Summers: Harness Market Forces to Share Prosperity

Larry Summers with general guidelines on how to share the gains from globalization and technological change:

Harness market forces to share prosperity, by Lawrence Summers, Commentary, Financial Times (free): When I studied economics in graduate school a generation ago we were taught that it was a “stylised fact” that the US income distribution was very stable. We were shown that the fraction of the population in poverty tracked almost perfectly ... median family income over time and that productivity growth and average real wage growth moved together... These observations led naturally to the conclusion that the main way of reducing poverty or increasing the incomes of middle income families was raising the rate of economic growth.

Today, we have another generation’s worth of data... This experience forces a reassessment of the earlier economic orthodoxy.

It can no longer plausibly be asserted that the income distribution is relatively static or that average wage growth tracks productivity growth. Indeed, in a recent paper ..., my collaborators and I concluded ... that, ...[i]f middle income families had shared fully in the economy’s income growth over the past generation their incomes would have risen twice as rapidly!...

What should be done? ...[T]he answers are not entirely clear but probably lie between the extreme positions... In the face of the experience of the past generation it is no longer credible ... to argue that ... addressing questions of ... distribution is populist or divisive. Given what has not happened to the pay cheques of average workers..., it is not plausible to suppose that policies that focus only on aggregate economic growth are sufficient to meet current challenges.

Equally, arguments that suggest the only way to raise the incomes of middle-class families is ... to regulate business practices more heavily or to restrict increases in international trade are very dangerous. As much justified concern as we have about increased inequality, ... it could be much worse if the economy had not been able to achieve the ... under 5 per cent unemployment and sub-3 per cent inflation ... for much of the past decade. This surely would not have happened without the US economy benefiting from greater global integration. As western Europe’s long experience with unemployment ... illustrates, we would be taking great risks if, in the name of benefiting workers, we ... made production in the US less competitive in the global marketplace.

The right approach is activist but it embraces activism that goes with – rather than against – the grain of the market system. This is not a new idea. The enduring legacy of the New Deal is not the many measures taken to regulate prices or increase public employment. It is the measures such as securities regulation and Social Security that do not seek to oppose but channel market forces and mitigate their consequences. ...