Sunday, January 06, 2008

Say No to Fuzzy Economics

Heartland voters in Iowa rewarded the populist candidacies of Mike Huckabee (R) and John Edwards (D) this past week, giving the former a commanding win on the Republican side and the latter a solid 2nd-place finish among the Democrats.

In a devastating column in today's Washington Post, George Will assails both men for "encouraging self-pity and economic hypochondria", and counters many of the beliefs that form the bedrock of the candidates' arguments. For example, concerning the much-bemoaned plight of the shrinking middle class, Will busts out this interesting fact:
Economist Stephen Rose, defining the middle class as households with annual incomes between $30,000 and $100,000, says a smaller percentage of Americans are in that category than in 1979 -- because the percentage of Americans earning more than $100,000 has doubled, from 12 to 24, while the percentage earning less than $30,000 is unchanged. "So," Rose says, "the entire 'decline' of the middle class came from people moving up the income ladder."

Thus far, John Edwards' campaign storyline has fixedly been about economic inequality, and it should be treated with skepticism. Whereas at least Mike Huckabee's message is largely about social and moral responsibility, I have been increasingly dismayed by Edwards' one-track focus on "corporate greed". I fear his message, divisive at the least, incitation to class warfare at its worst, is reflective of an incorrect understanding of economics and an underestimate of America.

David Brooks, writing in the NY Times a couple months ago, had an excellent column decrying what he dubbed "Dobbsianism"--a view that holds the rest of the world as a threat to our economy. It is a view that has manifest itself as a growing backlash against liberal immigration policies and free trade, one that sees the rest of the world only as responsible for "lead-painted toys, manipulated currencies and stolen jobs." It is a dangerous, wrong, pessimistic, backward attitude.

Our economy is not under siege from the rest of the world. China and India are getting plenty of headlines in the news, but there is plenty we are doing right (as I first mentioned about two years ago). The U.S. leads the world "in a range of categories: higher education and training, labor market flexibility, the ability to attract global talent, the availability of venture capital, the quality of corporate management, and the capacity to innovate." Furthermore, the U.S. is the productivity leader in almost every industry. America has a high standard of living, high birth rates, a younger population than much of Europe and Asia, and low unemployment.

Brooks goes on to counter the outsourcing Chicken Littles:
90 percent of manufacturing job losses are due to domestic forces. As companies become more technologically advanced, they shed workers (the Chinese shed 25 million manufacturing jobs between 1994 and 2004). Meanwhile, the number of jobs actually lost to outsourcing is small, and recent reports suggest the outsourcing trend is slowing down.

He concludes, correctly, that "The U.S. still has much more to gain than to lose from openness, trade and globalization."

With regards to the upcoming election, here's my take: The anti-capitalist, anti-free market views that are gaining in traction are in the economic interest of a very narrow segment of voters. Everyone else should be looking for a sober, non-alarmist candidate who understands current economic realities.


bigunit3000 said...

Edwards seems rather strong, at least in terms of economic policy.

Also, the quote from Steve Rose leaves me wanting more. Although the upper echelon income bracket has increased, Rose omits much information, such as the increase in wealth of tiers higher than 100k. Furthermore, 30k-100k is a large segment, and it is could also be possible that while some broke into the higher bracket, the average income of the 30k-100k fell. While I agree that there is not a plight of a middle class, there is not enough evidence to convince me that they're living in the lap of luxury, either.

I'm not a huge Edwards supporter -- I'd vote for him if he won, but that would be the same for almost any Democrat. I'm more of an Obama fan, myself.

Jesse said...

While I fully agree that the value of international trade is underestimated (Dobbs and his ilk don't help) I think you're overly dismissive of the growing income inequality.

First, I'm curious where Stephen Rose got his numbers, because they don't check out against the US Census' Statistical Abstract. From the numbers I could find, the percent of people making 100k or more DID double between 1979 and 2005, from 8.3% to 17.2% (all 2004 dollars) - Where he gets 12 and 24 I don't know. But that increase wasn't solely from the middle class as Rose claims, it comes about evenly from those making under 35,000 - a 4.6% drop - and from those making 35,000 to 100,000 - a 4.3% drop.

But that's really beside the point. All those numbers show is that there has been growth in the economy since 1979 - which is to be expected! Indeed, whether or not we accept his numbers, we have a shrinking middle class - people are either rich or they're not. You dismiss Edwards' message of growing income inequality, which is about the distribution of income within the economy. Those US Census numbers paint a pretty clear picture that the top 5% of households increased their share from 16.9% of aggregate income to 22.2% and the top 20% of households saw their share of aggregate income increase from 44.2% to 50.4%. Meanwhile, each of the bottom four quintiles saw their share decrease.

Whether or not it's a plight depends on your definition of plight. But when the GDP is doing fairly well but most of it is going to a select few, I think Edwards' message is a good one.

Jay said...

Since on average the income of all groups--poor, middle class, or rich--has been increasing, then it follows that there is a net positive flow of people from the lower&middle classes to the upper class. Because by definition, those successful people are no longer considered lower&middle class, the average income of the lower&middle class groups are artificially depressed.

Then, like Rose is saying, the median income of those groups is misleading because all of their high performers wind up being taken out of the sample.

* * *

Jesse, you make some good points. Nonetheless, if Sen. Edwards is concerned that the rich are getting a big slice of what is at least a bigger pie for everyone, I think he is going about it the wrong way.

God help me for quoting Mitt Romney, but during the Sunday night Republican debate, he said "You're not going to help the wage-earner in America by attacking the wage-payer in America."

When I hear someone rail against "big corporations" (quotation marks to indicate a sinister connotation), I wonder if they realize they are not talking about some abstract evil, but an entity made up of real people that is an essential cog in our economy, for the goods/services they provide and for the workers they employ. Plus, don't forget that average Americans invest in public companies, either directly or through mutual funds or pension plans.

If you want to help reduce the income gap, I think there's two things to be done. On the macro level, improve schools, medical care, etc. Help more workers get into the high-paying fields that are aligned with today's high-tech, global economy. On the micro level, promote investing by the middle class. Romney has a proposal, which I enthusiastically back, that would make all households making less than $200,000/yr exempt from paying taxes on investment earnings.

Anonymous said...

Good point, though sometimes it's hard to arrive to definite conclusions