Issue #6, Fall 2007

Rising-Tide Economics

In the twenty-first-century economy, growth and equality must go hand in hand.

In my White House days, I was known for tormenting the speechwriters by insisting that we should rip off Ben Franklin’s caution that we “must indeed all hang together, or … hang separately” with the economic refrain “we will grow together or grow apart.” My line never made it into a speech, but with the spread of globalization it has never been more apt. Indeed, the question of whether spreading globalization and information technology (IT) is strengthening or hollowing out our middle class may be the most paramount economic issue of our time.

Perhaps a better phrase to capture the notion of shared prosperity was John F. Kennedy’s observation that “a rising tide lifts all boats.” For progressives, the rising-tide metaphor is not a causal assumption that growth will automatically raise everyone. Rather, it is the aspiration and test for economic policy: Does it both raise the tide and lift all boats? This vision of shared prosperity is not only demanded by the global, interdependent economy, but rooted in the historic values of the progressive vision of the United States. Moving forward, we must recognize that the economy is undergoing a profound transformation, making it distinct from both the industrial era and even the beginnings of the Internet Age just a decade ago. In such a world, economic growth can be explosive, but growth alone is not enough. For Americans, shared prosperity, an opportunity for upward mobility, and economic outcomes determined more by merit than the accident of birth are fundamental to who we are as a nation.

The New Productivity Decade

Developments over the last decade emanating from the expansion of globalization and IT have greatly enhanced the need for “Rising-Tide Economics.” During this “New Productivity Decade” (1995 to 2006), globalization, investor confidence, a diffusion of information technology, and the end of the Cold War came together to spark efficiency and productivity in everything from inventory management to personal finances. During the first half of this decade, productivity–after languishing for 20 years at 1.6 percent annual growth–took off in 1995, averaging 2.6 percent over the next five years. It was a perfect example of the rising tide lifting all boats: As productivity grew 13 percent overall from 1995 to 2000, median family income kept up, growing 11 percent. From 1993 to 2000, every economic quintile saw income growth above 16 percent, with the strongest growth (23.4 percent) among the bottom 20 percent of earners. During the second half of this decade (2001 to 2006), while productivity kept expanding at an average of 2.8 percent per year, the story on shared prosperity could not have been more different. From 2000 to 2005, the typical working family saw its income fall 2.3 percent. And real wages actually fell for the first four years of the recovery. Rising productivity and historic corporate profits even seemed predicated on disappointing wages: Goldman Sachs found that more than 40 percent of record corporate profit growth of the last five years was due to the historically low share of national income going to labor. The contrast with the previous five years could not have been starker.

A significant difference between these two halves of the New Productivity Decade is that during the second half, globalization and IT dramatically expanded the capacity of workers from around the world to contest American middle-class service jobs. While jobs at the top and bottom of the income ladder that require a physical presence or face-to-face collaboration were less affected, an increasing number of jobs seemed to be falling into what economists Lori Kletzer and Brad Jensen have called the “tradable services” category: white-collar service jobs capable of being performed in a vast number of global locations. As a result, tens of millions of traditionally middle-income service and manufacturing jobs face downward wage pressure. This isn’t a short-term trend. According to Harvard’s Richard Freeman, it could take more than 50 years for labor costs in China and India–over 40 percent of the global labor market–to reach parity with those in the United States. The result, as labor economist Lawrence Katz has found, is an increasing polarization of the workforce, with inequality rising more between the top 10 percent and the middle, rather than between the middle and the poorest deciles.

Comparing the economic evidence from both halves of the New Productivity Decade underscores the imperative for economic policies that are focused on both growth and on ensuring that its benefits are widely shared. Globalization is making competition fiercer and the need for flexibility, innovation, top-notch human capital, and access to global supply chains greater, and yet global labor competition also offers the specter of downward wage pressure and dislocation for an increasingly broad cross-section of the workforce. Nevertheless, conservatives, such as columnist George Will, point to respectable GDP numbers and call those complaining about polarization and income inequality “economic hypochondriacs” who can always find a small cloud on the sunniest of days. Yet the strength of the economy should always be measured by how it is affecting the majority of its people. This is a distinctly American view. In the United States, of all nations, shared growth has defined our economic aspirations since our founding. Our framers’ fundamental critique of European economies was not based on their growth strategies, but rather on the rigid class structures that led to the spoils of growth being more determined by the accident of birth than enterprise, talent, and hard work. The American vision (though tragically denied to many initially) has been that growth and upward mobility would ensure a broad middle class that always has room for those willing to work and seek new opportunities.

Supply-Side Blindness: Rising Tide as Trickle Down

Issue #6, Fall 2007
 
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Estualeapasty:

hi, new to the site, thanks.

Feb 19, 2011, 3:12 AM

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