Pop­ulists base their agen­das on un­true nar­ra­tive

National Post (Latest Edition) - - ISSUES & IDEAS - David Brooks

Mi ddle- class wage stag­na­tion is the big­gest eco­nomic fact driv­ing Amer­i­can pol­i­tics. Over the past many years, so the com­mon ar­gu­ment goes, cap­i­tal­ism has de­vel­oped struc­tural flaws. Eco­nomic gains are not be­ing shared fairly with the mid­dle class. Wages have be­come de­cou­pled f rom pro­duc­tiv­ity. Even when the econ­omy grows, ev­ery­thing goes to the rich.

This ac­count of re­al­ity, which I’ve cer­tainly re­peated, ex­plains why the Demo­cratic Party has moved from the Bill Clin­ton ne­olib­eral cen­tre to the Bernie San­ders left. It ex­plains why the Repub­li­cans have moved from the pro-mar­ket Mitt Rom­ney right to the pop­ulist Don­ald Trump right.

On both left and right, move­ments have arisen to fix cap­i­tal­ism’s sup­posed struc­tural flaws, ei­ther by rad­i­cally in­ter­fer­ing in the mar­ket­place ( Bernie) or by clamp­ing down on global com­pe­ti­tion ( Trump).

But what if there are no struc­tural flaws? What if the mar­ket is work­ing more or less as it’s sup­posed to?

That’s cer­tainly the ev­i­dence in the U. S. from the last two years. Over this time, the ben­e­fits of eco­nomic growth have been shared more widely.

In 2015, me­dian U. S. house­hold in­comes rose by 5.2 per cent. That was the fastest surge in per­cent­age terms since the U. S. Cen­sus Bu­reau be­gan keep­ing records in the 1960s. Women liv­ing alone saw their in­comes rise by 8.7 per cent. Me­dian in­comes for Amer­i­can His­pan­ics rose by 6.1 per cent. Im­mi­grants’ in­comes, ex­clud­ing nat­u­ral­ized cit­i­zens, jumped by over 10 per cent.

The news was es­pe­cially good for the poor. The share of over­all in­come that went to the poor­est fifth in­creased by three per cent, while the share that went to the af­flu­ent groups did not change. In that year, the poverty rate fell by 1.2 per­cent­age points, the steep­est de­cline since 1999.

The num­bers for 2016 have just been re­leased by the U. S. Cen­sus Bu­reau, and the trends are pretty much the same. Me­dian U. S. house­hold in­come rose another 3.2 per cent, af­ter in­fla­tion, to its high­est level ever. The poverty rate fell some more. The share of na­tional in­come go­ing to labour is now ris­ing, while the share go­ing to cap­i­tal is fall­ing.

In a well- f unc t i on­ing econ­omy, work­ers are re­warded for their pro­duc­tiv­ity. As out­put, jobs and hours worked rise, so does in­come. Over the past two years, that seems to be ex­actly what’s hap­pen­ing.

The ev­i­dence from the past two years strongly sup­ports those who have ar­gued all along that in­come has not de­cou­pled from pro­duc­tiv­ity. A wide range of econ­o­mists, in­clud­ing Martin Feld­stein, Stephen Rose, Ed­ward Lazear, Joao Paulo Pes­soa, John Van Ree­nen, Richard An­der­son of the St. Louis Fed, and a team from Gold­man Sachs, have pro­duced stud­ies show­ing wages track­ing very pre­dictably with pro­duc­tiv­ity.

If any­thing, wages are a lit­tle higher than you’d ex­pect from look­ing at the pro­duc­tiv­ity and in­fla­tion num­bers alone.

The prob­lem of the Amer­i­can mid­dle-class squeeze, in short, may not be with how the fruits of pro­duc­tiv­ity are dis­trib­uted, but the fact that there isn’t much pro­duc­tiv­ity growth at all. It’s not that a ris­ing tide doesn’t lift all boats; it’s that the tide is not ris­ing fast enough.

For those in­ter­ested, Shawn Sprague has a good sum­mary of the data at the U.S. Lab or De­part­ment’ s “Be­yond the Num­bers.” He shows con­clu­sively t hat dur­ing this re­cov­ery we’ve en­dured a his­tor­i­cally low labour pro­duc­tiv­ity growth rate of 1.1 per cent. By some es­ti­mates, if pro­duc­tiv­ity in­creases had kept pace with the mid-20th-cen­tury norm, me­dian in­comes would be US$40,000 higher than they are to­day.

If pro­duc­tiv­ity it­self is the prob­lem, not dis­tri­bu­tion, rad­i­cally dif­fer­ent pol­i­tics is de­manded than we’re see­ing to­day. If pro­duc­tiv­ity is the prob­lem, we need more dy­namism, not less, more open­ness, not less, more growth- ori­ented poli­cies, not more di­rigiste and re­dis­tribu­tive ones.

There are a few things gov­ern­ment can do to help boost pro­duc­tiv­ity: In­crease mar­ket com­pe­ti­tion with more an­titrust en­force­ment and fewer li­cens­ing reg­u­la­tions; ad­mit more skilled im­mi­grants; in­vest more in hu­man cap­i­tal; dereg­u­late ur­ban land us­age back to the 2008 lev­els; in­tro­duce more mar­ket in­cen­tives into the low pro­duc­tiv­ity sec­tors, like health care and ed­u­ca­tion; fund more re­search into promis­ing tech­nolo­gies like new en­ergy stor­age sys­tems.

To­day pol­i­tics is po­lar­iz­ing to the pop­ulist left and the pop­ulist right. But if pro­duc­tiv­ity is the prob­lem, what we ac­tu­ally need is a resur­gence of the mod­er­ates. The mod­er­ate- left poli­cies of Barack Obama must have had some­thing to do with the mid­dle- in­come gains of the last two years. Mod­er­ate Democrats can plau­si­bly ar­gue that gov­ern­ment should not be in­ter­fer­ing in the mar­kets, but it should be ad­dress­ing the in­equal­i­ties that are the re­sult of deeper so­cial forces. There is still a yawn­ing gap di­vid­ing the me­dian Asian- Amer­i­can house­hold, which makes US$81,000 a year; the me­dian white house­hold, which makes US$ 65,000; and the me­dian African- Amer­i­can house­hold, which makes US$39,490.

Mod­er­ate Repub­li­cans can ar­gue that while gov­ern­ment should be ac­tive in boost­ing hu­man cap­i­tal, and in help­ing ru­ral Amer­ica, most of what’s needed is more dy­namic cap­i­tal­ism — more trade, more im­mi­gra­tion, more free com­pe­ti­tion, fewer reg­u­la­tory bur­dens, more growth.

Right now mod­er­ates are in re­treat. The pop­ulist ex­tremes are on the march. But the fact is they are bas­ing their eco­nomic and po­lit­i­cal agen­das on a story that is fun­da­men­tally un­true.

WHAT IF THE MAR­KET IS WORK­ING MORE OR LESS AS IT’S SUP­POSED TO?

MANY RE­PORT FEEL­ING LIKE ODD­BALLS. — ARTHUR C. BROOKS

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