An Introduction to Economic Populism

Robert B. Reich

I keep hearing from Democrats in Washington, including a few newly-elected ones, who want to know what kind of economics they ought to be supporting. They're worried about what's happened to the jobs and wages of most Americans, but they don’t want to sound like or be protectionists.

I’m reminded of a philosophical conversation I had several years ago 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 philosophy.

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 that of the top 1 percent has increased over fifty percent.

Yet the philosophical debate is coming up all the time these days, and it helps explain the new economic populism. Consider, for example, the Bush cuts. They’ve mainly benefitted the top fifth 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 make the heroic assumption the supply-siders are correct and no one has been made worse off. Yet even so, most Americans have not benefitted – nothing has trickled down. Real median wages have barely budged since they 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 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 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 question. 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 wages 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 in 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 and more affordable health care. All would need extended unemployment insurance and wage insurance. All would need affordable access to post-secondary education. And to pay for all of this, and guarantee upward mobility, the tax system would have to be made far more progressive than it is today – starting with excusing the first $20,000 of income from payroll taxes and removing the $100,000 cap on those taxes, and getting back toward the marginal tax rates on the highest incomes we had under Eisenhower and JFK.

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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* A version of this article appeared in the January, 2007 issue of The American Prospect.