The Democratic Party will likely be in control of the nation's economic policy levers in 7 months, and they don't know what to do. The best article I have seen about the intra-party debate, uncertainty, and confusion is this one by Jonathan Chait (which is the source of all the quotations below). Most striking to me is that the winners of the debate in the Clinton Administration, when the good times rolled, know that game plan won't work again and are far more confused than the losers of that intramural debate.
Oversimplifying a bit, there are two camps of political economists within the Party. Both are focused on the goal of fixing the stagnation in real pre-tax middle class incomes. One group, identified with the Democratic Leadership Council, Robert Rubin and the Hamilton Project, argued that Clinton should focus on growing the economic pie and that middle class income growth would come naturally. The other group, identified with Robert Reich, the American Prospect and the Economic Policy Institute, argued that the middle class had lost its power to negotiate for its share of a growing pie and needed government to reset the balance of power.
Rubinomics won the argument early in the Clinton Administration—with apparently good results—for 7 years the middle class enjoyed the largest real pre-tax income increases it had had since the 1960s. Graph here. But, according to Chait, the Rubinites' have been greatly surprised—and greatly troubled—as they have watched GDP grow under Bush but have seen all of the pre-tax gains going only to those on the top rung of the ladder. That didn't happen in the 1990s, and they can't figure out why it's happening under Bush policies that are not different in ways they think should affect pre-tax income distribution.
Rubinomics practitioners are publicly concerned about the effects of globalization. Alan Blinder has pointed out that tens of millions of US jobs could be outsourced and that that will tend to depress US wages.
A recent paper by the Hamilton Project, a Rubin-led group that is ground zero for former Clintonite economists, offered up a far more measured endorsement of free trade than would have been on display a dozen years ago, conceding, "International trade also has slightly exacerbated the underlying trend in the United States to a greater income inequality and increased levels of income volatility." Former Clinton economic advisor Gene Sperling wrote last year that his fellow moderates should admit that "accelerated market opening in nations with weak safety nets and poor labor rights can at least temporarily exacerbate inequity."
Even Rubin has talked about the "global convergence of wages." Translation: Developing world wages rise, ours fall.
Other Rubinomics theories are getting gobsmacked by data from the real world. Labor productivity is increasing in the Bush years but for the first time in 100 years the gains are going entirely to capital. Skills and education aren't delivering the expected benefits.
Economists on the Left are not surprised by any of this--they predicted it. Economists on the Right don't care. The economists in the Rubinomics middle are struggling, more or less alone, to make sense of it so they can have recommendations they believe in for Obama.
Thanks to Ezra Klein's blog for pointing me indirectly to the Chait article.
Skeptic