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Liberty, Fraternity, Inequality



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Veronique points to a sophisticated, fascinating reply by liberaltarian Brink Lindsey to straight-out liberal Paul Krugman’s assertion that growing inequality in the U.S. since about 1980 has been driven by changes in government policies and social norms. Brink quotes Krugman as writing:

Since the 1970s, norms and institutions in the United States have changed in ways that either encouraged or permitted sharply higher inequality. Where, however, did the change in norms and institutions come from? The answer appears to be politics.

Brink agrees that government policies and social norms have contributed to growing inequality, but makes the point at length that structural drivers beyond politics have played some role. I have argued a very similar position in National Review on several occasions, such as:

[I]nequality is partially driven by several major transitions that began to occur in the economy and society in the 1970s. First, U.S. domestic production of oil peaked in 1971, oil imports doubled between 1970 and 1975, and OPEC was able simultaneously to drive large price increases. This oil shock was directly regressive, but also tended disproportionately to hammer those industries that were the source of high-wage union jobs. Second, in 1970 “non-distributive services” (i.e., finance, professional services, health care, and so on) became for the first time a larger part of the private economy than goods-producing industries. The shift to services, especially as leveraged by the increasing technology dependence of the economy, tended to enhance the prospects of the cognitive elite at the expense of traditional industrial workers. Third, the combination of changes in cultural mores and social programs began to disassemble the traditional family. The social capital transmitted by intact families became a more and more relevant source of competitive advantage to those individuals raised in functioning homes as this family structure became less universal. Fourth, the foreign-born percentage of the U.S. population, which had reached its historical minimum in 1970, began to rise rapidly as massive immigration resumed after a multi-decade hiatus. This increased inequality by introducing a large low-income group to the population, and also by intensifying wage competition at the lower-skill end of the income scale.

Brink goes on to argue that the political and social changes that have allowed growing inequality — and have in turn been reinforced by it — are good things, not bad things. These include greater freedom for women, acceptance of diversity and non-conformism, and so on. I broadly agree with this diagnosis, though I think that Krugman paints too rosy a picture of the 1950s and Brink pays too rosy a picture of the current era. The trade-offs involved in policies that allow or encourage growing inequality are not nearly as one-sided as either Brink or Krugman asserts. They are uncomfortable.

But the United States didn’t just wake up in 1980 and decide to make a set of uncomfortable trade-offs through a process of abstract reasoning, or even entirely through organic social developments; we were pushed. What I think is missing from the debate as presented in Brink’s piece is international competition. Here’s how I tried to put U.S. economic strategy in the context of international relations it in the NR article:

Post-war U.S. economic policy was made by a generation of statesmen who dealt themselves a great hand of cards, and then played it brilliantly. It is hard to exaggerate the strength of the U.S. competitive position in the world economy in June 1945: America accounted for an absolute majority of all global manufacturing output, had the most technologically advanced economy in the world with ample supplies of natural resources, and could protect this state of affairs with an invincible military that possessed a nuclear monopoly. Most of the rest of the world was either in ruins, pre-industrial, or under the control of Communist regimes that smothered economic energies.

The reaction of most great powers in this situation would have been to declare direct, long-term control over as much of the globe as possible. Instead, the U.S. established itself as the primus inter pares of a loose coalition of nations that became known as the Free World, and established a set of politico-economic institutions and programs — NATO, the Marshall Plan, the Bretton Woods system, the IMF, the World Bank, and so forth — that encouraged rapid economic development within this coalition. Combined with the containment approach vis-à-vis the Soviet Union, this worked out very well for us.

One of the problems with this strategy, of course, was that it did work. While America got much richer, those nations in the coalition that had previously had advanced economies, predominantly Western Europe and Japan, really did develop to the point that by the 1970s they started to become economic competitors to the U.S.

The global circumstances that allowed the United States to have it all — high rates of economic and wage growth along with a high degree of economic equality — changed for the worse in the 1970s as other countries started to compete more effectively and the oil shocks battered the economy. Repeated attempts to apply Keynesian band-aids failed to get the economy to perform as it had in prior decades. The feeling of crisis at that time was not illusory.

Reagan’s solution proceeded from two diagnoses: that macroeconomic pump-priming was merely creating inflation, not growth, and that the U.S. economy had large untapped growth potential that was thwarted by many of the restrictions on markets that were part of the then-current economic consensus, including everything from price controls to government support for private-sector unionization to zealous antitrust enforcement. The Reagan economic strategy was therefore sound money plus deregulation, broadly defined.

It succeeded. Conventional wisdom in 1980 was that the U.S. would not be able to compete with Europe and Japan without becoming more statist, but over the past 25 years the U.S. has reemerged as the acknowledged global economic leader. Economic output per person is 20 to 25 percent higher in the U.S. than in Japan and the major European economies, and the U.S. economy dominates in size and prestige.

Ironically, with our victory in the Cold War, international economic competition has only become more severe. The primary geostrategic fact in the current world is the economic rise of the Asian heartland. While precise long-run predictions are usually a fool’s errand, it’s a pretty safe assumption that economic and strategic competition is likely to increase yet further over the next several decades. The economic world of 1955 is gone. Even if we wanted it back, short of emerging from another global war unscathed while the rest of the world is smoking rubble, we could not have it. The alternative strategy of simply opting out of international economic competition in order to focus on quality of life is not feasible without some kind of external military protection. Sooner or later, those who oppose our values would become strong enough to take away our wealth and freedom. And to remain strong enough to protect ourselves, we must have the economic performance created by freer markets.

(Jonah makes a very similar point in another context here as well.)

Keep this in mind when considering Brink’s take on the net impacts of immigration:

Although the large influx of unskilled immigrants has made American inequality statistics look worse, it has actually reduced inequality for the people involved. After all, immigrants experience large wage gains as a result of relocating to the United States, thereby reducing the cumulative wage gap between them and top earners in this country. When Lerman recalculated trends in inequality to include, at the beginning of the period, recent immigrants and their native-country wages, he found equality had increased rather than decreased. Immigration has increased inequality at home but decreased it on a global scale.

I agree with every word in this paragraph, but don’t think that it follows that decreasing global inequality should be the primary aim of U.S. immigration policy. The focus of U.S. immigration policy ought, in my view, to be the general welfare of the citizenry of the U.S.

This strikes me as highlighting a fundamental issue that liberaltarians need to wrestle with. We don’t live in a Kantian world of eternal commercial peace. Nation-states need to command sufficient loyalty and social cohesion to defend themselves and promote their values. While the Krugmans of the world can over-emphasize the importance of solidarity, it an’t nothing.

We are, in other words, between Scylla and Charybdis. If we give up the market-based reforms that allow us to prosper, we will lose by eventually allowing international competitors to defeat us; but if we let inequality grow unchecked, we will lose by eventually hollowing out the middle class and threatening social cohesion. This, not some happy-talk about the end of history, is what “globalization” means for the U.S.



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