How to Create Populists

Several years ago I had a philosophical conversation with my good friend and Cabinet colleague Bob Rubin over lunch in the White House mess.

Cabinet members rarely talk philosophy. There isn't time. Mostly, they talk about how to put out the next fire. But on this rare occasion, Bob and I found ourselves talking philosophically.

It started as a discussion of a particular policy then being debated inside the Clinton White House but then became more theoretical. It came down to two simple questions. Suppose a proposed policy will increase the incomes of some people without decreasing the incomes of any others. Should it be implemented? Bob and I agreed it should. But suppose the people whose incomes will rise are already wealthier than everyone else. Although no one will lose ground, inequality will widen. Should it still be implemented? I won't tell you where he and I came out on that second question. But we agreed that people who don't share in such gains feel relatively poorer. Widening inequality also further tips the balance of political power in favor of the wealthy.

That conversation occurred a decade ago. Inequality is far more worrisome now. The incomes of the bottom 90 percent of Americans have increased about 2 percent in real terms since then, while incomes of the top 1 percent have increased more than 50 percent.

The philosophical issue Bob Rubin and I discussed is coming up all the time these days, and it helps explain the new economic populism. Consider, for example, the Bush tax cuts. As we know, they've mainly benefited the top 20 percent of taxpayers. Supply-siders argue the cuts have generated enough extra revenues to pay for themselves so they haven't enlarged the budget deficit. That's debatable, but let's assume the supply-siders are correct and no one has been made worse off. Yet most Americans have not benefited -- nothing has trickled down. Real median wages have barely budged since the cuts were enacted. So the underlying question is whether they're justified by the fact that rich Americans have gained from them while no one has lost ground. The answer is clearly no. They've widened inequality.

Or consider trade-opening agreements. They give Americans access to more low-cost products and services from abroad. This makes Americans' dollars go further. But the agreements especially benefit the rich, who spend more than the middle class and the poor because they have more income to spend. The agreements also typically impose a burden on working-class Americans who thereby lose their jobs to foreigners. These job losers get new jobs, but studies show the new jobs pay 10 to 15 percent less than the old ones. Even if you assume that access to cheaper goods from abroad adds about 10 percent to 15 percent to their purchasing power, these working-class wage earners come out about even, at best. That means the overall result of most trade agreements is to widen inequality. Do the efficiency benefits of trade outweigh this result? Maybe a decade ago when inequality was less pronounced. Probably not now.

Immigration raises the same underlying issue. Low-skilled immigrants reduce the cost of all sorts of services -- from gardening to elder care. This stretches the dollars of every American but also depresses the wages of many low-wage American workers who have to compete with the new arrivals. Even assuming their increased purchasing power more than cancels out their wage losses, low-wage Americans don't gain nearly as much from immigration as higher-wage Americans do. The result is widening inequality among native-born Americans. Do the lower labor costs make up for this widening inequality? Unlikely, unless you include the new immigrants into the calculus. After all, once they've come here they're usually much better off economically than before they arrived.

If all these policies promoted economic growth and if all Americans had an equal chance to benefit from the growth, the case for them would be stronger. But relatively poorer Americans are less upwardly mobile today than they were a decade ago. To equalize opportunity, all Americans would need access to far better schools, to early childhood education and affordable post-secondary education. We need more affordable health care and far more progressive taxes on both income and wealth. Those who lose their jobs should have access to wage insurance that eases the burden of transferring to new, lower-paying jobs.

As inequalities of income and wealth continue to widen, the social cost of adding to them will continue to grow. Even if you are not an economic populist now, if present trends continue, eventually you will be -- including my good friend, Bob.

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