Update
—
A conversation with my Marron Institute colleague Paul Romer yesterday crystallized an idea I’d been toying with for some time. In a nutshell: opponents of taxing the rich have destroyed, on a practical level, the theoretical basis for believing that free trade benefits everyone.
The Econ-101 case for free trade is straightforward: Trade benefits those who produce exports and those who consume imports (including producers who use imported goods as inputs). It hurts the producers of goods which can be made better or more cheaply abroad. But the gains to the winners exceed the losses suffered by the losers: that is, the winners could make the losers whole and still come out ahead themselves. Therefore, trade passes the Pareto test.
[Yes, this elides a number of issues, including path-dependency in increasing-returns and learning-by-doing markets on the pure-economics side and the salting of actual agreements with provisions that create or protect economic rents on the political-economy side. It also ignores the biggest gainers from trade: workers in low-wage countries, most notably the Chinese factory workers whose parents were barefoot peasants.]
So when the modern Republican Party (R.I.P), in the name of “small government” and opposition to “class warfare,” set its face against policies to redistribute the gains from economic growth, it destroyed the theoretical basis for thinking that a rising tide would lift all the boats, rather than lifting the yachts and swamping the trawlers. Free trade without redistribution (especially the corrupt version of “free trade” with corporate rent-seeking written into it) is basically class warfare waged downwards.
Trade by itself can’t account for all of the fractal growth in incomes, with the top half of earners (mostly college graduates) pulling away from the less-educated bottom half, the top decile pulling away from the rest of the top half, the top 1% pulling away from the rest of the top decile, and the top tenth of 1% pulling away from the rest of the top percentile. (I suspect that the billionaires have also been pulling away from the merely rich, but I’m not sure there’s data to support that.) The increasing importance of “winner-take-all” phenomena (linked to the information revolution and the increasing importance of very-low-marginal-cost goods as well as trade), the combination of dual incomes and assortative mating, and the destruction of labor unions have all done their share.
But the bottom line is that all of the gains, not merely from trade but from economic growth, have been concentrated in the hands of a relative few. Â And worsening inequality harms the relative losers even if their absolute incomes do not fall.
Rising mortality rates among non-Hispanic white people without college degrees has attracted less attention than it deserved. In advanced societies, mortality goes down and life expectancy goes up, unless there is war, pestilence, or the sort of massive social and economic dislocation that accompanied the fall of the Soviet Union. For that to be happening in a substantial fraction of the U.S. population is truly frightening.
The Trump phenomenon - he gets his votes from non-Hispanic white people who didn’t graduate from college - suggests that growing mortality does, in fact, reflect a deeper malaise. That Trump’s policies would make those voters worse off economically - that he has chosen to appeal to their fears, resentments, and hatreds rather than their actual interests - just reinforces how desperate his people are.  Tom Edsall has it exactly right when he says “Trump has mobilized a constituency with legitimate grievances on a fool’s errand.”
This is not a problem that can be cured by listening to Mitt “47%” Romney. His complaint against Trump reflects the concerns of the economic class whose selfish interests, translated into pseudo-conservative ideology, made Trumpism inevitable. It will be interesting to observe how many of his fellow plutocrats are willing to join hands, not with people such as Cruz, Rubio, and Kasich who promise a continuation of downward class warfare, but with a Democratic Party moving increasingly in a social-democratic direction.
Mitt Romney has called Donald Trump a fraud—that’ll bring the angry blue collar voters in the Republican base back in line!
I wonder if it makes any sense to characterize the situation like this: since about 1980, the late great Republican party drew in blue collar voters by telling them two things: (1) what is good for the rich is good for you, and (2) what is good for minorities is bad for you. Premise #1 no longer resonates, but premise #2 resonates more strongly than ever.
Trump has called the Wall Street plutocracy “bloodsuckers,” not just “special interests” like Bernie Sanders has. In former days, this was known as “talking like a communist.” Trump’s ongoing success after saying this is good evidence for the total failure of premise #1. Producing evidence for the continuing power of premise #2 would be superfluous.
paragraph 7 ….morality or mortality?
Mortality, thanks. I’m not certified to judge their morals.
It's true that economic gains have been concentrated in the hands of the few. I think you're exaggerating the extent to which this is due to the failure of tax policy to more aggressively redistribute downwards. Even with limits on progressivity, the wealthy are paying for an ever rising percentage of the cost of government.
In fact, I think achieving this is why the government is deliberately exacerbating income inequality. To use a simple analogy, suppose you were running a dairy; Would you rather milk a dozen cows, or twenty million mice? Income inequality makes tax collection easier!
It makes other forms of rent extraction easier, too. If you're a politician, you can more easily buy the votes of the poor, and the wealthy have excess income they can direct your way, (Hiring your relatives for over-paid no work jobs, for instance.) but the middle class are just a waste of space. Too well off to be grateful for a hand out, too poor to pay you kickbacks, what good are they to you?
Small wonder that, as the government gains ever more influence over the distribution of wealth, it works to concentrate it.
Data are useful to evaluate theories. The U.S. had enormous inequality, similar to now before the Depression- and small government. By the period 1945-1980, we had much lower inequality- and much bigger government. Sweden, Denmark,…. all have proportionally bigger government than us, and much lower inequality. So you've got a nice theory there but it's in radical disagreement with the data.
Economists with respect to free trade have pretty much always been like the joke about the mathematician responding to a fire. They determine that there is a solution in which the winners could compensate the losers and still come out ahead, and then they say nothing (either theoretically or in the real world) about whether the compensation happens.
On a micro level, of course "free" trade would be pursued much less aggressively if the winners had to compensate the losers. This is essentially the agency problem expanded to national economies.
Well, if we're going to get all "realistic"… let's also not forget that if you don't live in a free country, like China… you aren't necessarily going to benefit from trade, since you are not free to form unions. Or churches, or anything else. This is yet another very good reason to be suspicious of "free" trade. How are Colombian union leaders doing these days, I wonder? No one seems to talk about it.
Meanwhile, two pessimistic points. I am firmly opposed to the TPP, or whatever it's called for two reasons. First, my country of origin labels are *already* disappearing from my food. That is simply wrong and I won't accept any excuses for it. If the fedgov can't handle the agreements it's already made, then we certainly don't need any new ones. Second, since US politics are run for the 1%, I gather this is probably true in the other countries as well. Well put all those water carriers together and what am I likely to get? Why on Earth would I be *for* this turkey? Send it back! On second thought, I *don't* need to know what's in it… I can guess. I've seen who this administration is, thank you very much. They have lots of good traits, it's true… but overall, they're old style Northeast Republicans. That's just not what the country needs.
Oh also. All those non-college people who are living with despair? It's a sin to leave them like that, festering in pain and anger. Bernie needs to hire a bus and go talk to them. I don't even care if he only gets one vote. He could take Elizabeth with him maybe. Maybe if someone could explain to them that it wasn't minorities who stole their good jobs, they might ease up on some of that xenophobia.
Apologies if I'm misunderstanding this, but in paragraph 2, sentence 3, is this:
"But the gains to the winners exceed the *gains* to the losers:…"
supposed to instead read something like this:
"But the gains to the winners exceed the *losses or harms* to the losers:…"
?
Correct. I put that error in deliberately, just to see who was paying attention. 😉
Now that you've caught it, I'll fix it.
Reality check for the "reality based"….
The US has among the most progressive income taxes in the developed world.
The average family in the top one percent pays over $421,000 annually in income taxes, thus contributing more to public goods than hundreds of families in the lowest quintile. Indeed it looks like every one percenter adds more in income taxes than almost a thousand low income families. ( for which I humbly thank them!)
Bottom quintile incomes after taxes and transfers (paid disproportionately as above by the rich) per the CBO have gone up on average by 16% in the non rich since 1979, not down or flat. (And the majority of the rich came out of the non rich ranks, further accentuating the trends at improvement). Considering the likely errors in inflation measures, real living standards are probably substantially higher than this.
The tax reductions, proportionate to what was being paid, have been overwhelmingly aimed at the lower quintiles.
As the above post alludes (too briefly), the real winners in globalization have been the previously excluded global third world poor. Extreme poverty has gone down in the last generation faster than at any time since the advent of humanity, with over a billion human souls emerging out of extreme impoverishment and premature death. This is the greatest single event for human welfare since the industrial revolution and deserves our greatest respect. Indeed it should be cause to celebrate.
Economists have of course long known (see Stolper/Samuelson) that trade expansion does not always benefit everyone shorter term. If the market expands and makes some relatively scarce goods less relatively scarce (such as unskilled developed world labor when a billion Chinese enter the market) then that factor can suffer. In effect, the gains to the global poor have been offset by lower short term after tax/transfer Growth rates for first world unskilled labor.
The essential insight to grok free trade is that it is an extremely positive sum game long term. However free trade requires something called Creative Destruction. What this means is that nobody's position is ever static and privileged. Everyone has to continuously be open to change and competition and the risk of obsolescence in order to share in the wider fruits of growing prosperity. If everyone plays by the rules, historically prosperity grows longer term by about two percent a year (thus growing 8X per century).
However, the most important insight in social science is the Problem of Cooperation often illustrated via the prisoners dilemma. In brief, this is the dilemma that even if we all benefit on average by cooperation (free trade and such) we gain more by defecting or cheating on the deal. If everyone else plays by the rules (which include the threat of creative destruction) and we don't, then we can gain even more! Of course once everyone defects there is no longer any 8X per century improvement in average living standards. Thus the dilemma.
I certainly agree that a healthy society needs to use the gains from markets to fund effective safety nets and prevent short term losers from defecting — preferably nets which do not incentivize free riding and cooperative defection. My guess is the "RIP" party would be more amenable to these transfers if they didn't view them as destructive to the culture and long term welfare of recipients. I suspect they see many of these transfers as being IATROGENIC. They may very well be right, but that is another comment for another post.
Here is the CBO report on most of the above stats: https://www.cbo.gov/sites/default/files/113th-con…
For a review of globalism on suppressing income growth in unskilled labor, see http://www.ddorn.net/papers/Autor-Dorn-Hanson-Chi…
Aren't you comparing the tax rate on the poor instead of the more relevant CHANGE in net tax rate over the time period? In other words, the relevant factor is net change in regressiveness over the time period, which is probably substantially less than ten percent.Everything I have read on the topic reveals that when adjusted for household size, taxes, transfers, health benefits, increasing age (retirements) and immigration (new immigrants pull down the average like short people entering a room) that median income has gone up considerably (though at a lower rate than post war). When you add proper measures of inflation and adjust for changing demographic mix, the increase are even larger.Just to clarify, I certainly believe that a billion Asians entering the market has acted as a headwind to wage increases. I don't believe that higher incomes or lower taxes on the wealthy have had a net negative effect, and likely has actually stimulated job growth and median wages worldwide. But I do support progressive taxes, if reasonable.Roger
Hi,Actually, after thinking about it, the calculations are not thatstraightforward, and I had fulfilled my procrastination requirement,so rather than get deeper in the weeds to make it carefully accurate,I deleted the comment. However, you make some assertions below thatare not true, AFAIK:
Did you see critique on Econolog of this article? Life is not fair — people show up to this world with different IQ and desire to work; trying to determine who wins / loses is a very academic exercise. I would rather focus on creating conditions where we use our resources best — we generate the most wealth and there are proper incentives in place — that is the best society possible. I do not want big government and redistribution; I want people who are Profit-Making Geniuses to manage our economy — and not taxing them excessively — it is counter-productive. East and West Germany — same people, drastically different economic outcomes — today East Germany still de-populates. It is best to create as much wealth as possible — and people who live by rules can make decent living even if relatively they have less money. People who live in the free market have the most dignity; crony capitalism arises with re-distribution; it makes us poorer, there are so many negatives. Mark — I am so sorry you do not see it.
because free trade is not free when US farmers are massively subsidised by the government. It means that farmers in other countries have no hope of competing.
Imagine the donut shop that is paid $1 by the government for every donut they produce. They set up shop next to you selling donuts for 5 cents each when it costs you 20 cents to even make a donut. That's what free trade is about at the moment.
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I see a generational/time of life driven sea change in the market. We are becoming a nation of savers for a few reason the main one being that we are stuffed to the gills with stuff. We don't need more stuff. We need more security and liquidity, not more houses filled with more stuff. The era of stuff is over, for a while at least. So forget stuff. People want to de-stuff their lives, and bulk up their bank accounts.