Issue #6, Fall 2007

Rising-Tide Economics

In the twenty-first-century economy, growth and equality must go hand in hand.

In my White House days, I was known for tormenting the speechwriters by insisting that we should rip off Ben Franklin’s caution that we “must indeed all hang together, or … hang separately” with the economic refrain “we will grow together or grow apart.” My line never made it into a speech, but with the spread of globalization it has never been more apt. Indeed, the question of whether spreading globalization and information technology (IT) is strengthening or hollowing out our middle class may be the most paramount economic issue of our time.

Perhaps a better phrase to capture the notion of shared prosperity was John F. Kennedy’s observation that “a rising tide lifts all boats.” For progressives, the rising-tide metaphor is not a causal assumption that growth will automatically raise everyone. Rather, it is the aspiration and test for economic policy: Does it both raise the tide and lift all boats? This vision of shared prosperity is not only demanded by the global, interdependent economy, but rooted in the historic values of the progressive vision of the United States. Moving forward, we must recognize that the economy is undergoing a profound transformation, making it distinct from both the industrial era and even the beginnings of the Internet Age just a decade ago. In such a world, economic growth can be explosive, but growth alone is not enough. For Americans, shared prosperity, an opportunity for upward mobility, and economic outcomes determined more by merit than the accident of birth are fundamental to who we are as a nation.

The New Productivity Decade

Developments over the last decade emanating from the expansion of globalization and IT have greatly enhanced the need for “Rising-Tide Economics.” During this “New Productivity Decade” (1995 to 2006), globalization, investor confidence, a diffusion of information technology, and the end of the Cold War came together to spark efficiency and productivity in everything from inventory management to personal finances. During the first half of this decade, productivity–after languishing for 20 years at 1.6 percent annual growth–took off in 1995, averaging 2.6 percent over the next five years. It was a perfect example of the rising tide lifting all boats: As productivity grew 13 percent overall from 1995 to 2000, median family income kept up, growing 11 percent. From 1993 to 2000, every economic quintile saw income growth above 16 percent, with the strongest growth (23.4 percent) among the bottom 20 percent of earners. During the second half of this decade (2001 to 2006), while productivity kept expanding at an average of 2.8 percent per year, the story on shared prosperity could not have been more different. From 2000 to 2005, the typical working family saw its income fall 2.3 percent. And real wages actually fell for the first four years of the recovery. Rising productivity and historic corporate profits even seemed predicated on disappointing wages: Goldman Sachs found that more than 40 percent of record corporate profit growth of the last five years was due to the historically low share of national income going to labor. The contrast with the previous five years could not have been starker.

A significant difference between these two halves of the New Productivity Decade is that during the second half, globalization and IT dramatically expanded the capacity of workers from around the world to contest American middle-class service jobs. While jobs at the top and bottom of the income ladder that require a physical presence or face-to-face collaboration were less affected, an increasing number of jobs seemed to be falling into what economists Lori Kletzer and Brad Jensen have called the “tradable services” category: white-collar service jobs capable of being performed in a vast number of global locations. As a result, tens of millions of traditionally middle-income service and manufacturing jobs face downward wage pressure. This isn’t a short-term trend. According to Harvard’s Richard Freeman, it could take more than 50 years for labor costs in China and India–over 40 percent of the global labor market–to reach parity with those in the United States. The result, as labor economist Lawrence Katz has found, is an increasing polarization of the workforce, with inequality rising more between the top 10 percent and the middle, rather than between the middle and the poorest deciles.

Comparing the economic evidence from both halves of the New Productivity Decade underscores the imperative for economic policies that are focused on both growth and on ensuring that its benefits are widely shared. Globalization is making competition fiercer and the need for flexibility, innovation, top-notch human capital, and access to global supply chains greater, and yet global labor competition also offers the specter of downward wage pressure and dislocation for an increasingly broad cross-section of the workforce. Nevertheless, conservatives, such as columnist George Will, point to respectable GDP numbers and call those complaining about polarization and income inequality “economic hypochondriacs” who can always find a small cloud on the sunniest of days. Yet the strength of the economy should always be measured by how it is affecting the majority of its people. This is a distinctly American view. In the United States, of all nations, shared growth has defined our economic aspirations since our founding. Our framers’ fundamental critique of European economies was not based on their growth strategies, but rather on the rigid class structures that led to the spoils of growth being more determined by the accident of birth than enterprise, talent, and hard work. The American vision (though tragically denied to many initially) has been that growth and upward mobility would ensure a broad middle class that always has room for those willing to work and seek new opportunities.

Supply-Side Blindness: Rising Tide as Trickle Down

For many conservatives, the notion of a “rising tide lifting all boats” is not a test but an automatic assumption that growth–and specifically tax relief to upper-income Americans–will trickle down and lift everyone else up. Supply-siders even argue that Kennedy devised the “rising tide” metaphor to defend his decision to reduce the absurdly high marginal tax rates that existed at the time. For example, promoting the 2003 Bush tax cuts, former Treasury Secretary John Snow said, “I think it was President Kennedy who talked about ‘a rising tide lifts all boats,’ when asked to characterize his tax plan back in 1962, I think. There is a lot of merit in that idea.” But as his presidential papers reveal, Kennedy never used the “rising tide” line to defend tax cuts of any type. Indeed, the first time he used the line as president was, fittingly, in Colorado on August 17, 1962, to praise congressional approval of a giant dam project.

History aside, the ideological faith in trickle-down economics is wrong on three counts. First, while supply-siders see Reaganomics as a golden period, the 12 years of Reagan-Bush were more like a period of rising yachts and sinking row boats. From 1980 to 1993, average incomes of the top 5 percent rose 62 percent, the top 20 percent rose 34 percent, and the middle was stagnant. The bottom quintile actually saw its income decline by 10 percent in real terms. Second, the “don’t worry, be happy” attitude of the supply-siders shows a profound blindness towards the increased sense of risk and economic anxiety being felt by working Americans. Fear of outsourcing is not just the province of manufacturing workers; rather, 61 percent of Americans think their or a friend’s job may be at risk from globalization. A 2006 Pew Research Center poll found that half of the respondents worried that their children would be grow up to be worse off than they are. And while the Bush Administration’s rhetoric may show insensitivity to rising economic anxiety, its economic policies have been like a boxer leaning into a left hook–responding to that anxiety by imposing even more risk on the individual, from partially privatizing Social Security to pushing incentives to move more Americans into an often callous individual health market. Taken together, these policies amount to what Economic Policy Institute economist Jared Bernstein calls YOYO (“you’re on your own”) economics. And finally, their ideological insistence on small government prevents conservatives from embracing growth-maximizing public policies that can help attract high value jobs, encourage more risk taking, and reduce the backlash against globalization, precisely by mitigating the negative effects of job loss.

The “Rising Tide, Raise All Boats” Opportunity

The progressive response to supply-side economics cannot simply be its mirror-image: policies so exclusively directed at redistribution and combating insecurity that they ignore private-sector growth, upward mobility, innovation, savings, and entrepreneurship. We shouldn’t replace a focus on growth regardless of equity with a focus on equity regardless of growth. The answer lies neither in following the 1990s Clinton playbook word-for-word nor in an overreaching populist reaction focused only on how to divide the 2007 economic pie. The rise in insecurity and wage pressure certainly demands a stronger public commitment to the social compact, as well as greater scrutiny of trade deals than what existed in the 1990s. Yet we must also be cautious of policies that unduly and unnecessarily deny our nation the pro-growth and pro-equity benefits that can flow from fully engaging in the global economy with a stronger social compact.

Becoming more sensitive to the potential downsides of globalization should not cause us to forget its potential upsides. First, the same global supply chain that is putting downward pressure on wages has also proven to be a source of lower-cost inputs for our exports and lower-priced goods for working families. Catherine Mann, at the Peterson Institute for International Economics, finds that the globalization of IT hardware in the 1990s reduced prices for IT in the United States by 10 to 30 percent, contributing significantly to the spread of such technology and productivity gains. Second, while increased engagement with China and India for some may seem to be a threat to current jobs and wages, for our children the major job issue could be access to providing services and products to these nations’ exploding middle classes, as per capita income in India and urban China triple in the coming 20 years. Third, we cannot forget that the first half of the New Productivity Decade did demonstrate that when expanded openness and innovation were combined with public policies that encourage work and higher education, the result was a truly tight and higher-skilled labor market, which served progressive goals including a sizable reduction in poverty, a dramatic increase in family incomes for African-Americans, and enhanced private sector efforts to recruit and train traditionally marginalized workers. No public works program can match the job creation that is spurred when the U.S. economy leads in the design and deployment of breakthroughs like IT–and hopefully, in the future, alternative energy.

These cautions should not be seen as trump cards against measures to reduce economic insecurity and inequality, nor as a call for timidity in pursing progressive economic policies. Rather, Rising-Tide Economics should ask how we can best address major economic challenges by raising all boats in the most pro-growth way possible.

A Progressive Compact on Trade One of the greatest challenges and most controversial issues in laying out a progressive pro-growth economic agenda is international trade. This debate on trade and globalization is increasingly portrayed as an epic battle between the Clinton approach of the 1990s and the populist critique of that approach. Yet, on some issues such as labor standards and adjustment assistance, there has been more consensus than is often acknowledged. To be sure, there remains intense controversy about whether Bill Clinton should have signed NAFTA 13 years ago, when it clearly contained inferior side agreements on labor and the environment. At the same time, by the end of Clinton’s second term, he had negotiated an innovative pact to encourage labor standards with Cambodia as well as the Jordan Free Trade Agreement, which included enforceable core labor standards supported by the AFL-CIO.

In 1994, Clinton and his labor secretary, Robert Reich, were designing far-reaching re-employment reforms with guaranteed long-term funding and with one-stop shopping to make it easy for workers to access employment services. Clinton even proposed health care for workers between jobs in 1998. These plans foundered under a Republican Congress, but despite that roadblock, Clinton tripled worker-dislocation funds and passed a limited re-employment reform bill. These examples illustrate that at least some of the most intense disagreements among progressives over “Clintonomics” are less about policy aspirations than about the trade-offs that were made and, most notably, the fact that Clinton chose to move forward on trade even when he faced opposition from a Republican Congress over more robust adjustment policies and labor standards.

Looking backwards, Clintonites such as myself continue to see the trade and economic policies of the 1990s as contributing to a sound post-Cold War foreign policy and a booming economy that was striking for its degree of shared growth, while critics still believe Clinton’s trading policies hurt working families. Yet looking forward, there is room for a new consensus among progressives. There is growing recognition by nearly all that the wage inequality we have seen in the second half of the New Productivity Decade requires a stronger social compact both at home and abroad and less of an automatic assumption that market openings will strengthen, not strain, America’s middle class. At home, this means a more ambitious agenda to spur job creation on our shores, increase the pool of skilled workers, and strengthen re-employment assistance. Among trading partners, it demands a stronger commitment to enforcing trade agreements, preventing currency manipulation from countries like China, and better labor standards and partnerships to strengthen safety nets, universal basic education, and the monitoring of labor rights. A commitment to decent working conditions abroad is not about shielding the United States from all low-wage competition. Instead, it is about ensuring that low-wage competition is not based on extreme exploitation offensive to basic human rights: child labor, sweat shops, bonded labor, or the killing or jailing or labor leaders. Thea Lee, policy director and chief international economist at the AFL-CIO, rightly noted this distinction when she explained that the union’s claims against China were not about the country’s “right to compete in the global economy on the basis of low wages,” but about the “incremental cost advantage that comes from the brutal and undemocratic repression of workers’ human rights.”

Issue #6, Fall 2007

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