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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: / 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.