Amity Shlaes, writing in Commentary has a good overview of how middle-class anxiety is fueling economic populism:
There is no denying the mood to which Hacker, Stern, and Dobbs—to say nothing of the leaders of the Democratic party—are responding. Americans are more worried about their economic well-being, and the uncertainties we face are daunting. Many defined-contribution programs like 401(k)’s will indeed fall short when retirement arrives. And even at its healthiest, the economy will not be able to outgrow the budgetary challenge posed by Social Security. This problem, in turn, will be made worse by the expansive prescription-drug plan pushed through by President Bush and the Republican Congress.
At the cultural level, too, the new economy can be deeply disconcerting. Are the Goldman Sachs partners and employees who, last December, divvied up some $16.5 billion in bonuses really worth that much more than the rest of us? Then there is globalization, which, no matter what our social background, challenges us in both superficial and fundamental ways. A son cannot hope to work at the now-shuttered factory that once employed his father. A middle-class applicant to Princeton, the University of Michigan, or a local magnet school finds himself in competition with the children of Asian immigrants, who often perform significantly better on standardized math tests. Americans of an older generation now wonder if their success—and the country’s—owes something to the fact that the U.S. was a protected enclave for much of the postwar period. It is hard to discover that you are no longer the smartest person in the room.
Still, even such warranted concerns demand a reality check. A good place to start is with several of the crucial details in the populists’ indictment. Consider, for example, Hacker’s table of downward-plunging family income. To present a chart that consists only of such plunges, with no rises, may serve his point, but Hacker himself knows that this is not the full story—after all, one can only plunge from a height. Unfortunately, the reality of regular upturns in family income, which robs the chart of much of its polemical force, is neatly tucked away on a distant page.
There’s a deep disconnect between how people perceive their neighbors are doing and how they perceive themselves to be doing. The worries about the economy seem to be general worries — consumer confidence is at a five-year high. People are more confident about their personal economic situation than they are about the state of the economy in general, which is a curious phenomenon.
I think this is largely a self-fulfilling prophecy — the media keeps selling economic bad news, and people’s impressions of the economy are largely driven by what they hear in the media. The other big factor is gas prices and the stock market — those are visible economic factors that give people are benchmark for economic performance. Productivity, interest rates, unemployment in general, all those other economic benchmarks that are of interest to economists don’t have much relevance to people’s lives in general. If gas is cheap and stocks are high, people tend to be more economically confident. If gas is high and stocks are down, people are more worried.
It’s not that all these concerns are imaginary. College costs are still skyrocketing, health care costs continue to rise, and even staunch defenders of capitalism can’t find that CEO pay is truly merited by the performance of the CEOs that are making those multi-billion dollar deals.
The problem is that economic populism is exactly the wrong solution for America’s economic problems:
Taken as a whole, the wish list of Hacker, Stern, and Dobbs represents a plan to turn America inward. They would like to see higher taxes and mandated wages, stronger unions with international reach, and a range of new state-run entitlements. If this recipe for economic security looks familiar, it should: it is reminiscent of the platforms of, say, the old British Labor party or Germany’s Christian Democrats in the 1950’s. What the economic populists seek is management and redistribution from above. Reading their manifestoes, one forms a picture of gray-suited men arriving for quarterly meetings in national capitals, somberly calibrating over conference tables the rate and direction of economic growth.
The ideal held out by Hacker, Stern, and Dobbs is more dangerous than the galloping capitalism that they lament. Moving toward a social-democratic model would likely bring about the very sort of dire economic circumstances conjured up by their books. Raising the scale and scope of American government to a European level would deal a permanent blow to our competitiveness. It would, among other things, make the U.S. a far less interesting and dynamic place in which to work. Whatever Senator McCain’s worries about the future, younger Americans still expect to do well. They are not in the same position as the youth of France, to whom the Archbishop of Paris recently declared, “I do not believe that anybody can guarantee you this security, no more than [they can] guarantee that you will have a standard of living comparable to your parents.” It would be ironic indeed if, just as Europe is starting to come to grips with the crushing burden placed upon it by its statist policies, the U.S. were to adopt such arrangements wholesale.
The worst thing we can do is centralize and ossify our economy. The “social model” of Europe barely struggles over there, if it were applied to a country much larger and more diverse, it would fail faster and more spectacularly — with all the consequences being that much larger. The model espoused by the populists has already failed — and trying to adopt it here would have the same results.
In the case of health care, the reason why costs are skyrocketing has little to do with a lack of government control — it comes from too much government control. There’s no reason why health coverage should be tied to employment. It makes little sense for one’s employment situation to determine the level of one’s health insurance. Health insurance should be as portable as any other asset — if we tied car ownership to employment, cars would be prohibitively expensive too. The “company store” mentality ensures that employers have incentives to keep costs down and employees have reason to utilize as much as they can get away with — which makes everyone unhappy. While the current system can be done better — such as encouraging more preventative measures — even that only ameliorates the situation rather than fixing it. Health insurance needs to be decoupled from employment and needs to be subject to individual rather than bureaucratic control. Only then will the people who utilize the system and the people who pay be the same people — and only then will there be a real incentive for people to demand the best quality treatment at the same price.
Economic populism centralizes authority and control, which goes against the principles of basic economics. A strong economy requires decentralization as much as is possible — prices should never be determined by fiat but by the signaling methods of the market. Job growth requires more innovation and less bureaucracy. Instead of fearing globalization, we should be realizing that the benefits of global markets have created millions of jobs right here at home. To try to turn back the clock to the protectionism of the past would be to put those people out of work.
Economic populism is stuck in the past. Technology has meant that heavy manufacturing is less crucial than it once was — materials technology means that automobiles can go 100,000 miles without a tuneup and washers can last for a decade rather than a few years. We all benefit from those advances, but they also mean that there’s less demand for manufactured goods. The old days when everyone worked for the same employer for life and had a guaranteed pension are long gone, and nothing we do can (or should) bring those days back.
Our economy is about skilled labor, services, and high technology. It requires more investment in education (which means educational reform, not throwing more money into the system), more economic literacy on the part of consumers, and an understanding that we’re part of a global economy and can’t engage in the kind of paleo-populism of decades past.
Ultimately, the concerns about the economy are largely psychological rather than economic. For all the talk about how things were so much better in the past, would anyone like to go back to the economy of the 1970s, the 1960s, or the 1950s? Would anyone care to engage in the protectionism of the 1920s which exacerbated and may even have provoked the Great Depression? Would we be better off if the poor quality vehicles being sold by GM were the only affordable cars for American workers?
The populists want to paint a dire picture of the US economy, but it doesn’t take much questioning to understand why their view just doesn’t work. We can’t turn back the clock, but we can face the realities of the future. Change can be a frightening thing, and it does produce winners or losers. However, we are the beneficiaries of years of technological and social advancement, and the rise in homeownership, the rise in workers with college education, and the fact that we’re all living longer and healthier lives are direct results of these changes. Populism serves to embrace the failed strategies of the past, while the solutions we need are solutions that acknowledge the changes of the future.