U.S. economy

The end of American exceptionalism, by Clive Crook

Road to ruin?, Financial Times

Living standards, inequality, poverty, well-being

Presidents and income growth, by Larry Bartels

Pulling apart: a state-by-state analysis of income trends, by Jared Bernstein, Elizabeth McNichol, and Andrew Nicholas

Hunger stalks millions of poor Americans, Financial Times

Worked over and overworked, by Steven Greenhouse

The economic costs of poverty, by Harry Holzer, Diane Whitmore Schanzenbach, Greg J. Duncan, and Jens Ludwig

Good jobs for Americans who help Americans, by Robert Kuttner

Trends in infancy/early childhood and middle childhood well-being, 1994-2006, by Kenneth Land (via The Early Ed Watch Blog)

For many, a boom that wasn’t, by David Leonhardt

Maybe money does buy happiness after all, by David Leonhardt

Tax credits and public benefits (pdf), by Elizabeth Lower-Basch (via Matt Lewis)

Wall Street winners get billion-dollar paydays, New York Times

Inside the middle class: bad times hit the good life, by the Pew Research Center

The wage that meant middle class, by Louis Uchitelle

Taxes

McCain and the decline of US, by Brad DeLong

Read their lips: Clinton and Obama take the pledge, by Howard Gleckman

Bush made permanent, by Paul Krugman

Weighing a McCain economist, by David Leonhardt

Principles of taxation, by Mark Thoma

Capital gains mythology, by Eric Toder

Health care

Are you confused yet?, by Jacob Hacker

The path to universal health care, symposium in The American Prospect

Housing

As cities revive, America’s poor are forced to the periphery, Financial Times

Playing the housing blame game, by David Leonhardt

Unsold homes tie down would-be transplants, New York Times

Modern suburbia not just in America anymore, USA Today (via Richard Florida)

Education

Evaluating NCLB, by Harry Brighouse

Considering effective education solutions, by the Center for American Progress

How the world’s best-performing school systems come out on top (pdf), by McKinsey and Co.

Primary watch: ignoring early education, by Sara Mead

Early education at risk?, by Sara Mead

Fixing education policy, by Jim Ryan

Trade

Krugman’s conundrum, The Economist

Better roses than cocaine, by Nicholas Kristof

Is trade the problem?, New York Times

America needs to make a new case for trade, by Larry Summers

Immigration

Of income and incomers, by Tim Harford

Immigration in western Europe, by Gianmarco Ottaviano and Giovanni Peri

Immigration reform suggestions: bring back indentured servitude?, by Jeff Weintraub

U.S. politics

The opiate of the elites, by Jeronimo Cortina, Andrew Gelman, David Park, and Boris Schor

Loose lips and Democratic ships, by E.J. Dionne

The culture wars, by Kevin Drum

The importance of campaign policy, by Ezra Klein

“Elite” … what’s it to you?, by Geoff Nunberg

Abroad

The paradox of disappearing European unemployment, by Tito Boeri

Europe’s employment growth revived after 1995 while productivity growth slowed: Is it a coincidence?, by Ian Dew-Baker and Robert J. Gordon

The new face of hunger, The Economist

How to show a dictator the door, New York Times

U.N. panel urges changes to feed poor while saving environment, New York Times

Japan may be rigid but it is not inefficient, by David Pilling

Miscellaneous

An uncertain truth, by Daniel Engber

When one parent is better than two, by Shawn Fremstad

How to really change your kid’s behavior, by Alan Kazdin

If climate skeptics are right, it is time to worry, by Paul Klemperer

Income inequality in the U.S. has increased sharply in the past generation. Those who worry about this development do so partly on grounds of fairness and partly because inequality may have adverse effects on politics, health, and crime. Sometimes overlooked is a more immediate cost: slow income growth for a large chunk of the population.

The following chart shows average inflation-adjusted incomes in 1979 and 2005 for various groups of households: the bottom 20%, the lower-middle 20%, the middle 20%, the upper-middle 20%, the next 10%, the next 9%, and the top 1%. The incomes include government transfers and subtract taxes. The data, from the Congressional Budget Office (here), are the best available for this purpose.

The average income among all households rose at a rate of 1.5% per year over these two and a half decades. But as the chart makes plain, much of that increase went to households at the top of the distribution, especially those at the very top. Households in the bottom three quintiles experienced very slow income growth — 0.2% per year for the poorest quintile, 0.6% for the next, and 0.7% for the middle.

What would 2005 incomes have looked like if income growth had been proportionate rather than heavily skewed in favor of the top — in other words, if all incomes had increased at a pace of 1.5% per year? The dashed line in the next chart shows the answer. To make it easier to see the effect, I include only the bottom 80% of households here. All of them would have been a good bit better off.

It’s often said that progressives focus too much on the distribution of income and don’t pay enough attention to absolute income levels. In fact, its impact on absolute incomes is one of the chief reasons to be concerned about rising inequality.

Income inequality in the United States has increased sharply since the 1970s. How much of this is due to reduced tax progressivity?

A key element of the rise in inequality has been the dramatic jump in incomes among the top 1% of the population. According to calculations from IRS data by Thomas Piketty and Emmanuel Saez (available here), this group’s share of total income more than doubled during the 1980s and 1990s.

This is due in part to the fact that in recent decades taxes have done less to reduce the top 1%’s income share. The following chart shows the pretax and posttax income share of this group from 1960 to 2001, according to the Piketty-Saez calculations. Between 1960 and 1979, its posttax income share was 70% of its pretax share. In the period from 1980 to 2001 that increased to 84%.

(Note: The Piketty-Saez data end in 2001, so they don’t reflect the Bush tax cuts. Calculations by the Congressional Budget Office suggest that from 2002 to 2005 the top 1%’s posttax income share was 85% of its pretax share, very similar to what the Picketty-Saez data indicate for 1980-2001. I don’t use the CBO data here because they go back only to 1979.)

What effect has this had on inequality?

The chart makes clear that most of the rise in the top 1%’s posttax income share is due to the increase in its pretax share rather than to changes in tax progressivity. The next chart offers another way to see this. The solid line in the chart shows the top 1%’s share of after-tax income since 1960. The dashed line shows what the top 1%’s share of income would have been had taxes reduced it to the same degree as in the 1960s and 1970s. It’s lower, but not massively so. Changes in taxation have mattered, but they have not been the main reason for the rise in the top 1%’s income share.

If reducing inequality is an aim of the next administration, increasing the progressivity of our tax system would surely help. But this is only one piece of the puzzle.

Kathy G. is against it — as are many progressives, it seems. The main reason is that means testing is thought to “make the relevant programs a lot more politically vulnerable.” I used to believe this, but I’m now skeptical.

A paper by Robert Greenstein (in a 1991 Brookings book, The Urban Underclass) initially spurred my rethinking. He noted that some of our most important means-tested benefits, including the Earned Income Tax Credit and Medicaid, fared quite well during the Reagan era. Christopher Howard’s recent book The Welfare State Nobody Knows updates Greenstein’s argument and analysis. Peter Whiteford has an informative examination of cross-country patterns, with a focus on Australia’s successful use of targeted benefits. My own preliminary assessment of the evidence is here (pdf).

That doesn’t mean I favor means testing of Social Security benefits. When you have a universal program in place that is contributory, functions well at reasonable cost, and enjoys considerable public support, it makes sense to keep it universal. But for a number of other programs I worry about progressives getting hung up on the alleged superiority of universalism.

A question in the International Social Survey Programme’s 1999 survey offered respondents pictorial illustrations of various income distributions and asked “What do you think the distribution in your country ought to be like — which do you prefer?” The choices were depicted as follows:

A relatively small share, fewer than 20% in most countries, said they preferred type A, B, or C. This isn’t surprising; each of those three has a large share of the population at the bottom. The bulk of respondents selected either type D or type E.

D and E are identical in their population shares at the bottom. The difference between them is that D has a larger share in the middle, whereas E has a larger share at the top. Average income is higher in E. Inequality is lower in D.

Interestingly, more respondents in the ISSP survey preferred D than preferred E. The results are strikingly similar across countries, even among nations that seemingly have very different orientations toward affluence and equality.

I wouldn’t go so far as to conclude from this that people tend to value low inequality over high incomes. Other ways of posing the question might yield different results. But it does suggest that inequality matters to people.

I suggested in an earlier post that it would be good if leading Democrats encouraged Americans to embrace economic change. Doing so would increase the political feasibility of putting in place a policy package that enhances economic security and promotes mobility.

I want to try to spell out the argument a little more clearly and elaborate a bit.

The argument

1. Economic globalization tends to benefit Americans as consumers. We get to choose from a wider array of products and services, and the increased competition among firms tends to reduce the prices we pay.

2. Economic globalization also benefits some Americans as workers. The prices their employers pay for inputs are lower, and the number of customers is larger. Both may increase employment and/or wages.

3. Economic globalization hurts some Americans as workers. Some lose their job; others experience stagnant or falling wages.

4. Access to the U.S. market tends to benefit citizens in poor countries, in the form of more jobs at higher wages. This is good for Americans on both altruistic and self-interested grounds.

5. It is economically and politically wise to have government policies in place that help those hurt by globalization to adjust. These include unemployment insurance, portable pensions and health insurance, retraining, job placement assistance, wage insurance, infrastructure improvement for hard-hit communities, and a higher and inflation-adjusted minimum wage and Earned Income Tax Credit. In addition, government can support job creation via a large-scale investment in renewable energy and/or an employer subsidy. By compensating the losers, these policies make globalization win-win. And in doing so, they lessen opposition.

6. Technological advance has properties similar to globalization; it tends to benefit us as consumers and some of us as workers, but it also hurts some of us as workers. So too does the ability to move, buy, and sell across state borders within the United States.

7. The policies described in #5 are just as appropriate for those hurt by technological change or internal economic movement as for those hurt by globalization. We would want these policies even if there were no cross-country trade or offshoring at all.

8. These policies are likely to be easier to sell politically if framed as a response to all forms of economic change, including globalization.

9. We already have most of these policies, but they are inadequate in coverage, funding, and coordination.

10. Part of the reason these programs are inadequate is that debate about economic globalization tends to get stuck on the question of free trade vs. managed trade. Three groups have an interest in framing the debate in these terms. One is Republicans who find it helpful to argue that Democrats are protectionist and therefore against the interests of American as consumers. The second is lobbyists for firms that stand to benefit from protection. The third group is people who work in manufacturing and offshorable services. They hope that blocking trade and offshoring will help protect their jobs. Democrats want their votes and hence often say they’ll address globalization in part by restricting it.

Regardless of whether the proposed restrictions are relatively minor (minimal labor and/or environmental standards) or extensive, once this door is opened it almost inevitably takes center stage in the debate. Far less attention, if any, gets devoted to the adjustment and cushioning side. As a result, the political constituency and momentum for these policies tend to be far smaller than they could be.

11. For Democrats, it might not be harmful politically to shift toward a position that embraces economic change — in other words, that forgoes managed trade. Democrats could then ask voters whether they prefer globalization and technological advance with less government help (the Republican position) or with more. But even if it hurts them politically in the short run, an approach that focuses on responding to globalization via adjustment and cushioning rather than managed trade is, in my view, the right thing for Democrats to do.

12. This does not mean Democrats ought to rule out trade restrictions altogether. What it means is that they should leave them off the list, or put them at the very bottom, of strategies for addressing job loss and wage stagnation. And labor and environmental standards should be discussed mainly in the context of foreign and/or environmental policy, rather than trade policy.

A couple of examples

Barack Obama and Hillary Clinton. In campaigning in Ohio and Pennsylvania, Clinton and Obama have criticized trade agreements such as NAFTA for contributing to American job losses. What’s ironic is that the leading economic advisers to both candidates — Austan Goolsbee for Obama and Gene Sperling for Clinton — are known to have different views about how to approach economic globalization. I’m not sure whether the candidates’ positions are due to the closeness of the campaign or to a genuine difference between them and their advisers (more on this here, here, and here). Either way, I’m afraid there will be little significant advance in pursuing the policy agenda highlighted in point 5 above until leading Democrats move away from the managed trade approach to globalization.

Jared Bernstein. I’ve just read Jared Bernstein’s book All Together Now: Common Sense for a Fair Economy. It’s full of compelling analysis and argument. On addressing the challenge of globalization, he offers a three-pronged proposal (pp. 72-77). One is help with adjustment. A second is a proactive strategy to create new jobs. These are both terrific. The third, though, is to more actively manage our trade arrangements, mainly in the form of imposing conditions on our trading partners — “some degree of labor standards and honesty in exchange rates.” There is nothing wrong with this per se. But once managed trade is introduced as an option, it ends up crowding out discussion of other approaches.

Okay, but …

They don’t really mean it. Neither Obama nor Clinton is likely to press for serious restrictions on trade or offshoring if elected president. This holds for most Democrats running for Congress too. But that isn’t the point. Even if they did follow through on a managed trade agenda, it probably wouldn’t have much impact on actual import levels. Pacts such as NAFTA seldom dramatically alter the degree of cross-border trade; had it not passed, imports from Mexico would not be much lower than they are today. The problem isn’t that managed trade rhetoric might lead to actual trade restrictions; it’s that it distracts from efforts to advance the scope and generosity of adjustment and cushioning policies.

Are there really net gains to Americans from globalization? I think the evidence leans heavily in favor of believing so, but some reasonable analysts are skeptical. Even if this skeptical view were correct, though, I doubt that trade restrictions would do nearly as much good for Americans as a generous set of cushioning and adjustment policies.

We need the cushions in place first, before agreeing to forgo trade restrictions. This is a reasonable notion in the abstract. But it traps us in an unproductive loop. Insisting that the cushions come first reduces the chance we’ll get them. And round and round we go.

I might be wrong about the impact of restrictionist rhetoric on the politics of social policy. My argument rests on a hypothesis that Democratic leaders’ trade rhetoric has a significant effect on the political feasibility of more generous and extensive social policies. I could be wrong about this. But given that any trade restrictions they might actually put in place would probably do little to stem globalization, it seems to me the potential costs of abandoning managed trade rhetoric are likely small.

More reading

Here are links to some of my favorite writing on this issue:

Alan Blinder, Offshoring: the next industrial revolution?

Brad DeLong, Free vs. fair trade

James Galbraith, Why populists need to rethink trade

Nicholas Kristof, Inviting all Democrats

Paul Krugman, Pop internationalism

Paul Krugman, In praise of cheap labor

Paul Krugman, Divided over trade

Paul Krugman, Trade and wages, reconsidered

Robert Reich, Hillary and Barack, afta Nafta

Dani Rodrik, Has globalization gone too far?

Gene Sperling, The pro-growth progressive

Gene Sperling, Rising tide economics

Joseph Stiglitz, Making globalization work (ch. 3)

Mark Thoma and others, Helping the losers from globalization