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Debunking America’s Populist Narrative: No Longer So Live at Project Syndicate

Debunking America’s Populist Narrative: BERKELEY – Listen to the dog-whistles—or, rather, dog-screams—of American politics this just-begun election season and this is what you hear: of Chinese and Mexicans together with Wall Street and lousy trade deals who outsourced factories and robbed you of your rightful good job, of Mexicans who come here willing to work for less and force you to listen to words in a Spanish you cannot understand, and of Muslims of whom you live in fear that their bombs will blow you to bits. These dog-scream undercurrents are scary, and scarier than usual. They are scary for foreigners who, by virtue of living in this world, find themselves not just in the room but in bed with the psychologically-unstable hyperpower elephant that is the United States. They are scary for Americans who thought or hoped or perhaps only wished that they lived in the Republic of George Washington, Abraham Lincoln, and Teddy and Franklin Roosevelt. READ MOAR

Now this fear can be irrational and extreme. Donald Trump collects only 40% or so of the vote from the 15% or so of the adult population that votes in Republican Party primaries, and polls tell us he is massively unpopular with the bulk of American adults. An Iranian-American friend of mine claims to be considerably heartened: that he had thought that about half of American voters thought like Donald Trump, and it turns out to be less than half that. There is no proper comparison between those supporting Bernie Sanders’s policy-oriented critique of soft neoliberalism and a Republican Party where all remaining presidential candidates’ speeches are best characterized as, in the words of an anonymous CNN closed-caption transcriber, as “incoherent yelling”.

Nevertheless, there is a common narrative developing on the right and the left about the causes of income stagnation for America’s working and middle classes over the past generation. It has been a generation since there were any serious number of Republican senior politicians or intellectuals in the business of educating the American people about any of the realities of economic policy. And this election season Hillary Rodham Clinton’s campaign has more important fish to fry than challenging this common developing narrative. And that leaves… me… So I am here to try to point out that this common narrative is almost surely not right, and policies based on it will not serve the U.S. or the world well.

The developing common narrative runs like this:

  1. American middle- and working-class incomes have stagnated because incomes have become more unequal.
  2. Incomes have become more unequal because that is what the plutocracy wanted.
  3. The plutocracy gave Wall Street the power to vacuum up income from the rest of the economy.
  4. Wall Street took advantage of this power and performed the vacuuming by outsourcing the valuable jobs that made up America’s manufacturing base first to low-wage Mexicans and second to overly-clever Chinese.
  5. One way the bipartisan establishment government played a key part in this was in deregulating Wall Street.
  6. A second way the bipartisan establishment government played a key part in this was via NAFTA that began the outsourcing of America’s valuable high-quality manufacturing jobs to low-wage Mexicans.
  7. A second way the bipartisan establishment government played a key part in this was via the establishment of permanent normal trade relations with China followed by a refusal to characterize the Chinese government as an exchange-rate manipulator, and so continuing outsourcing of America’s valuable high-quality manufacturing jobs to overly-clever Chinese.

The anti-cosmopolitan thrust of this shared rightist and leftist narrative is completely wrong. In no sense was the United States out negotiated in managing the process of globalization. The establishment view was that the United States ought to encourage poorer countries of world to grow rapidly and to allow them the export-led industrialization road to prosperity. Richer trading partners are, in the long run, trading partners that it is more advantageous to trade with. The national security of the United States fifty years hence will be much improved if schoolchildren in Mexico and China are then taught that the United States worked hard to help their economies become prosperous rather than tried to keep them as poor as possible as long as possible. And the impact of trade on the U.S. income distribution is second-order—much less important than other factors, and an impact that it would have been very easy to neutralize and counteract by government policies to manage globalization.

Of course, as Mark Kleiman of NYU’s Marron Center points out, the Republican Party’s rigid and die-hard ideological “oppo[sition to]… taxing the rich… destroyed, on a practical level, the theoretical basis for believing that free trade benefits everyone.” You can’t say that globalization will be win-win if you rigidly cling to the belief that winners from being in the right place at the right time with the right skills and the right market position have earned every cent the global market economy allows them to collect. You can’t reassure potential losers from globalization if you believe that their requests for some form of social insurance against disruption makes them, indeed, losers who need to be stopped from becoming successful takers. It is America’s politics—the propensity of some not to vote, and the propensity of others to elect those ideologically opposed to making globalization win-win—that is to blame here, not low-wage Mexicans and overly-clever Chinese.

And the American political rot goes deeper. Managing economic growth requires that the U.S. government do what Steve Cohen and I in our Concrete Economics argue the U.S. government always did before 1980: pragmatically adapt its policies to make and to encourage Americans to make those investments in skills, factors of production, communities of engineering and entrepreneurial practice, and market position that make sense to promote equitable growth. There were good reasons for the United States to hand off industries that could only be competitive in the world market via low wages.

There were many fewer good reasons of the United States to hand off industries that were important generators of spillovers from communities of engineering practice—what Noyce, Moore, Grove, and company called “technology drivers”. (But note that by the same token it is not good to spend public money like water to hold on to former “technology drivers” that are no longer so.) There were no good reasons at all to bet on finance and financialization and making profits by convincing investors to bear risks they should not; on health-care administration and making profits by passing off to others the hot potato of actually paying for care and treatment for the sick; on making profits by getting paid for locking up two percent of our young men for terms so excessive as to be cruel albeit not, alas, unusual; or to bet that the real problem with American economic growth is that the plutocracy did not keep enough of the money that stuck to them as it blew past and needed to be incentivized by yet further tax cuts for the rich. Whatever you think of the substantially-irrational tax system of the 1970s, it is not the case that tax cuts for the rich are always the needed policy. (It is also not the case that you can never be too rich. And it is definitely not the case that you can never be too thin.)

Steve and my diagnosis is that it is not globalization, and not poor American negotiators of trade deals, and not low-wage Mexicans or overly-clever Chinese that bear responsibility; t is, rather, American politicians and intellectuals who peddle ideology rather than practicality. It is, rather, the voters who support and elect them; and it is the others who do not bother to vote—they are responsible.

As Dani Rodrik wrote in this space only a week ago, while “populists can easily [and falsely] point to the [others who are the] culprits responsible for the masses’ ills… establishment politicians are… immobilized by their central narrative… of inaction and helplessness… [as] stagnant wages and rising inequality [are blamed] on technological forces beyond our control…. It was [always] the choice of governments…”

We and Dani may differ slightly or more than slightly about which choices governments made as they sought equitable national growth and global prosperity in the context of globalization. But we are agreed that neither the leftist and rightist populist narratives of malign agency by others nor the establishment narrative that nothing could have been done differently that would have mattered is correct. And neither provides a base for sound economic policy in the future.