argument as you could possibly want for a smart, bold populism."