WERE CLINTONITES WRONG ABOUT THE ECONOMY? -- Freakoutonomics

[ProSense]

WERE CLINTONITES WRONG ABOUT THE ECONOMY?

Freakoutonomics

by Jonathan Chait
Post date 10.26.06 | Issue date 11.06.06

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."...

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October 28, 2006

Power

Snip...

What Chait does is tell the economic history of the past 30 years. It's something a fair number of wonks could rattle off to you, but wouldn't actually be allowed to write for anyone -- too boring, with too little new information. The magazine industry is biased against context. Chait's genius was to peg it to the retreat of Clintonomics, thus giving it the sexy, and guaranteeing it a place in the feature well of The New Republic.

In short, here's the story: As you all know, in the late 70's, wages begin to stagnate. The ostensible reason for this is slow growth and plummeting productivity. During the post-war period, productivity averaged 2.5% a year. From 1973 to 1995, it was 1.5%. Since wages have always tracked productivity, smart lefties began focusing on how to reinvigorate productivity. They did that through Clintonomics: Fiscal responsibility combined with mild downward redistribution. The deficit reduction freed up money for the private sector to invest (when the government runs a high deficit, it pushes up the price of loans by sucking up so much money itself -- economists call this "crowding out"), and worked like a charm. Helped along by the tech boom, productivity shoots up, as does growth, and both metrics have remained healthy and robust ever since (well, till this quarter).

The hitch: Wages didn't track. Productivity and growth went up, but they weren't distributed across the economy. Wages increased somewhat throughout the mid-to-late 90s, but as the supercharged growth gave way to the robust numbers of the past few years, the rich began sucking up the gains (if you've been reading this blog, you already know that. For a refresher, go here). The left has tried to explain this away as a consequence of Bush's fiscal policy. Sadly, the trends show up in pretax income also. The right has tried to explain this accelerating inequality as an unstoppable structural feature of the new economy: It's the meritocracy, or computers, or benefits, or global trade. Unfortunately, those explanations are largely bullshit. Europe also has computers, and trade, and mobility, and benefits, and has easily avoided the widening chasm we've seen. So what makes us different?

In a word, power. Or the distribution of it. Europe has strong unions and active governments; countervailing powers that wrest a portion of the pie for their constituencies. We don't. This is a point I made in my riposte to Jacob Hacker this week, but it can't be said often enough. There is a tectonic shift in liberal thinking underway. We used to think the country's economic problems were about economics. At times, that's been true, It isn't now. Now, they're about power. And that's a conversation the Clintonites are very grudgingly, very awkwardly, coming to accept.

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October 28, 2006

EXPLAINING INCOME INEQUALITY....It's worth reading Jon Chait's entire article about rising income inequality in the New Republic this week, but for my money here's the most important factoid to lodge firmly in your brain:

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.

Whenever you hear someone propose an explanation for skyrocking income inequality over the past few decades, try to think about whether it explains the fact that inequality has gotten immensely worse not just between the top 20% and the bottom 20%, but between the top 1% and the 9% just below them. For example:

Greater returns to education? Do you really think that the top 1% are better educated on average than the next 9%?

Greater rewards for technical skills? Do you really think the top 1% have greater technical skills than the next 9%?

Globalization?

More stable families?

Race and gender?

A failure to take account of the growing value of health benefits?

Do any of these things plausibly seem like big differences between the top 1% and the next 9%? Pretty clearly they aren't. So why is the top 1% outpacing even the well-to-do who inhabit the next 9%? What's the big difference between these groups? If you're interested in reading more about this, it's below the fold.

Here's the answer: the top 1% have a lot more money. The rest is left as an exercise for the reader.

[aquart]

1. The rich are insufficiently taxed.

And this government is borrowing its ass off to support them.

[1932]

3. And thanks to Alternative Minimum Tax, the people just below them are

over-taxed by comparison.

[1932]

2. Education and skills do increase the value of a person's labor

but, with stagnating wages, decreasing taxes on capital gains (from stock sales) and stock dividends, and with the cost of education increasing (and financed by student loans sold to Wall St investors), the increasing in value of that labor isn't going to working people. It's going to the people who hold stock options at the companies employing them.

[papau]

4. He is spot on - great article n/t

n/t

[KoKo]

5. Let's give this some votes for the Greatest Page....Kick.