Martin Wolf Sees Social Democracy in America's Future

Martin Wolf takes a look in his Magic-8 ball at America's future and sees... social democracy:

FT.com / Columnists / Martin Wolf - Why America will need some elements of a welfare state: Is globalisation a leading cause of rising inequality in high-income countries? The outcome of the debate on this question may determine whether the US will remain open to trade. If policymakers do not craft an imaginative response, protection against imports may be the outcome, regardless of its (non-existent) merits....

Mr Bernanke mentions the three standard hypotheses: skill-biased technical change; “winner-take-all” markets for the most talented; and globalisation. The last, in turn, would include trade, migration and rewards available to smart players in globalised capital markets.

Mr Bernanke himself comes to the standard and, in my view, largely correct, conclusion that “the influence of globalisation on inequality has been moderate and almost surely less important than the effects of skill-biased technological change.”...

This has long been the persuasively argued view of Jagdish Bhagwati of Columbia University.... Prof Feenstra notes that new possibilities for specialisation in tasks along the value chain may increase demand for skilled labour in both richer and poorer trading partners. But his empirical evidence still suggests that technology is more significant....

What, if anything, should be done? At first glance, the trend towards greater inequality should not worry a person with Mr Bernanke’s principles. But that response would be quite wrong... rising inequality causes declining equality of opportunity... makes losing a job costlier, more objectionable and so more resisted.... In a country in which much social insurance has historically been supplied by employers, the loss of jobs and the closure of businesses is particularly traumatic. Protectionism then emerges as the politically correct form of resistance to the market....

There are two possible responses. One is to insist that people are simply on their own. The present administration will, I predict, be the high water mark of this conservative tide. The other is to create a system of support that does not destroy incentives... greater funding of education for the disadvantaged (ideally, with private supply) and universal health insurance. The left will also want higher minimum wages and generous subsidisation of low earnings.

I am not suggesting that the US should embrace Europe’s interventionist follies. But without more generous government-financed services, the US may be unable to maintain a dynamic, internationally open and socially mobile society. That may seem a paradox. It is not.

I wish I could see it. But I am having a hard time doing so. American politics aren't... logical.

One would have thought that the rise in the value of a sheepskin from a 30% lifetime wage premium over a high-school diploma in 1975 to a 90% premium in 2005 would have called forth an extraordinary wave of public support and public funding for investment in education that would have pushed that premium down somewhat: lots more Americans should be getting a higher education now than were getting one in the mid-1970s. But they aren't.

One would have thought that the increasing importance of pension and health benefits in a more medically-capable and longer-lived society would have made American workers enthusiastic about the "flexicurity" agenda pursued by Labor Secretary Bob Reich and others in the first phase of the Clinton administration. But they weren't--at least not in a manner visible to me or to decisive legislative votes like Sen. Breaux or Rep. Tauzin. And the Labor leaders weren't either. "Burial insurance. We don't want burial insurance" was the refrain that I heard from my spear-carrier perch in the back of the room.

One would have thought that initiatives like Barney Frank's "grand bargain"--the left supports trade liberalization if the right supports social democracy--would have gained more traction with a left that realizes that trade restrictions are negative-sum when they aren't smoke-and-mirrors and a right that recognizes the potential economic and soft-power security gains from an even more interdependent world. But they haven't.

Lots of things that make obvious and indisputable sense in America simply don't happen for one or another strange political reason.

In my view, those who benefit the most from America's open economy are consumers, elderly home-sellers, middle aged mortgage-borrowers, construction workers, and those producing and selling high-end consumer goods who benefit from consumer spending ultimately and indirectly burt surely financed by low interest loans from the People's Bank of China. They don't know how much they gain. Those who lose the most from America's open economy are manufacturing and other workers who find themselves competing with imports. They know how much they lose.

A substantial and relatively rapid fall in the dollar unaccompanied by macroeconomic distress would, I think, make a big difference. But absent that, I don't see any political coalition assembling in America for freer trade. Maintaining stasis will be the best we can hope to do.

So I share Martin Wolf's sense of where the U.S. should go--I have shared it for a couple of decades, at least. What I don't see is how to get there.

Comments

[dale]

Dean Baker often makes the case that chief among the winners from our current trade regimes are highly paid professionals. Not just grandma and construction workers, but MDs, attorneys,academics, all those with good, proteced jobs,whose livlihoods have not yet been into full play in the global arena.

And for the love of God Brad. Why is the case for a highly developed social democracy not made each and every time the case for "free" trade is made? If one is really putting forward a technocratic case for building a more proseprous world- how can such a detail as the intentional mechaninsms for the intentional distribution of that prosperity EVER be left out of the discussion? Why isn't the WTO called the World Social Democacy Organization or the WTO-WSDO?

[bigTom]

I agree with Martin. Unfortunately I also share your pessimistic view that a clear need frequently doesn't translate into political action. Politics is more likely to follow a path of least (political) resistance, which in this case is likely to be protectionism.

[turkey turkey turkey]

Bwwahahahah. If Martin Wolf really "sees social democracy in America's future" then he's well on the way to being a candidate for the funny farm.

American elites have no interest in downward wealth redistribution and American democracy is too weak to force the issue. Social democracy is just not going to happen.

[andres]

"So I share Martin Wolf's sense of where the U.S. should go--I have shared it for a couple of decades, at least. What I don't see is how to get there."

Well, Brad, one has to be blunt for an important question like this. The first step in getting there is to utterly discredit the Republican party and emasculate it as a political force. The American people can start by throwing George Bush and Richard Cheney in prison--God knows they deserve it, given a war of aggression started under false pretenses, and repeated violations of the US commitment to the Geneva Conventions, of the right to legal counsel, and the authorization of illegal searches such as the wiretapping program. This should be done for its own sake, but also because the Republican party is the main bulwark against economic policies that try to bring about greater equality of opportunity. The degree to which this is true can be glimpsed by the huge campaign against the Clinton health care plan and by the failure of Congress to pass a single minimum wage increase between 1995 and 2006.

The second step is to start a thourough political reform that (a) reconstitutes the mainstream media by separating it from external corporate ownership (b) eliminates the two-party duopoly on elections, and (c) institutes public rather than private financing for elections.

Only then will there be the political leverage to make the US look more like western Europe. Take it or leave it.

[Barry]

Brad: "One would have thought that the rise in the value of a sheepskin from a 30% lifetime wage premium over a high-school diploma in 1975 to a 90% premium in 2005 ..."

Another way to phrase this would be 'the deliberal mass destruction of blue-collar careers...'.

It wasn't accidental. It reflected changing politics.

[Barry]

Brad: "One would have thought that initiatives like Barney Frank's "grand bargain"--the left supports trade liberalization if the right supports social democracy--"

What's happened is that the left sometimes supports trade liberalization, and sometimes opposes it. Sometimes successfully, and sometimes not.

Meanwhile, the right almost always opposes social democracy; usually successfully.

"...would have gained more traction with a left that realizes that trade restrictions are negative-sum when they aren't smoke-and-mirrors and a right that recognizes the potential economic and soft-power security gains from an even more interdependent world. But they haven't."

Brad, the whole G-D thrust of that FT article is: increasing insecurity among US workers leads to trade restrictions, as it's the only way left open to salvage some security. Until and unless you understand that - and you don't, right now, you just look at it in incomprehension - you won't understand what's going on.

[Ponzi Q. Globalization]

"If policymakers do not craft an imaginative response, protection against imports may be the outcome, regardless of its (non-existent) merits"

Non-existent? I'm not saying that protection would be a net positive but does it really have NO merits? Even when assuming no social democracy here in America?

"This has long been the persuasively argued view of Jagdish Bhagwati of Columbia University"

Jagdish Bhagwati? Isn't this the same globalization shill that resorts to Americans have nothing to fear from inferior foriegners silliness such as:

"I have taught hundreds of fine foreign students in the last few years, but only a small fraction are at the level of proficiency that Intel looks for in its research programs."

(http://www.cfr.org/publication/6767/why_your_job_isnt_moving_to_bangalore.html)

to defend his religious beliefs?

"Protectionism then emerges as the politically correct form of resistance to the market"

As Dean Baker points out (over and over and over again) protectionism is already part of the market. The whole idea that the market is some pure ideal that protectionism would sully is quite stupid. What is this mythical market anyway? Is it holy? Should we cross ourselves when speaking its name?

"I am not suggesting that the US should embrace Europe’s interventionist follies."

Follies? Maybe. Yet many countries in Europe have both higher life expectancy and lower infant mortality rates. These are very important measurements of the performence of a nation's economic system.

"But without more generous government-financed services, the US may be unable to maintain a dynamic, internationally open and socially mobile society. That may seem a paradox. It is not."

Does the U.S. today have more social mobility than European countries? I'm sure someone here knows where to look.

"I wish I could see it. But I am having a hard time doing so. American politics aren't... logical"

"Lots of things that make obvious and indisputable sense in America simply don't happen for one or another strange political reason."

American politics is logical. It's just broken. The political system produces outcomes that favor politically connected groups over the general population.

"In my view, those who benefit the most from America's open economy are consumers, elderly home-sellers, middle aged mortgage-borrowers, construction workers, and those producing and selling high-end consumer goods who benefit from consumer spending ultimately and indirectly burt surely financed by low interest loans from the People's Bank of China."

You left out rich rentiers, Wall Street, and CEOs.

[ken melvin]

I think Social Democracy more consequent the realization that resources are finite and that we are all in this together. Much attributed American know how, entrepreneurship, free markets, etc., is better attributed, until recently, lots of resources to exploit and waste.

[save_the_rustbelt]

If trade and economic policies (Bush/Clinton/Bush) continue to savage blue collar workers and much of the middle class there will be a populist rebellion.

Take a look at the election results in Ohio.

If the free traders are whining now, wait until the Senate is full of Sherrod Browns.

"Let them eat cake" may be the line of some politicians and most economists, but eventually the peasants will grab their pitchforks.

[centrist]

ponzi,
The economist has done articles on social mobility within the last year and "old stale germany"(among other nations) had more mobility that the US.

[trotsky]

I listened to some Chamber of Commerce types this week complain that Gov. Schwarzenegger's plan puts too much of a burden on small business without dealing with the real problem -- runaway costs.

Then I read Steven Pearlstein on a new McKinsey study on health care costs:

"The study aimed to determine why the United States spends nearly double the average of other industrialized countries on health care -- with no better, and in some cases inferior, medical outcomes. Even after adjusting for wealth, population mix and higher levels of some diseases, McKinsey calculated that we spend $477 billion a year more on health care than would be expected if the United States fit the spending pattern of 13 other advanced countries. That staggering waste of money works out to 3.6 percent of the nation's entire economic output, or $1,645 per person, every year."

You'd think the level-headed Chamber of Commerce types would want to immitate what the other wealthy countries are doing. Hahahahahaha!

[Alex Tolley]

"One would have thought that the rise in the value of a sheepskin from a 30% lifetime wage premium over a high-school diploma in 1975 to a 90% premium in 2005 would have called forth an extraordinary wave of public support and public funding for investment in education that would have pushed that premium down somewhat: lots more Americans should be getting a higher education now than were getting one in the mid-1970s. But they aren't."

However there has been an explosion of private education in the UC extension courses and trade schools, at least in Silicon Valley. Much of it attended by people interested in raising their skill levels for better employment opportunities.

"So I share Martin Wolf's sense of where the U.S. should go--I have shared it for a couple of decades, at least. What I don't see is how to get there."

Well the last 2 decades have been a period of fairly extended, relatively high economic growth and the largest bull market in history. With a judicious mix of side-tracking wars and meaningless red-meat social issues, I'm not surprised that not much has happened. But a sustained slowdown, loss of American global hegemony and an anti-religious backlash, I could see that the political system could move us to the situation Wolf indicates.

[hari]

Brad: You've to take into account Wolf's origin and commitment to what German's call "Social-Market Economic System". Scandinavian interventionist form of social democracy is more egalitarin in ideological thrust. EU "social-market economic" model is finally emerging from dis- investments specially in education and current social indicators are moving up_as opening of internal market and its stability becomes a competition/political issue. All curent trends are relatively positive.
If current EU social indicators are stabalized it's impact on G-7 will become serious, as EU productivity is also gaining strength (except in UK).
My take on US politics is based on lack of serious involvement of grass-root movements in formulating party platforms and policy objectives.
Inevitably political "backlash" is not out of question, if Democrats are unable to deliver because of their own internal divisions.
Finally, Euro monetary policy is gaining global strength/followers from China/India and others_
which might force the hand of decision-makers in Washington D.C.

[JonF]

Re: One would have thought that the increasing importance of pension and health benefits in a more medically-capable and longer-lived society would have made American workers enthusiastic about the "flexicurity" agenda pursued by Labor Secretary Bob Reich and others in the first phase of the Clinton administration.

Universal health insurance polls extremely well among almost all groups except the very wealthy and the (fairly tiny) cohort of true-believer libertarians. Even Religious Right types are on board for this sort of reform. The problem in the 90s wasn't that voters didn't want universal healthcare, rather it was that the clintons came up with a complicated, confusing plan that no one understood, which they then failed to support vigorously, and which big money special interests were then able to defeat.

[save_the_rustbelt]

I'm working in Michigan today, where everyone is telling workers "get more education."

Problem is, the result will be unemployment or underemployment with a better education.

Hey, that should help.

[Steve Pilon]

Brad
I love your blog. I have been thinking about the implications of globalization for a while now (See my book review: "Can America Compete?", SAIS Review, Winter/Spring 1986; Vol 6, No.1: pp 238-241 in which I propose a "grand bargain" similar to that suggested by Barney Franks). You say "Those who lose the most from America's open economy are manufacturing and other workers who find themselves competing with imports." but in fact ALL un-skilled US workers (including those employed in the non-tradable sectors) have seen their wages drop as a result of globalization, since the workers formerly employed in manufacturing are now competing for jobs in services, therby exerting downward pressure on wages in the non-traded sectors as well. Of course, wages for workers in India and China have seen their wages rise significantly. In addition, this effect is visible even in higher-skill jobs, such as engineering and architecture, now that massive amounts of data can be shipped around the world via the internet. This suggests that "more education" for displaced US workers may not be the panacea it is sometimes made out to be.

After 2 decades of cheerleading for "Free Trade", mainsteam economists seem to be coming to the realization that despite being a net positive sum policy (of what magnitude?), Free Trade makes owners of capital the big winners while developed-country workers are the losers. I recommend PIMCO's Paul MacCaulley's thoughts on this subject.

Happy Trails
Steve Pilon

[kharris]

Sununu the Elder was quoted in the press saying he didn't care whether chips made by US workers were micro-chips of potato chips, as long as they were working.

When Reagan came to Washington, the city was flooded with his backers of a certain age and position, coming to "show support" by asking for favors. One big complaint was that hotels that operated "like in the old days" were nowhere to be found. No more the sort of establishment where you left your shoes outside the door at night and found them back in the morning, nicely shined - without ever having to see the shoe-shine guy.

As long as the Jane Galts of the world continue to argue that we have too much education already, don't expect to hear that we have made a bold new push to lift our national education level.

Reno,

"…-it will push prices up." Yeah, that's the mechanism. If you want to rebalance trade, you need to make imports more expensive for us and less expensive for our trading partners. It's a rare solution that is without cost.

[anne]

No; there is no reason to believe a loss in value of the dollar will increase domestic prices. That was not the case from September 1985 and the Plaza Accord. The long term bond market is telling us, look for long term price moderation so I am.

[Michael Carroll]

People's answers are just to pat on this one. We do have a presidential election coming up here and come of these questions can be forced onto the table. The problem is NOT just the right. The left has to take some blame here too.

More education in a decent business environment eventually translates into entreprenuership and jobs. But eventually were all..

Anne, could you elaborate. I worry four fifths of the bond market is telling us to look for long term price deflation and one fifth is telling us to look for hyperinflation.

[save_the_rustbelt]

Steve Pilon:

That is the most sensible summary of these issues I have seen in a long time. Thank you.

[realist]

Ponzi:

"Does the U.S. today have more social mobility than European countries? I'm sure someone here knows where to look."

So we do. I'm too lazy to look up references, but the answer is "No, there is not more, and in some cases rather less." If you're looking for social mobility you're better off in Germany, much better off in Scandanavia, and even slightly better off in the class-bound UK.

[Scott Littlehale]

My (unfinished) dissertation topic arises!

To understand why "the left" doesn't rush to grab at the Grand Bargain as outlined, remember (as implicitly recognized by Brad) that the political players are organizations, not individuals, facing a different cost-benefit calculation.

U.S. unions (mostly) are organized sectorally. Individual social insurance that is portable across sectors doesn't help a union that is deeply embedded in an industry unless the costs that a union must bear to "diversify its (sectoral/occupational) portfolio" are drastically reduced.

Hell, even intra-sectorally, at the firm level, there are real issues stemming from portfolio-diversification costs (I'm thinking Big Three auto vs. "transplants").

The Employee Free Choice Act (slated to die by veto), if passed 15 years ago, would have helped some (by reducing the costs to unions of countering employer anti-union tactics & and by lowering employees' fear of employer retaliation).

But it wouldn't have addressed the fact that workers would still be worried by their (globalization- and tech change-induced) increased substitutability. Given that costs of searching out a new job (even if buffered by wage insurance & portable bene's) are driven up by the fact that many such workers have a mortgage and intangibles that amount to a sunk investment in a community, they will still be nervous about doing anything that could result in offshoring/outsourcing. Which amounts to a decreased likelihood that they'll sign the union representation-authorization card ...

... which will lead to continued (and understandable) union resistance. The thing is, the significant "globalization" policy battles are mostly already over. Transnational Biz & repub's have little need to go for the "grand bargain" in exchange for policies getting through. The Peruvian market just isn't important enough ...
[apologies for long comment]

[ken melvin]

I see more than a little reason to question whether competition per se is good, especially when it comes to labor, and I think it's more than a little possible that the cheap labor provided by legal and illegal immigrants do more harm than good. The results may look a lot more like China and Mexico than America past.

[Corvid]

Free trade comes and free trade goes. Money and capital needn't be attached to place but people necessarily are, at least until someone figures out how to do wire transfers of the human heart.

[wjd123]

"I am not suggesting that the US should embrace Europe’s interventionist follies. But without more generous government-financed services, the US may be unable to maintain a dynamic, internationally open and socially mobile society. That may seem a paradox. It is not."

This is ambiguous. Is Wolf saying that all intervention into the economy is folly, or is he saying that some interventions by the Europeans into their political economies have turned out to be folly and we shouldn't imitate those. History shows the first stance to be impossible in a democratic political economy. The second is of no help, a mere admonishment: beware.

It seems to me that the folly of intervention is not understanding what one is intervening in. And since the United States is made up of diverse cultures different from those of Europe what is folly in Europe may not be folly here.

Knowing the culture you are intervening in is the right way to intervene. The wrong way would be the Bush way where intervention and reality are kept apart when reality doesn't suit ones ideology.

Nonintervention is simply not possible if economic and social problems persist for a long enough time. The only question is how do we act wisely. Considering how much trouble people have distinguishing between their individual interests and social interests and how ready people are to lie with statistics to protect the former, it's a monumental task.

We can improve the odds of intervening wisely if we hold our representatives responsible for their mistakes. Voters should punish interventionists whose economic counsel turns out to be folly just as they do punish those who stand pat in a crisis believing the economy will correct itself, and lose.

[Nick Kaufman]

If I may say Barney Frank's grand bargain doesn't strike me as a bargain at all: It is typical Scandinavian social democracy, an unheralded aspect of which is the outward and open character of the economy which allows for truly competitive sectors.

However a crucial difference is that small European social democracies follow this path because it's necessary; because their economies are small, they are open and because they re open, they are subject to the volatility of world trade.

This is not the case with the large and largely autonomous old U S of A. Did I mention the closed-economy largely importing and not exporting old U S of A?

So, why would the right accede to such a bargain which isn't a bargain, when they are not obliged by politics of need to accede to?

[Robert Waldmann]

"A couple of decades" indeed. You were pushing that line when I met you 29 years ago. The weasel words "at least" won't do the trick. You were probably a free trader social democrat in nursery school.

And to be Frank about Frank -- some grand bargain -- he wants social democracy in the USA because he is egalitarian, believes all people are created equal and doesn't believe there will be a large reduction in money metric utility he wants free trade because he is egalitarian, believes all people are created equal and think it would be espcially good for third world workers. A bargain like briar rabbit saying please please don't throw me in the briar patch or me saying I'll take your house off your hands if you also give me $500,000 or

What Barney Frank said.

Still, one congressman isn't a majority and we all have work to do.

[Martin Wolf]

In response to the question above, what I was saying is that America should not imitate the mistaken policies of Europeans, above all excessive regulation of labour markets.

[wjd123]

Dean Baker of "American Prospect" explaining the workings of Stolper-Samuelson.

"this is simple. most workers are in the less-educated category and have already had their wages cut. The question is do they want to see their wages rise or not. When the wages of high wage workers fall, this lowers the price of the goods and services they produce and thereby raises the real wages of everyone else."

In my opinion allowing the economic sphere to correct itself without protecting standards,economic morality, just doesn't cut it:

What about the political side of the political economy. I live in a country where minimum wage laws are enforced my co-workers lives in a country where they are not. I'm allowed free association, They're not. My country men want environmental controls, their country men can't afford them. How much is this price-factor leveling going to effect my economic security, my economic freedom, and my health?

It's no longer a matter of my co-workers misfortune is my fortune in affording me even lower prices. My economic security, my economic freedom, and my health are under attack because they are a factor of production which another country's political economy is dragging down.

There is more being leveled here than the price of labor, rents, and capital. Economic morality, the rules and regulations, guiding the economic sphere is being leveled also.

It seems to me that the EU has the right approach when it brings along economic standards with free trade.