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 gains to 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. 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.
[Cross-posted at The Reality-Based Community]