The New Bipartisan Capitalism
The Financial Services Forum, a purportedly nonpartisan organization of CEOs from top banking, investment, and financial firms, has released a new study, "Succeeding in the Global Economy: A New Policy Agenda for the American Worker." As the Wall Street Journal reported, "The effort marks one of the first times top business leaders have sought to weigh in collectively in the globalization debate." It is a story worth examining. Running the organization is Donald Evans, a long-time Bush insider who played a prominent role in his 2000 presidential campaign and, until 2005, was his commerce secretary. Two of the three economists Evans commissioned to write the study--Matthew Slaughter and Grant Aldonas--also served in the Bush Administration. The third, Robert Lawrence, worked under Clinton. On cue, they received endorsements from Congressmen on both sides of the aisle--Barney Frank (D-Massachusetts) and Spencer Bachus (R-Alabama). (Nonpartisan, remember.) And they continue to lobby Capitol Hill successfully.
All three are experts on trade policy, with a history advising high-level officials. They regularly turn up in the financial press and have attracted some attention for their joint effort. In particular, Matthew Slaughter, an op-ed page fixture and perhaps the most visible economist in the group, was so happy with the report that he just had to ensure it reached all the right policy analysts and intellectuals. Open the July/August issue of Foreign Affairs and you'll see the major findings republished under the thundering title, "A New Deal for Globalization." What a way to lure a target audience!
For many political leaders, the apparent breakthrough is that the views of globalization's defenders and detractors are becoming more compatible. Smaller now, they say, is the divide that has made it difficult for stakeholders across the political spectrum to reach a consensus on policies that could boost incomes and allay the fears of vulnerable workers. Of course, differences remain--spirited disagreement among knowledgeable parties being more productive than anodyne uniformity. Yet a broad coalition from government, business, and finance may bring economic issues into sharper focus in time for the 2008 elections.
The study exudes all the urgency and feeling of a well-timed political tract, fueled by the worry that protectionism, unless defeated soon, will dwarf other key issues in the national conversation ahead. "Left unaddressed, the trends in public opinion," the authors warn, "will gather momentum and will shape the economic policy debate into the 2008 presidential elections and beyond. There is a real risk that, absent an effort to clarify and address the real economic challenges at hand, policies will be implemented that isolate the United States from world markets and thereby undermine the ability of U.S. firms and workers to remain competitive in a global economy." The latest data supports their entreaty. A recent Financial Times/Harris poll shows majorities in the US and Europe wholly unconvinced that freer trade can serve as a bulwark against economic instability, with many citizens firmly supporting increased taxation on the rich. For their part, the three economists predict the grip of protectionism will tighten so long as workers at the bottom fail to see the benefits of global engagement translate into higher incomes and job security.
"Growth in real income," they acknowledge, "has been extremely skewed to very high earners, with little or no growth for most workers," but not without emphasizing, of course, that the results of trade liberalization across borders have been higher aggregate productivity and living standards for the United States. Big-picture analysis usually only comforts disinterested economists. To politicians and their constituents, clinical talk of aggregation does not sound especially soothing, for it raises awareness of abnormality, an undiagnosed illness, even, among those who don't exactly fit the profile. If everyone else is really doing better, what is wrong with us? Why aren't we earning more and living better? Where is the medicine?
To their credit, these economists acknowledge that the concerns of many American workers are "real, widespread, and legitimate," an admission few in the business community, let alone representatives of the private sector with substantial government experience, have thus far been willing to offer. Not that such political sensitivity is entirely unfeigned. It has the expensive redolence of something carefully hatched in a windowless conference room in a Washington strategy firm: Improve the way Wall Street's interests are represented by making old news from the left palatable to the right. They are now peddling this pitch as part of a larger crowd-pleasing program: Creatively use domestic tax policy to reinvent national economic policy and distribute the gains of globalization more evenly, without sacrificing global economic engagement.
Surprise, surprise: The lobbying is working and income redistribution measures are gaining bipartisan support, as if it took the global victory of capitalism for fiscal conservatives and liberals to learn a hard lesson from an earlier era--how to share. Don't let the irony distract you: If the ideological impasse on globalization has really begun to fade, we can use the emerging agreement on economic inequality to reinvigorate debate about how best to ameliorate it. All the more reason to consider what this triumvirate of multi- tasking economists is proposing. The details reveal conflicting messages and debilitating inconsistencies, yet help clarify the structural and historical features of capitalism at a moment when better perspective on the economic underpinnings of current policymaking and the politicization of economic policy could be very instructive.
They think the income tax is already quite progressive, yet they support restructuring the Federal Insurance Contributions Act (FICA) tax--the payroll tax that funds Social Security and Medicare. FICA is a regressive flat tax--15.3 percent on the first $97,500 all workers earn. So they are right to want reform. Overhauling it or eliminating it for people earning below the national median income--two key options they entertain--might help reduce pre-tax inequality, but not without reintroducing inequality elsewhere and uneasy tradeoffs in the process. Faustian bargains do not begin or end in handshakes.
"Without taking on the broader issue of needed reforms in Social Security and Medicare," they claim, "we think there is real virtue in seeing FICA as simply a tax that is capable of being restructured to leave more of the average worker's hard-earned income in their pockets as a means of directing the economy-wide benefits of globalization more to the average worker's kitchen table."
You can't touch FICA without seriously damaging Social Security and Medicare. Their own admission of skewed income growth points toward a more realistic, if divisive, reform effort. Given the wealth accruing so inexorably at the top, fix the regressive elements of the income tax system. The system may simply no longer be able to keep pace with the growing number of earners bursting through the ceilings of abundance. Income tax reform would neither privatize nor dismantle Social Security and Medicare--difficult options they'd rather not address, but the only ones they leave on the table, less by default, it seems, than by design. Avoidance often speaks louder than acceptance.
There is a deeper quandary under the surface, memorably explored by the late John Kenneth Galbraith in The Good Society. Tax policy, even if ideologically neutralized somehow, cannot correct the inequities of the market--the animating reason why redistribution of income seems necessary and desirable in the first place. Worse, it requires a three-tiered system consisting of only one class--a viciously lionized middle class. As Galbraith explains, all reputable reference to our class structure emphasizes the middle, not the upper and lower, forcing these extremes into the background. The arithmetically ascendant middle shields the rich, enabling progressive tax relief on behalf of average workers to reach higher and higher ranks of the affluent. In this scheme, the upper does not exist apart from its exponential extension of the middle, while the truly middle and lower fight to stay on our radar. No wonder we refer to the upper-middle and upper-upper middle and cannot effortlessly distinguish between the ultra-rich and merely loaded.
From a philosophic standpoint, our fateful economists have conflated distributive justice and reparative justice, intimating that more hands on more dollars will almost magically transform the underlying global conditions of production and circulation that perpetuate inequality as a matter of course. Throwing money around without trying to curtail the forces driving income stratification is both irresponsible and naive. "What is necessary," Galbraith rightly notes, "are strong ameliorating actions that reflect and address the inherent and damaging inequality." Reducing the payroll tax in the hope of redistributing income is a comparatively weak action objectionable on its face.
Let's come back to those workers sitting at their kitchen tables. The study says educated workers are less likely to lose their jobs and suffer declines in reemployment earnings, and more likely to change jobs at a lower cost. Quite plausibly, those are some of the economic benefits of education the authors cite as reasons for investing in skills training and higher learning. But they are troubled by this statistic: 96.6 percent of Americans find themselves in educational groups where mean total money earnings have been falling, not rising, since 2000. So troubled, in fact, that they concede investment in education is overrated. Why? Because it takes too long--generations!--to update skill sets, rendering new knowledge obsolete by the time it can be applied. Their view is laughably out of touch with technological reality and how quickly most people learn to adapt. Any baby boomers or grandparents reading this online should be offended.
Once again, these economists would rather avoid the root causes and effects of a policy dilemma. They don't really illuminate the statistical relationship between education and income, nor do they offer much insight into how the current trend of declining earnings among the educated could be altered. Instead, they uplift our "culture of innovation and independent thinking that for generations has been a core source of comparative advantage" and a supposed guarantee of our global competitiveness. When economists have to invoke cultural tradition you know we're in trouble. Unless we want to believe that geniuses emerge fully formed from the womb, the best way to foster independence and innovation is through good habits of mind. Now as ever, that can be accomplished through well-funded educational systems that actively cultivate ingenuity by encouraging intellectual risk-taking over and against inert thinking.
Nevertheless, we are left wondering why income among the educated can decline with the rise of world markets. A solid account, originally from Marx, has been percolating the mainstream for a while. When education reaches poorer classes previously excluded from the workforce, the supply of skilled labor grows. Better supply and strong demand heighten competition. Over time, this same labor, while still employable, is devalued for its similarities, driving wages down, even though the overall working ability of the population increases. People continue to work, but employers can pay less for labor. When qualified labor is readily available, workers must compete at the level of price, effectively cheapening their qualifications as they strive to elevate themselves above their competitors. They must give employers incentives to hire them, not the other way around. This is why competitive salaries can seem low and overachievers can seem average.
Diversifying labor markets can help ensure wider success, but that requires development of flexible skills across sectors backed by a recommitment to the liberal arts and sciences. Technocratic training is seldom a reliable basis of longevity. If anything, today it has become a salient source of skill gaps in many fields. Consider the phenomenon of reverse outsourcing. More students from rapidly developing countries like India are leaving school undereducated, with narrowly circumscribed skill sets that don't meet the expansive needs of employers, including those in the IT industry. So firms are now looking outside their teeming local labor pools to the US and Europe to fill positions. They want candidates who can demonstrate greater flexibility in how they solve problems and the kind of staying power that only a comprehensive college education can secure.
All the same, thoughtful investment in education, important as it is, does not change the fact that the present limit of capitalism may be capitalism itself. Our economists-cum-lobbyists do not address the issue, nor have many politicians lately, not even John Edwards. But with more heterodox economists challenging market militancy and garnering press coverage, we may have a shot at catapulting this issue into the national economic dialogue, assuming certain presidential hopefuls can drop the dorm-room posturing.
What did Mitt Romney tell Hillary Clinton the other day? Oh yeah: forget Karl Marx, go read Adam Smith (as if HC were a heartfelt communist). This gossamer polemic indicates just how easily headline-grabbing taunts replace genuine argument over economic matters. And, actually, Marx's political forecast turns out to be accurate: "The structure of the fundamental economic elements of society remains untouched by the storms that blow up in the cloudy regions of politics." The lousy weather remains.
Far better it is, then, to scrutinize those economic elements lately overlooked. We can start by observing that capitalism shows few signs of remedying its most basic dynamic: Wealth continues to grow and accumulate into the stratosphere, while the population that benefits from it becomes ever smaller. Some conservative economists maintain this picture diminishes significantly once we expand the concept of wealth to include human capital. By their lights, the wider dispersal of education, experience, talent, and skill refutes the empirical evidence of top-heavy, concentrated wealth. But they seldom provide a way to measure human capital. And their implied conclusion that we're all rich in spirit does not carry the weight of a refutation.
Even when economists on the right countenance some existence of inequality, they tend to deny asymmetrical accumulation is the real motive and purpose of capitalism, focusing instead on enhanced growth, increased productivity, and freer channels of exchange. These may fortify the system, but they are not simply greasing the wheels unaided. Nor are they the fresh fruits of globalization. They defined the transition from feudalism to capitalism. To trumpet their novelty today is to hold constant the vicissitudes of economic history. It is like buying antiques without recognizing that their value and significance will inevitably fluctuate.
To what end do these economic fortifications currently operate? Unfortunately, the well-being of greater numbers of people cannot be the answer. That would flagrantly contradict the dynamic of the global system. Improving life for the vast world population is an unworkable option when the drive for accumulation is fed by expanding world markets that generate wealth on ever-grander scales for those at the top. When workers at the bottom look up, they see too little being produced to meet their needs. But assume dispossession and poverty were reduced on similarly grand scales. The view from the summit of affluence would not be sunny but terrifying: too many people at the bottom capable of jeopardizing the bedrock inequality that enables capitalism to function. The way to bridge this chasm is to step away from it.
The antagonism will only be aggravated, as it has been in the past, unless we treat the role of economic justice and fairness more substantively and the role of world markets more historically. The two aims should be combined in future policy proposals. Marx can be an ally here, but not for the reasons you might think.
Analyzing the transition from feudalism to capitalism, he noted that the extension of trade helped create the world markets that revolutionized the way feudal industries and guilds had operated, ultimately tearing them asunder. Trade established the global framework of capitalism--interdependence of nations and economic openness--but was powerless to confront the conditions of inequality that would soon come to underlie that framework. If trade revolutionized old forms of industry, Marx argued, new forms of industry will revolutionize trade and the conditions it leaves untouched. Extend this account to the present and the liberalization of trade as a stand-alone nostrum appears not simply reactionary, but infantile--an anachronistic tantrum to recapture the excitement of capitalism's birth, a period before industrial maturation. We have some growing up to do.
The next step is to figure out how the business and financial sectors can help political institutions redress economic ills in ways that honor fairness and pragmatism, justice and efficiency. This is the project our three bipartisan capitalists should embrace. This is also the heart of the New Deal, as Franklin Delano Roosevelt once described it: "Clothed with the power of government but possessed of the flexibility and initiative of a private enterprise."