INCOME INEQUALITY: WHO’S REALLY TO BLAME?

THE RECIPE FOR PRESIDENTIAL RE-ELECTION used to be simple: keep employment high and prices low. Indeed, as of the early 1980s, the noted political scientist Seymour Martin Lipset was touting this formula as a potent predictor of electoral outcomes. Just add up the unemployment and inflation rates, he said. If this “misery index” was below 10, thumbs up for the incumbent. If above 10, then it was time to pen the memoirs.

Well, that was then. These days the misery index is just above 8, the lowest in a quarter-century, theoretically signifying a Nirvana-like America. Yet President Clinton spends much of his time saying he shares our pain. And this isn’t just another example of his famously rampant empathy. Conventional wisdom has him presiding over seething economic discontent, even as he presides over an ongoing economic recovery that makes Europe and Japan envious.

The problem, of course, is that for a couple of decades now, economic growth has made the rich richer but hasn’t been trickling down much to the rank and file. Hence the two trends Clinton has long fretted over: stagnant middle-income wages and rising income inequality. You would think this bad news would be good news for Republicans. Tony Blankley, the spokesman for Newt Gingrich, wonders why Clinton is so determined to dwell on it. “If he is suggesting that he is politically impotent on this huge issue,” Blankley has observed, “then he is opening himself up to the argument that he should hand over the presidency to someone who isn’t impotent.”

But who? Of all the contenders for the Republican nomination, only one is seizing the issue in a full-throated way. Only one decries the “stagnant wages of an alienated working class” and lambastes overpaid CEOs. Only one is going beyond standard Republican indictments of the “intellectual elite” to attack the financial elite, venturing beyond cultural populism into full-fledged economic populism. And that candidate is Pat Buchanan–not exactly the dream nominee of Gingrich and the rest of the Republican leadership.

The problem, from their point of view, isn’t just Buchanan’s reputation as (depending on which of his critics you consult) a demagogue, an anti-Semite or a closet fascist. Equally problematic is his eclectic extremism–far right on social issues, well to the left on trade, a frequent dissenter from the party line.

What does it say that the one Republican candidate who can claim to be grappling with America’s most heartfelt economic problem is on the party’s fringe? One answer is that this issue has mainstream Republicans flummoxed. A close look at the logic of income inequality and stagnant wages suggests that the ideology of people like Bob Dole and Phil Gramm may leave them at least as “impotent” on the issue as Clinton, if not more so. And a close look at Buchanan’s attempt to fashion a maverick Republican cure for the problem only underscores that prospect.

Buchanan’s prescription begins with a dramatic diagnosis: “Real incomes of American workers have fallen 20% in 20 years.” Well, not exactly. America’s real wages–wages adjusted for inflation–have fallen 7% in 20 years. (That’s the typical, or median, wage–lower than the wages of half the workers, higher than the wages of the other half.) The total real income of the median household has actually crept upward 1% in 20 years. And if you add in the value of benefits like health care, both numbers look a shade rosier. Still, that’s quite a comedown from the 1950s and ’60s, when the median real wage often grew about 2% in a single year. What’s more, blue-collar workers have seen real wages fall 8% in only seven years. These workers are primary targets of Buchanan’s appeals to the “forgotten men and women who work in the forges and factories.”

If these men and women want lots of people to blame for their plight, Buchanan is the man to see. His explanation for low wages implicates not just American elites–heartless CEOs and Wall Street money shufflers–but much of the world’s non-Caucasian population: legal immigrants, illegal immigrants and low-paid workers abroad, especially in Asia and Latin America. Together, these foreign-born suspects amount to a two-part explanation for our troubles. Low-wage immigrants and low-wage foreign workers, says Buchanan, compete with native-born Americans and drive down wages. Hence his two-pronged solution: restrict immigration and restrict imports.

Actually, restrict is a mild word for Buchanan’s immigration policy. He wants a five-year ban on legal immigration, and he is not exactly hospitable to illegal immigration; he will “defend the borders of my country” against this “invasion,” whether that means a construction effort on a par with the Berlin Wall or “putting the National Guard all along our southern frontier.”

Most economists agree with Buchanan that–in the short run, at least–immigrants who work for cheap wages can depress low-skill wages. But good evidence of a sizable effect is scarce. Princeton economist David Card studied the 1980 Mariel boatlift, which brought 125,000 workers to Miami. This influx of mostly low-skilled Hispanics–equal to 7% of the area’s labor force–had no discernible effect on the wages of low-skilled non-Hispanic workers, or on their unemployment rate.

Findings suggesting a larger immigration effect sometimes shrink under inspection. According to a much cited estimate by the economist George Borjas, immigration accounts for one-fifth of the widening of the wage gap between workers with different levels of schooling. But these differences in educational level account for less than a third of the overall growth in wage inequality. And one-fifth of one-third is one-fifteenth.

All told, immigrants have probably done less to depress the wages of low-skilled American workers than the millions of low-skilled American women who have entered the work force since the 1960s. And the growing inequality of household income also has a large demographic cause: as more single working mothers populate the lower end of the income scale, more households at the upper end have two well-paid professional workers. Still, blaming immigrants is much better politics than blaming “American demographic trends.”

On trade, as on immigration, Buchanan yields to no presidential contender in the extremity of his policy. Not only did he vocally oppose NAFTA and the creation of the World Trade Organization (unlike Dole, Gramm and Clinton), now that these agreements have passed, he won’t let bygones be bygones. He wants to dismantle both pacts and erect new trade barriers: a 10% tariff on Japanese goods, a 20% tariff on Chinese goods and a “social tariff” of unknown size on goods from Mexico and other developing nations.

The rhetorical virtues of this approach are great. It expands the list of job-stealing aliens not only to swarthy workers abroad, but also to wily Japanese bureaucrats, “foreign lobbyists,” the unpatriotic heads of “transnational corporations,” and the shadowy figures who sit on the wto’s dispute-resolution panels (who in turn represent the ominous new world order that, Buchanan says, threatens American sovereignty).

The substantive virtues of Buchanan’s proposal are less clear. If stagnant real wages are the problem, raising the cost of imports is a curious solution. As shoes and microwave ovens at Sears or Wal-Mart get pricier, the real wages of the average American worker go down, not up. When economists cite lower prices as benefits of free trade, protectionists sometimes reply that we should worry more about “workers” and less about “consumers.” But, of course, workers are consumers.

Sharply raising tariffs might, in the short run, protect some jobs in industries facing import competition. But even if these tariffs didn’t trigger a full-scale trade war, they would probably inspire counter-tariffs that would cost American jobs in export industries. To point this out, says Buchanan, is to counsel “fear and timidity.”

There are less risky ways to dampen the effects of cheap foreign labor on American wages, but they are the tools of Democrats, not Republicans. Trade deals like NAFTA can require member nations to have a high minimum wage, maintain strict environmental regulations or guarantee the right to unionize. Such rules directly confront the problems of inhumanely low wages and reckless environmental degradation–the Third World production shortcuts that Buchanan says justify his social tariff. But Buchanan’s ideology won’t countenance this solution since it involves the transnational panels of adjudication that he deems inimical to sovereignty. Nor do many mainstream Republicans like this leftish solution. One reason NAFTA’s environmental and labor side agreements are bare bones, and barely consequential, is that Republicans opposed putting flesh on them.

Perhaps the biggest problem with Buchanan’s trade platform is the premise that trade is a big part of the problem. Most economists concur that trade with low-wage nations depresses low-skill American wages, but most don’t think the effect is very large. Stanford economist Paul Krugman points out that in 1990 nonoil imports from low-wage nations amounted to 2.8% of America’s GDP–a low number and, more to the point, barely higher than the 2.2% figure for 1960, back before low-skill American wages started dropping.

Further, low-skill American jobs are under assault not just at Chrysler and General Electric, but at companies not subject to global competition. “There’s been an even faster exodus of low-skill jobs from retailing than from manufacturing,” observes Gary Burtless of the Brookings Institution, co-author of Growth with Equity. “That’s not consistent with the thesis that trade per se is the problem.”

So what is the problem? Last year at a conference sponsored by the New York Federal Reserve, 18 economists were surveyed about growing inequality. The average response blamed 11% of the problem on trade and even less on immigration. The biggest culprit–with a rating of 45%–was technological change.

Exhibit A: the recently announced bank merger between Chase Manhattan and Chemical. The resulting company is expected to cut 12,000 jobs, in part by closing branch offices. One reason the bank can give up so much floor space is that people now do less of their banking by walking into a bank and talking to a human being, and more of it via home computer or cash machine. Maybe the newly unemployed bank tellers can find a job. Maybe they can even find a job repairing cash machines. But that will require new training. And absent that training, the next job may not pay well, since the skills these workers possess have been devalued by technology–thus do wages stagnate.

Many recent headline-making layoffs fit the Chase Manhattan pattern. They come not from firms staggering in the face of foreign competition but from firms doing well. And the lost jobs aren’t for the most part shipped abroad; some of the layoffs by these multinational firms are abroad. This year Mobil, a week after reporting a $636 million quarterly profit, announced job cuts of 4,700 worldwide, 9% of its staff.

If technological change is indeed the main problem, then there’s good news and bad news for Pat Buchanan. The good news is that the economic anxiety he aims to harness will persist for years. As software grows more deft, it may displace workers higher and higher on the skills ladder, thus swelling the ranks of the anxious. Over the past two decades the list of endangered workers has expanded from assembly-line laborers threatened by robots to accountants who are worried about Turbo Tax. And there’s no obvious end in sight; software could cut the demand for lawyers, doctors and engineers. So blame may remain a growth industry.

The bad news for Buchanan is that the politics of blame could grow more subtle. If voters see that the root cause of their anxiety is not some sweaty illegal alien, not some shifty Asian lobbyist, but rather the faceless force of technology, then Buchanan’s rhetoric loses some oomph.

Moreover, Buchanan’s platform of economic nationalism loses some logic. True, high tariffs could protect low-skill jobs threatened by technological change. But they would do this largely by so insulating the nation from global economic currents that American technology would begin to atrophy. VOTE DECAY in ’96 isn’t a winning bumper sticker.

President Clinton’s proposed cure for the wage problem–creating a better-educated, more highly skilled work force–is in theory more versatile than Buchanan’s. True, the Clinton approach was crafted with trade in mind; Labor Secretary Robert Reich, like Buchanan, stresses the role of economic globalization in displacing low-skilled American workers. But Reich’s plan, unlike Buchanan’s, makes about equal sense regardless of what the problem is. Whether workers are displaced by low-skilled immigrants, low-skilled foreigners or technology, they need new skills.

Reich’s training schemes have received a cool response in various corners. According to an analysis in the conservative journal the Public Interest, it would have cost $214 billion in training just to restore the average male high school dropout’s 1989 earnings to the level of 1979. Still, some economists see cause to give the idea a chance, if on a smaller scale. Germany, where real wages have been rising even at the bottom of the income ladder, spends three times as much for each worker on labor-market training as the U.S., according to Stephen Nickell at Oxford. And Germany’s secondary school vocational track is finely geared to the job market. “Germany spends a much larger proportion of its educational budget to raise the skills of the least skilled,” says Peter Gottschalk of Boston College, co-author of the forthcoming book America Unequal. “I’ve had some doubts about government training programs, but the German example has gotten my attention.”

Boosting federal spending on training and education is not an issue Republicans are inclined to seize. House Republicans have axed the $750 million budget for Clinton’s program to improve skills via the public schools–the Goals 2,000 package, strongly backed by a group of CEOs known as the Business Roundtable. Buchanan has promised to do the same, and for that matter to ax the whole Education Department.

Of course, the one policy guaranteed to lessen income inequality–regardless of what causes the problem–is taking money from the rich and giving it to the less rich. And, like federal funding for education, progressive taxation is not an issue Republicans instinctively embrace. More than half of the House’s tax cut of $245 billion would go to the 6% of American households with incomes over $100,000, according to estimates by the Washington group Citizens for Tax Justice. Less than one-fifth of the cut would go to the three-fourths of American households making less than $50,000.

Though Buchanan is more comfortable than his Republican rivals with rhetorically assaulting the rich, he doesn’t seem eager to assault them financially. He favors a capital-gains tax cut, and he wants to replace the present income tax with a “flat tax.” The fine points aren’t yet clear, but the history of undetailed and supposedly populist flat tax proposals is not auspicious. The one proposed by Congressman Richard Armey in 1994 turned out to feature a revenue shortfall of more than $200 billion, according to a Treasury Department analysis. When the department hypothetically narrowed the plan’s deductions enough to close the gap, the result was a tax increase for households with incomes under $100,000.

No foreseeable tax package is likely to restore America to its Golden Age of relative equality. As policy analyst Mickey Kaus notes in The End of Equality, “The top 1% have gotten so rich that it would take an effective tax rate of more than 50% to cut their income share back down to what it was in 1977.”

Still, the same trend that thus complicates the economics of redistributive taxation presumably simplifies the politics of it by increasing the number of resentful voters. Between 1980 and 1989, the share of national income claimed by the most affluent one-twentieth of households rose from 21% to 26%; for the upper one-fifth as a whole it rose from 47% to 52%. Meanwhile, the share fell for the second one-fifth–and the third, and the fourth, and the fifth. The potential appeal of a sharply redistributive income tax is unknown, but this simple math suggests it’s bigger than before and getting bigger. And that is President Clinton’s issue to claim–not Buchanan’s, not Gramm’s, not Dole’s.

Though Republicans aren’t big fans of redistributive taxation, they are big fans of cutting overall taxation. To the extent that there is a generic Republican response to stagnant wages, this is it: spur growth by slashing stifling taxes.

But a question arises: If aggregate growth has lately been widening the gap between the affluent and the middle class, why should spurring even more growth by unfettering capitalism be expected to narrow the gap? It’s the most fettered capitalist economies that have kept that gap the narrowest. Virtually all European countries have higher taxes than the U.S. (as a fraction of economic output) and higher income equality.

Here lies a fundamental challenge facing mainstream G.O.P. presidential candidates: the venerable reassurance that a rising tide lifts all boats grows problematic when half the boats seem to be (as Buchanan himself has put it) anchored to the bottom. And tributes to capitalism ring hollow if technological change is doing the anchoring. For no economic system more efficiently abets technological change than capitalism.

Certainly that efficiency brings benefits. Some economists say if more of the benefits were quantified–if we could say how much more bang-per-buck you would get from Windows 95 than from dos 3.0, or from a new CD player than from an old, no-frills model–the official inflation rate would be lower and median wages would then look less stagnant, if far from vibrant. Another benefit of lean, efficient capitalism is jobs; the American unemployment rate is stunningly low by European standards–half the French and Italian rates.

Still, the cost of keeping employment high amid technological flux is dislocation, as workers are ushered abruptly to their new place in the scheme of things. In 1993 and 1994, as the unemployment rate dropped from 7.3% to 5.4%, an estimated 1.1 million U.S. workers were laid off-the highest two-year number on record. And no small number of those workers found new employment at lower wages.

As it happens, a classic treatise on these sorts of upsides and downsides of capitalism was written by the same economist who invented the misery index–Arthur Okun, Chairman of Lyndon Johnson’s Council of Economic Advisers. In 1975 he published a book called Equality and Efficiency: The Big Tradeoff. Its point was that there is natural tension between the two halves of its title. Redistributive taxation, minimum wages, unemployment insurance and the like may enhance equality, but they impede overall efficiency and growth. Ideology is partly a question of which side of the tradeoff you favor.

On both sides of the ideological spectrum, observers warn against taking Okun’s point too far. Those on the right say battling inequality myopically can create inefficiency and more inequality in the long run; welfare, with its disincentives to work, can foster an underclass that steadily recedes from mainstream prosperity. Those on the left say battling inequality farsightedly–via investments in the schooling and health of citizens–can lead to greater equality and greater economic efficiency.

When America began its turn to the right with the election of Ronald Reagan, the basic economic problem was thought to be inefficiency: the slow growth and high inflation called stagflation. Reagan’s prescription–cutting taxes and regulation–was a prescription for efficiency, for aggregate growth. Now growth is not the big problem. Yet the mainstream Republican prescription remains the same. Buchanan at least grasps this paradox. But, like other Republicans, he has trouble escaping it. Being a conservative, he is skeptical of both short-term equalizers like income redistribution and of pricey long-term schemes like federally funded schooling.

Meanwhile, his own prescription is of uncertain value at best. And even if it did work, it would work at the expense of bedrock Republican values. To raise tariffs, after all, is to raise taxes on international commerce–to impede economic efficiency, thus shielding some workers from the market’s invisible hand.

If middle-income wages remain sluggish and inequality keeps growing, economic populism could become a big political movement. But any Republicans who joined it would start with a handicap: “Republican economic populist” has long been considered a contradiction in terms. And Pat Buchanan provides no clear reason to change that judgment.