Saturday, July 1, 2017

The Importance of Fairness: A New Economic Vision for the Democratic Party

I have been a Democrat my entire life. Today, the Democratic Party matters more than ever because it is the only organization currently capable, at least theoretically, of preventing the Republicans from turning the United States into a fully-fledged banana republic, ruled by and for a handful of billionaire families and corporate chieftains, with a stagnant economy and pre-modern levels of inequality. Yet I cannot find anything to disagree with in Senator Bernie Sanders’s assessment:
“The model the Democrats have followed for the last 10 to 20 years has been an ultimate failure. That’s just the objective evidence. We are taking on a right-wing extremist party whose agenda is opposed time after time and on issue after issue by the vast majority of the American people. Yet we have lost the White House, the U.S. House, the U.S. Senate, almost two-thirds of the governors’ chairs and close to 900 legislative seats across this country. How can anyone not conclude that the Democratic agenda and approach has been a failure?”
A central shortcoming of the party is that, on economic issues, it has nothing to say to people trapped on the wrong side of our country’s growing inequality divide. Hillary Clinton won the “working class” (household income less than $50,000) vote, but by a much smaller margin than Barack Obama in 2012 or 2008—despite Donald Trump’s ardent efforts to alienate African-Americans and Latinos. Some people voted for Trump because of racism or misogyny. But Clinton was also flattened by Trump among voters who feel their financial situation was worse than a year before or who think that life will be worse for the next generation. She lost the Electoral College in the “rust belt” states of the Upper Midwest, whose economies have never fully recovered from the decline of American manufacturing.

The Democratic Party was once the party of working people. So why is it increasingly becoming the party of well-educated, socially tolerant, cosmopolitan city-dwellers? Because, in an age of stagnant median incomes and a disintegrating social safety net, Democrats have no economic message for the many people who are struggling to make ends meet, to pay for college, to stay in a home, or to save for retirement.

This impotence is the product of sweeping changes in the intellectual and political landscape of the United States. As I discuss in my recent book, Economism, contemporary thinking about economic issues is dominated by “economism”: the belief that simplistic models accurately describe the real world and should be the basis of public policy. (For example: The minimum wage is an artificial price floor in the labor market, therefore supply will exceed demand, therefore unemployment must increase.) This naive or disingenuous worldview, according to which unregulated markets produce the best of all possible worlds, is frequently invoked to defend policies that favor the wealthy and justify the vast inequality that results.

Economism was promoted by conservatives who sought to roll back the New Deal and restore a mythical libertarian paradise governed by free markets, with a minimal state and low taxes. Their vision became the platform of the Republican Party in the 1970s and the policy handbook for President Ronald Reagan and every conservative leader since. In response, Democrats have tacked to the right on economic issues. Since Bill Clinton, the Democratic Party’s economic vision has been that prudent management of macroeconomic factors would foster higher private sector growth, which would in turn create jobs and prosperity for working families. The central planks of this platform have included: cutting budget deficits to reduce interest rates; reappointing Republican Federal Reserve chairs who would control inflation; and even seeking a “grand bargain” that would reduce Social Security spending in exchange for modestly higher taxes. As the Republican Party has been taken over by charlatans who insist on cutting taxes and crippling government at every opportunity, Democrats have rebranded themselves as the moderate party of responsible economic stewardship.

But there are two problems with this approach. The first is that it is economism lite. While Republicans say, “Free markets solve all problems,” Democrats respond, “Free markets solve most problems, but markets sometimes fail, so sometimes they need to be judiciously regulated to produce efficient outcomes.” This may be more accurate, but it undermines Democrats’ appeal to people who have not benefited from overall economic growth—because they have the wrong skills, live in the wrong place, got sick at the wrong time, or otherwise got unlucky.

The second problem is that economism lite doesn’t work, at least not anymore. A rising tide might lift all boats, as President John F. Kennedy claimed; but, then again, it might not. Since Ronald Reagan was elected president in 1980, labor productivity—the amount that each person can produce in an hour of work—has grown by 94% (a modest but respectable 1.9% per year); real per capita gross domestic product—total economic output per person—has grown by 82% (1.7% per year). Over that same period, however, median household income has increased by only 16% (less than 0.5% per year). In other words, the country as a whole has become almost twice as rich, but the typical family makes only a little more money than in 1980. Where has all the money gone?

To the very rich, as can be seen in one chart:

(If you compare the top 1% with the bottom 99%, or the top 10% with the bottom 90%, or the top 0.01% with the bottom 90%, you get the essentially the same picture.)

To be clear, the failure of overall economic growth to benefit the middle and working classes is not solely or even primarily the Democrats’ fault. The villain in that story is the Republican conservatives who weakened unions, undermined the social safety net, and slashed taxes on the rich. Globalization and competition from low-wage countries were another factor. But since the onslaught of the conservative revolution, Democrats have played defense by claiming the space once occupied by moderate Republicans. Recall the pivot to deficit reduction in 1993, welfare reform in 1996, the capital gains tax cut of 1997, the commitment to free trade agreements from NAFTA to TPP, and the bipartisan commitment to financial deregulation that helped produce the devastating financial crisis of 2008.

Barack Obama temporarily had a filibuster-proof majority in the Senate, and yet his principal accomplishments were an economic stimulus bill that was more than one-third tax cuts; a health care plan modeled on Mitt Romney’s Massachusetts reforms; a technocratic financial reform bill that neither reduced the dominance of the megabanks that caused the 2008 crisis nor, judging from subsequent experience, deterred them from serial lawbreaking; and a financial system rescue that kept the big banks (and their executives and shareholders) afloat while they fraudulently foreclosed on millions of homeowners. There were positives in Obama’s economic record: The recession would have been worse without the stimulus, millions of people got health coverage, and the Dodd-Frank Act included some steps in the right direction. Taken as a whole, however, Obama governed as what we called a moderate Republican only a few decades ago, and the only vision one can distill from his actions is that of prudently harnessing market forces to generate growth. (Perhaps the president and his advisers would have preferred more progressive policies in some areas such as health care—but they were constrained not just by the Party of No, but also by a Democratic caucus effectively controlled by its conservative wing.) For an unemployed recent graduate buried by student debt, or a factory worker laid off in middle age while underwater on her mortgage, or a retiree who saw her savings evaporate in 2008 and 2009, the argument that Hillary Clinton and the Democrats are not as bad as the Republicans was just not compelling enough.

One of the central themes of my book is that economism is an ideological worldview: a lens through which we see the world, which affects the way we interpret reality and serves the interests of certain groups. Logically, it can only be overthrown by another worldview. And so the book ends this way:
“Millions if not billions of people today hunger to live in a world that is more fair, more forgiving, and more humane than the one that we were born into. Creating a new vision of society worthy of that collective yearning—one that goes beyond the false promises of economism—is the first step toward building a better future for our children. That is the story that remains to be written.”
What the Democratic Party needs is an economic message that: addresses the real problems that many Americans face on a daily basis (instead of callously insisting that “America is already great”); and resonates with their very real frustrations and anxieties. Both politically and as policy, the idea that the rising tide of economic efficiency and growth would lift all boats has failed. It is time for something new.

by James Kwak, Baseline Scenario | Read more:
[ed. See also: Conspicuous consumption is over. It’s all about intangibles now.]