Economics For Contenders
Thomas Palley runs the Economics for Democratic and Open Societies Project. He is the author of Plenty of Nothing: The Downsizing of the American Dream and the Case for Structural Keynesianism. His weekly economic policy blog is at www.thomaspalley.com.
TO: Progressive Presidential Candidates:
RE: Framing a Winning Economic Policy
FROM: Thomas I. Palley
The unbalanced U.S. boom that has followed the 2001 recession provides a real window of opportunity for progressive Democrats to reverse the laissez-faire extremism of the last 30 years. This window may open still wider if the economy suffers a recession in the next two years. If progressives are to take full advantage of this opportunity, they will need a new economic policy frame. Here's a suggested road map.
The roots of past failure
As a rule, progressive economic policies have played well in slumps, but their traction has tended to weaken with recovery as it becomes more difficult to argue for change of direction. This pattern has been a recurrent problem over the last 25 years, especially since the so-called good times have often not been that good for many working families. Once recessions have ended, policy has quickly reverted to the laissez-faire model. The result has been globalization without standards, persistent erosion of worker bargaining power and expansion of the economic power of corporate and financial elites.
Behind this political failure lies a progressive economic policy framed in terms of unemployment, fairness and, more recently, budget deficits. This triptych—unemployment, fairness and budget deficits—is deeply flawed as it lacks staying power, rests on an essentially negative message that clashes with America's economic optimism and is prone to economic confusions.
Though unemployment resonates deeply in recessions, it loses traction once the economy moves into recovery stage. That means progressive critique can sound off-key for the greater part of the business cycle.
Economic fairness has more lasting appeal. However, it seems to be a secondary economic value for many Americans and is usually trumped by concerns with efficiency, enterprise and growth. This public attitude is reinforced by laissez-faire economists who regard a trade-off between equity and economic efficiency as unavoidable
Finally, focusing on budget deficits makes it look as if government itself and lack of saving—conservative positions— are the problems. That, in turn, pushes tax policies that privilege saving and profits and increases both the deficit and inequality. Additionally, focusing on the deficit produces message confusion since budget deficits can be desirable to counter recessions or finance public investment. That adds the further complication of distinguishing "good" deficits from "bad" deficits due to tax cuts for the wealthy and wasteful spending.
A winning economic policy frame
Despite their failings of framing, progressives have considerable traction on economic issues because of deep-seated public anxiety about the economy.
These anxieties have only deepened during the unbalanced boom of the last four years—a boom marked by slow job growth, hidden chronic unemployment, wage stagnation, stagnant poverty rates and further increased wealth and income inequality. The only upside has been robust consumption spending, but even that is superficial since its source was a housing price bubble.
These unhealthy features provide the key to a winning progressive economic policy frame. That frame must restore the link between wages and productivity growth, combined with full employment. In addition, the budget and trade deficits should be discussed in terms of long-haul sustainability.
Linking wages and productivity growth focuses on the entire business cycle, rather than just recession. That fills the gap afflicting existing policy messaging in booms, and booms that fail to deliver rising wages can be rightly criticized. Moreover, emphasizing productivity growth makes it an explicitly pro-growth message. Lastly, the message is anchored in economic history, the "golden age" of the American economy being 1945-1973 when wages and productivity rose together and the rising economic tide lifted all boats.
A winning strategy substitutes full employment for unemployment. Words matter. Full employment is an affirmative concept, whereas unemployment is a negative one. Full employment also resonates with self-help, whereas unemployment can suggest welfare. And spotlighting full employment also fits with tying wages to productivity since tight labor markets help workers win a share of their productivity. Of course, what constitutes full employment is open to debate, but that is a debate worth having and one that conservatives have shuttered since the late 1960s.
Finally, the budget and trade deficit should be reframed in terms of sustainability. That escapes the prison of the lock-box and balanced budgets by recognizing that deficits can be both good and bad. As with full employment, sustainability is also open to debate, but once again that's a debate worth having.
A frame of productivity based wages, full employment and sustainable deficits embodies a powerful affirmative logic. Moreover, it provides an easy funnel for showcasing the "hot-button" discontents of today's economy. Rising inequality and the CEO pay explosion are simply the flipside of today's wage-productivity disconnect. The trade deficit drains demand from the U.S. economy, undermining full employment and manufacturing, which is key to future productivity-wage growth. And George Bush's tax cuts have promoted bad unsustainable deficits.
Most importantly, such a frame invites questions of what caused the disconnect between wages and productivity, and what can be done to remedy that disconnect. Those questions open the way for deeper discussion about the economy, and in particular the role of economic power. Once that door is open, it's easy to understand the role of unions in tying wages to productivity and limiting CEO excess. It is also easy to see why globalization will not work unless accompanied by global labor standards.
By way of example, consider the debate over the minimum wage. The existing progressive policy frame emphasizes fairness, with the minimum wage helping low-paid workers make a living. Compare that with a wage-productivity frame in which the minimum wage is part of the system for tying wages to productivity growth. That suggests not only should the minimum wage be increased, it should also be indexed to the median wage (say at 50 to 60 percent). Whereas the former approach relies on charitable sentiments, the latter approach gives everyone a vested interest in the minimum wage. That's a winning political strategy.
Lessons from history
History contains some encouraging parallels with the current moment, but it also shows that winning will require more than just a wish list of progressive policies. In the 1940s, Keynesian economics swept through the halls of academe and policymaking, transforming the way that people thought about the economy. Absent the Great Depression, it is unlikely this revolution in thought would ever have happened.
Likewise, in the 1970s, the stagflation induced by the OPEC oil price increases created a window of opportunity for Milton Friedman's laissez-faire idea of a natural rate of unemployment that returned economics to pre-Depression modes of thought. George Bush's sick and unbalanced boom provides progressives with a similar opportunity.
However, history also illustrates that crisis alone is not enough to change thinking. Ideas must also be ready to fill the vacuum that opens. That has important strategic implications for progressive presidential candidates. Put bluntly, a laundry list of policy proposals is not enough to transform thinking about the economy. That is a deeper task requiring policy be connected to a convincing vision of how the economy works.