A Progressive's Guide to Populist Economics
The American economy is doing badly. The boom of the "roaring '90s" has vanished, replaced by a fragile "jobless recovery" with insecure foundations. The end of prosperity -- of growing wealth, rising pay and plentiful jobs -- coincided with the arrival of George Bush in the White House, raising inevitable questions about whether the new President is to blame for the country's changing fortunes.
The short answer is yes. The boom of the '90s was bound to end sometime, but the Bush administration took a bad situation and made it much worse by cutting taxes, loosening regulation over corporations, imposing destructive protectionist measures and spending freely on foreign wars.
Democrats ought to make hay over Bush's economic failures, but they are failing to do so for two reasons: Bush has engineered a phony economic recovery; and the progressive remedies for American economic weakness are hard to sell politically.
The Phony Recovery
Bush engineered rapid growth in the second half of 2003 through enormous borrowing by the federal government coupled with tax cuts. Combined with low interest rates, the easy money got consumers spending, but because there remains a glut of capacity in both industry and services, corporations have responded by continuing to pare jobs and restrain their own investments. The result is jobless economic growth.
For the moment, Bush gets to claim that he has righted the economy. But only for the moment. The Federal Reserve, in late January, signaled that it may soon raise interest rates, because of growing concerns over inflation. The mere specter of a rate-increase appears to have ended the latest stock boom. Meanwhile, the outlook for new employment is poor, raising the odds that when voters go to the polls in November the Democratic presidential candidate will be able to say that Bush's first term cost 2.5 million American jobs.
The Hard Sell
Despite America's dismal economic performance under Bush, restoring policies that promote equitable and sustainable growth remains difficult. The remedies -- higher taxes, more government regulation of business, and the restructuring of government programs to benefit the swelling ranks of the poor and lower-middle class -- are not generally viewed as politically attractive. How can Democrats present a progressive economic program that is at the same time politically popular? The outcome of the presidential election will likely turn on this question.
Bashing greedy corporations and unethical executives will only get Bush's opponents so far. A positive plan is needed. Democratic candidates for President are, significantly, calling for a reversal of some of Bush's tax cuts. Such a reversal would help undo the economic damage of Bush's presidency. More taxes will raise government revenues, thus reducing the huge deficits that are otherwise likely to burden the government for many years. But in order to succeed with a tax-increase message, Democrats must re-frame the issue of taxes as one about investment in the country's future. Paying taxes must also be framed as a variety of patriotism -- and an especially important symbolic act in a time of threats to U.S. security.
Merely calling for an increase in taxes isn't enough. Democrats need an array of fresh economic ideas that excite voters who are listening to a barrage of dissembling from the Bush administration. Without new ideas suited to a new economic moment, Democrats won't defeat Bush in November. Before we address ways in which Democrats can frame economic alternatives in ways that make them popular politically, let's review the core economic principles that distinguish progressive Democrats from profligate Republicans.
Understanding the Principles
Democratic economic principles are defined by the following:
Equity: For Democrats, equity ought to be the byword of their economic thinking. Wealth inequality is rising again in America. The work force is increasingly dominated by high-wage and low-wage jobs. Unions remain marginalized, growing weaker by the day. Worker rights are solely protected by the courts, whose remedies often deliver too little and come too late. Job destruction is occurring again in the U.S. and at an alarming rate, recalling the 1970s and early 1980s, when both highly educated people and non-unionized blue-collar faced gloom and hardship.
Any economic recovery worthy of its name must benefit all strata of American society. The economic democracy has been an engine of American history and democracy as far back as Thomas Jefferson. Freedom meant nothing if a people lacked the wealth to exercise it. Democrats need a set of policies that will promote the democratization of wealth in America. They need policies that will narrow the economic disparities in the nation, not widen them. They need policies that will promote greater economic opportunities for people without family wealth. They need to help preserve jobs as well as create them.
Corporate governance: Under the cover of the 1990s economic boom, corporate managers violated the basic rules of business fairness. The corporate sector may once have earned the right to increasing self-policing; corporations have lost that right. Business executives must once again submit to rigorous government regulation of their practices. Democrats must make a case for the re-regulation of a corporate sector that has mortgaged values in its quest for quick bucks. The scandals of Enron and the mutual fund industry are not isolated, but rather reflect the widespread collapse of business values.
Government can help restore these values (with assistance from consumer, investors, employees and a new generation of corporate leaders). Democrats must concentrate on promoting an alternative business ethos rather than lay the blame for corporate misbehavior on Republicans, where it doesn't belong. The boom -- as booms always do -- undermined business values. Easy money is the enemy of honesty and fairness. With the end of easy money, the stage is set for a revolution in business values and practices, if only the Democrats are brave enough to promote it.
Fair trade: The economic boom of the 1990s owed much to a dramatic reduction in trade barriers -- and an equally dramatic rise in trading partners. With the collapse of the Soviet Union and the bloc of communist countries in Eastern Europe, capitalist trade greatly widened. The emergence of a pro-capitalist Chinese government also spurred trade. The virtual end of socialist movements in Latin America and the rise of at least officially democratic governments in Mexico, Brazil, Chile and Argentina further expanded the pool of world trade.
The U.S. economy was a major beneficiary of trade expansion. U.S. hegemony over global finance and technology -- the two big winners of the 1990s expansion -- meant that both jobs, money and talented people flowed onto American soil. But widening trade, while accelerating growth, brought destabilization. By the 1990s, a series of financial and economic crises -- in all parts of the world -- exposed the harsh truth: The shift to open borders had occurred too quickly. Poorer nations needed more government protection, while rich nations maintained an array of trade barriers (most egregiously in the areas of agriculture) that worsened the plight of the poorest countries, especially those in Africa.
In its approach to trade, the Bush administration has largely continued the "neo-liberal" policies of the Clinton years. These neo-liberal policies no longer suit the times. Democrats must do more to respond to the dark side of widening trade and the economic crises washed up in the wake of world capitalism. Bush's deviation from neo-liberal orthodoxy has been limited to selective protectionism based on the narrowest political gain.
Fiscal discipline: In a few short years, the U.S. government has gone from the epitome of fiscal rectitude to the ultimate financial binger, spending without concern for the debts incurred. What's changed? The American president. Former President Bill Clinton sacrificed social programs -- and the chance for bold initiatives -- in order to restore a balance federal budget, and to even run surpluses.
His administration was helped, of course, by a booming economy, in which rising incomes and staggering capital gains led directly to higher tax revenues. The end of the boom reduced these tax revenues, wringing out the surpluses. But Bush's tax cuts are the chief reason for record budget deficits, which are conservatively estimated to exceed $500 billion this year (meaning government will spend one-third more than it take in). Since the fiscal year 2000, the tax receipts of the U.S. government fell from 20.9 percent of the gross national product to a projected 15.7 percent this year.
According to economist Paul Krugman, about 45% of the fall in tax revenues results from tax cuts. Bush has proposed an additional $1.1 trillion in tax cuts over the next decade, further handicapping the federal government.
Tax cuts surely do stimulate the economy, by putting more money in the hands of consumers. But tax cuts do so at a great cost to equity: Rich people have unduly benefited from the tax cuts. Besides, the stimulation from tax cuts was essentially redundant. Low-interest rates, courtesy of the Federal Reserve and low-inflation, mean that cheap money is available for the purchase of homes, cars and other big-ticket items. Spending by Americans, in short, would remain relatively high even in the absence of tax cuts, diminishing the reasons for them.
The tax cuts, of course, came at a cost: big U.S. deficits for the foreseeable future (and a record in the year 2003 alone). These deficits are bad news for future generations of Americans since high deficits always lead to reduced productivity, job growth and wage gains. In short, high deficits suffocate an economy, leading to stagnation. Even worse, high deficits impose a crushing burden on the economies of other nations. The savings of foreigners is covering the debt of the U.S. government. Foreign savers do this by buying U.S. bonds, paying dollars for these bonds (which results in propping up the dollar, making U.S. exports more expensive). Instead of foreigners putting money in their own economy -- and spurring growth at home -- they are helping to grow the U.S. economy. What's bad about this? The International Monetary Fund worries that big U.S. deficits will weaken so many economies around the world that a global economic crisis will result.
To be sure, Democrats often have favored deficit spending in the past. And indeed there is nothing wrong with running deficits -- for the right reasons. Democrats must highlight the economic dangers of deficits, while at the same time recognizing that some government spending must be re-directed toward different ends.
Seven Steps Toward a Healthy Economy
Economic principles are important. Equity makes sense morally and politically; when wealth is relatively smoothly distributed throughout a society, everyone in the society feels a stake in it and rational politics becomes possible. Sound corporate governance is essential: A game is worth playing only when the rules are fair. Fair trade, especially with poorer nations, will improve America's standing in the world. Fiscal discipline will enable government to take bold initiatives on issues that matter, such as universal health-care and improved education.
But economic principles are abstract. Democrats also need to promote concrete actions that will make a difference in the lives of ordinary Americans. Here are seven:
1. Tax the rich.
Higher taxes aren't a way to punish the rich for their success but rather the only available means to bring government revenues in line with its spending obligations. Since the advent of the income tax in the U.S. in the early 1900s, taxes on income were progressive, meaning that the more a person earned the higher a percentage of their income went to the government as taxes.
By the 1970s, tax rates became very high in the U.S. (and in other industrialized countries), with the wealthiest people paying as much in taxes as $8 out of every $10 of additional income earned. Because workers, rich or not, began taking home such a small percentage of their marginal earnings, they rebelled against high levels of federal income taxes. President Ronald Reagan sharply reduced taxes on individual incomes, giving people more incentive to build their earnings but triggering large, persistent government deficits.
In the first years of George Bush's presidency, tax rates were further lowered, and the pattern of the Reagan years has re-occurred. Lower taxes on individual income have resulted in high deficits, with no balanced budget in sight.
The answer to the government's fiscal crisis is to raise taxes, but taxes must be raised in a progressive manner. The rich must pay at a higher rate than the middle class at a higher rate than poor. How much higher is a question for debate, but without a widening of rates between rich, middle and poor, the American tax system will unfairly benefit the few at the cost of the many. Taxing the rich more heavily is the first step towards economic sanity.
2. Help workers get better treatment on the job.
American workers have toiled for some decades with fewer job protections than their counterparts in Europe and Japan, where labor unions and paternalistic employer practices are deeply engrained. In hard times, workers are understandably restive.
Those big productivity gains notched by corporations are largely coming from squeezing their employees harder. President Bush has turned a deaf ear to the cries of pain coming from the American workplace. Democratic candidates for president must not do the same. Workers need more legal protection both to complain about corporate outrages and to organize union shops.
Union membership is of course no panacea, but in many sectors of the economy unionization is the only bulwark against untrammeled corporate power. Bush despises unions. Many Democrats don't understand them. Unions are no longer about protecting featherbedding and resisting change. Democratic candidates for president are accustomed to winning the endorsements of leading unions. This election they must do more: They must promote workplace democracy through proposed legislation that protects workers against inhumane and unsafe treatment and permits them -- without fear of dismissal -- to unionize, take their grievances public and compel management to reform.
In addition to supporting the expansion of formal unions, the federal government can also encourage other forms of workplace organization that improve employee power. Unions have, by definition, the right to bargain collectively for wages and benefits on behalf of a set group of workers. Not all workers need collective bargaining, but most need protections against arbitrary treatment and relentless pressure. Existing labor laws cover some of these abuses, but the laws need strengthening and enforcement should be intensified.
3. Tackle the speculative bubbles in housing and stocks.
President Bush is nothing if not a master of the useful distraction. The war in Iraq, as Senator Ted Kennedy has noted, has been a well-timed sideshow, allowing the president to ignore pressing domestic issues. Possibly the most pressing is the persistence of a speculative bubble in housing prices and the resurgent bubble in stock prices. Both of these bubbles have been fueled by a Republican president seemingly blind to the great risks to the U.S. economy of either (or both) of these bubbles popping.
The steep and steady rise in home prices has many causes, not all of them mysterious. There is an underlying supply problem in a country that has seen impressive population growth due to immigration and a much higher rate of births than posted anywhere in Europe or Japan. But home prices now clearly exceed rational levels in many parts of the country. Excessive prices are destructive because too much capital, which might be used for productive purposes, sits idle in real estate.
The government has contributed to the housing boom in two ways. First, low interest rates from the Federal Reserve Bank have effectively made homes less expensive. These same low interest rates have made stocks more attractive than they ought to be. People need to put their money somewhere, and the safest havens for money --- government and corporate bonds -- bear an ultra-low return these days. By keeping interest rates low, Fed chairman Alan Greenspan assists both stockowners and homeowners. While many Americans thus benefit, wealthy Americans disproportionately benefit. Somewhat higher interest rates would ease speculation in stocks and real estate, letting some air, so to speak, out of the bubble.
In the same way, reform of the home-mortgage deduction would do the same. The federal subsidy to homeowners has grown to ridiculous proportions given the high level of home prices in many parts of the country. A tighter cap on how interest deductions would help to restrain rises in home prices. The tighter cap would only effect the rich, buyers of the most expensive homes, and have the benefit of increasing taxes paid by the rich.
To be sure, finagling with the home-mortgage deduction might be unpopular. But another collapse in stock prices -- or worse, a collapse in home prices -- would produce a bumper harvest in suffering in America. No sitting president would easily survive a collapse in home prices, which would wipe the net worth of millions of Americans, literally rendering them paupers. The risk of a home-price collapse is debatable, but no respected economist puts the risk at zero.
By historical standards, neither stock nor home prices are sustainable. President Bush has chosen, to the nation's peril, to ignore the fragility of these markets in the hopes that the speculative party will last long enough for him to win re-election (or safely fade from view). But he may not be so lucky, and Democratic challengers would be wise to address the issue so that they too are not blamed should the roof cave in.
4. Improve early and primary education.
American universities are the envy of the world. The best and brightest of the planet vie for places in the top U.S. graduate and undergraduate schools. A large measure of the America's business success -- especially in innovation- and science-based industries -- flows from the country's unparalleled university system.
The same cannot be said for early and primary education. American public education, from the ages of 3 to 14 (the onset of high school) is abysmal. In certain large states, such as California, spending per pupil is shameful. Private education is little better, except for those schools that openly cater to the super-rich.
Early-childhood education has a great deal to do with economic outcomes. One of the reasons that the U.S. happily accepts the best and brightest of the world into its universities is that the domestic crop is often lacking. Too many young Americans, especially those whose own parents have not attended university, lack the educational achievements necessary to participate in a growing economy.
The answer to poor schools and weak students is not obvious. Nor will the solution be inexpensive. Yet Democrats need to present a variety of possible reforms, tuned to America's staggering diversity. The need is clear. Rebuilding America's schools is essential for economic democracy to take root and thrive. A more educated population will raise the sophistication of political debate as well. To be sure, education initiatives are a graveyard for policymakers and administrators alike. Reform after reform has foundered. But none of the reforms has addressed the basic problem: too little spending on the poorest of students, and no nationwide campaign to raise the educational level of everyone, without reliance on appeals to religious or ethnic affiliation.
America increasingly relies on a multi-ethnic, multi-cultural and multi-religious workforce. Only through a profound reform in secular education can the American workforce improve its skills. Technology does its part in raising productivity, which is the chief of ingredient of new wealth. The other ingredient is improved human inputs in the former of people working smarter. What the U.S. has done on the university level, it can do on the level of early-education. The payoff, in human and economic terms, will be considerable.
5. Promote ethical and sustainable innovation.
Bush is spending heavily on research and development, trying to position himself as a President with a vision for America's technological future. But his vision is elitist, corporatist and ultimately symbolic. Bush prefers to campaign for space exploration to a more down-to-earth emphasis on renewable energy. He prefers corporate-dominated medical innovations, where government researchers help corporations profit, forcing the consumer to pay twice (once for the government's research and again for the fruits of that research, controlled by the corporation).
Democrats ought to emphasize the need for government to sponsor innovations that help ordinary Americans: high-speed trains, renewable-energy, cheaper drugs, safer automobiles. Corporations devote enormous resources to a few "sweet spots" in the market, ignoring vast areas where innovations can benefit society more democratically.
6. Reform the welfare system for corporate farmers.
Communism is dead, and America is not a socialist country -- except for the farm sector. Big agriculture has a secret partner: the American taxpayer. The government pays for anywhere from one-tenth to one-half of the costs of farm production, through tax deductions and outright grants. And not only rice, cotton, peanuts and other essentials get paid for by the government. Wine does too.
Subsidies to farmers began in the Depression, when many farms were run by families and bad times wiped them out. For decades, farm subsidies have smoothed out the uncertainties of farming, spreading the risk across a population of consumers for whom eating is a priority.
But farm subsidies have outlived their usefulness. Rather than helping individual families, they mainly go to large corporations, which have employees (not sons and daughter) tilling their soil. These corporations exist to earn a profit, and if they can't earn a profit from farming, they should get into another line of work -- not line up for a handout from the government.
Worse, farm subsidies are harming poor farmers. In dozens of countries around the world -- and especially in the Latin America and Africa -- farmers could raise their living standards by exporting output to the U.S. Even with the costs of transportation, the farm output from Latin America and Africa could be competitively priced -- were it not for the welfare payments given U.S. farm corporations. These welfare payments lower the price of American food so that imports from poor countries can't compete.
The Bush administration defends farm subsidies. What's wrong with that? Isn't cheap food a good thing?
Not always. To start with, the food only seems "cheap." Taxpayers are footing the bill for some of the food. Second, the "cheap" food bites back by reducing agricultural output in the countries that are too poor to defend their agricultural sector as aggressively as the U.S. government does. Farm products from the U.S. today flood into many countries where large portions of the population are farmers -- and yet they can't get output to market that matches the American stuff. As a result, rice farmers in Africa have abandoned their fields because "Chicago" rice, imported into their country on ships, is so cheap it no longer pays to grow it.
By abolishing farm subsidies, the U.S. would go a long way toward streamlining its farm sector and raising incomes in the rest of the world. A virtuous circle could result, with the rising wealth in poorer countries converted into increased sales of American technology and other sophisticated goods. To be sure, an end to farm subsidies will lead to some rises in food prices. But in time, these rises will end as foreign producers -- especially those in the poorest parts of the world -- become more efficient in reaching U.S. markets.
7. Stop the flow of jobs out of America.
Both high-wage and low-wage jobs are leaving American shores as corporations seek a better deal in foreign lands where labor lacks basic protections and wages are far lower. To be sure, some job loss is inevitable, but government can slow the outflow by challenging corporations over these transfers, and penalizing them where appropriate.
Just as President Bush has said no government contracts should go to nations that allegedly aren't helping in the war on terrorism, Democrats can say that no government contracts should go to corporations that are moving jobs out of America. Government contracts should reward companies that realize that without healthy workers there are no healthy consumers.
Of course, Democrats should support more training for workers to make them more attractive. But the carrot of training must be matched by the stick of punishments to those corporations that relentlessly shift jobs abroad. Bush wants to make it even easier for U.S. companies to destroy American jobs. Democrats must say no, and give employers incentives to keep jobs in this country.
Today's Economic Populists
Economic alternatives to the Republican status quo exist. They are sensible, pragmatic and fair. Yet these alternatives involve sacrifice. How do Democrats promote a program of higher taxes and fiscal discipline to American voters in the face of a Republican siren song that promises pain-free economic growth?
Progressives have tried (and largely failed) for decades to convincingly advance a program of economic equity. President Lyndon Johnson's "war on poverty" was partial and unsatisfying. The drive for a minimum standard of living, modeled on the social democracies of Europe, was roundly defeated in the 1972 election, which saw Richard Nixon defeat George McGovern. In the 1990s, progressives successfully raised the minimum wage, and the Clinton administration oversaw the creation of millions of new jobs. But in victory, Democrats embraced corporate-led growth and trickle-down policies. Political economy, under Clinton, became the task of succoring capitalists.
The end of the '90s boom marks a return to an older populist style of challenging corporate power. In such attacks, progressives are finding an audience. Witness the revulsion against the greed and irresponsibility of top executives and the widespread lawlessness in the fields of finance, for instance.
Overall, corporations are less popular today than anytime since the late 1960s and early 1970s, when populist economics reached a high-water mark in the second half of the last century. In states where job losses are marked and continuing -- such as California, South Carolina and Ohio, to name a few -- the audience for corporate bashing cuts across ideologies and is truly bi-partisan.
Democrats have an opportunity to create a compelling message for equitable economic reform by building on outrage over executive malfeasance and Enron-style abuses. How can they do so?
First, Democrats must recognize that corporate bashing is a useful beginning but only that. Today's economic populists must be armed with an alternative program that promises to empower government, create jobs and narrow economic difference between Americans, not widen them. To gain credibility with voters, today's economic populists ought to root their campaign in an intelligent assault on corporate privilege, while at the same time shoring up government finances through tax increases under the banner of economic nationalism.
Through better enforcement of existing taxes on corporations, for instance, the federal government can raise at least another $100 billion a year. Beyond more revenues, corporations ought to be challenged to provide greater security and more training to their workers. Unions ought to be assisted in their struggle to resist givebacks to employers and to expand the pool of organized employees.
By attacking corporations where they are weakest, Democrats can rally voters around new economic approaches that call for equitable sacrifices. They can build popular support for hard economic choices. They can shame Republicans for their cozy relations with business. To be sure, populism is no panacea but it allows Democrats to take the battle to the core supporters of Republicans, the beleaguered American middle-class. And out of this engagement, Democrats may succeed, as they have in past economic crises, moving a majority of Americans to consider and ultimately support a new economic agenda.
G. Pascal Zachary is a regular AlterNet contributor and the author of "The Diversity Advantage: Multicultural Identity in the New World Economy" (Westview, 2003).