Debunking America's populist narrative
One does not need to be particularly good at hearing to decipher the dog whistles being used during this year's election campaign in the United States. Listen even briefly, and you will understand that Mexicans and Chinese are working with Wall Street to forge lousy trade deals that rob American workers of their rightful jobs, and that Muslims want to blow everyone up.
All of this fear mongering is scarier than the usual election-year fare. It is frightening to people in foreign countries, who can conclude only that voters in the world's only superpower have become dangerously unbalanced. And it is frightening to Americans, who until recently believed – or perhaps hoped – that they were living in a republic based on the traditions established by George Washington, Abraham Lincoln, and Teddy and Franklin Roosevelt.
But what is even more unsettling is the political reality this rhetoric reflects. There can be no comparing Democratic presidential candidate Bernie Sanders's policy-oriented critique of neoliberalism to the incoherent bluster of Donald Trump or Ted Cruz on the Republican side. And yet, on both the right and the left, a common narrative is emerging – one that seeks to explain why the incomes of working- and middle-class Americans have stagnated over the past generation.
Unfortunately, this narrative, if used as a basis for policymaking, will benefit neither the US nor the rest of the world; worse, it has yet to be seriously challenged. For decades, senior Republican politicians and intellectuals have been uninterested in educating the American people about the realities of economic policy. And Democratic frontrunner Hillary Clinton has been too busy trying to fend off Sanders's challenge.
Broadly, the narrative goes something like this. American middle- and working-class wages have stagnated because Wall Street pressed companies to outsource the valuable jobs that made up America's manufacturing base, first to low-wage Mexicans and then to the Chinese. Moreover, this was a bipartisan effort, with both parties unified behind financial deregulation and trade deals that undermined the US economy. First, the North American Free Trade Agreement (NAFTA) led to the export of high-quality manufacturing jobs to Mexico. Then the US established permanent normal trade relations with China and refused to brand its government a currency manipulator.
The reason this narrative is wrong is simple. There are good reasons why the US adopted policies that encouraged poorer countries to grow rapidly through export-led industrialisation. In helping Mexico, China, and other developing countries grow, the US is gaining richer trading partners. Furthermore, there is a strong case that US national security will be improved if, 50 years from now, schoolchildren around the world learn how America helped their countries prosper, rather than trying to keep them as poor as possible for as long as possible.
It was not globalisation that caused incomes to stagnate. Trade with countries like China and Mexico is just one factor affecting income distribution in the US, and it is by no means the most important one. The reason that incomes have stagnated is that American politicians have failed to implement policies to manage globalisation's effects.
As Steve Cohen and I argue in our book Concrete Economics, macroeconomic management requires the government to do what it always did before 1980: pragmatically adopt policies that promote equitable growth.
There were good reasons for the US to offload industries that required low wages to be globally competitive. But there was little reason for the US to offload industries that had become important "technology drivers." Nor were there good reasons for a lot of other bad decisions, such as allowing the financial industry to profit by convincing investors to bear risks they should not and allowing health-care providers to profit from administration at the expense of the care and treatment of the sick. Other bad decisions include incarcerating 2 percent of the country's young men and concluding that America's economic problems would be solved if only the rich could keep more of their money.
It is not difficult to see where the blame lies. As Mark Kleiman of NYU's Marron Institute points out, the Republican Party's rigid and die-hard ideological opposition to "taxing the rich [has] destroyed, on a practical level, the theoretical basis for believing that free trade benefits everyone." It is difficult to argue for redistributing the benefits of globalisation when you believe that the market channels gains to those who deserve them. Nor can you ameliorate the painful effects of globalisation if you believe that social-insurance programmes turn their beneficiaries into lethargic "takers."
It is not globalisation, poor negotiation tactics, low-wage Mexicans workers, or the overly clever Chinese that bear responsibility for what is ailing America. The responsibility lies instead with politicians peddling ideology over practicality – and thus with the citizens who elect them, as well as those who don't bother to vote at all.
The writer is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research.
Copyright: Project Syndicate, 2016.
(Exclusive to The Daily Star)