Back in the 1990s, when Democrats last had any power in Washington, the party was run by economic centrists. Bill Clinton and his crowd believed in free trade and free markets...Judging by the political rhetoric of the mid-term election campaigns, that centrism has all but disappeared...Gone is the firm defence of globalisation. In its place is a new populism, based on bashing business, boosting the unions and meddling with markets. The party's bigwigs attend anti-Wal-Mart rallies...[A]lmost everyone puts top priority on raising the minimum wage.
This populism is based on a dangerous combination of nostalgia and sloppy thinking. The nostalgia is for a rose-tinted version of the 1950s and 1960s. If only the unions were stronger or big business cowed, the argument runs, the middle class would once more flourish, and the gap between rich and poor would narrow.
That is nonsense. The principal causes of rising inequality, in America and much of the rest of the world, are rapid technological innovation and globalisation...Neither business-bashing nor union-boosting will turn back the clock, as most Democrats privately admit. But Wal-Mart is an irresistibly easy target. Crafting an agenda that would really help American workers would be rather more demanding.
Start with tax reform
If Democrats are serious about fighting inequality, their top priority ought to be tax reform. America's tax code is the country's main mechanism for redistributing income. Yet it is a tangled mess, increasingly reliant on regressive taxes, such as the payroll tax, and full of subsidies that benefit rich people while reducing economic efficiency.
The mortgage-interest deduction, a subsidy for home-owners, costs some $80 billion a year, does little to help poor people buy their own homes and does a lot to encourage rich people to buy McMansions. Over half the subsidy goes to the richest tenth of Americans. Tax incentives for employer-provided health insurance cost some $150 billion a year and are a big reason for America's escalating medical costs. Again, the richest tenth of Americans captures more than one-quarter of the benefits. All told, the tax code is larded with more than $700 billion-worth of inefficient subsidies. Scaling them back would improve the economy's efficiency and would free up a huge amount of money, both to reduce the deficit and to shift resources to poorer Americans.
And the best way to shift those resources is again through the tax code, by expanding the Earned Income Tax Credit (EITC). Introduced in 1975 and extended by Ronald Reagan and every president since, the EITC is a type of negative income tax for poor workers and is America's most efficient anti-poverty tool. If Democrats are serious about helping poor workers, they should advocate further expansion. But few Democrats mention the EITC...Instead they want to raise the minimum wage...which few would prescribe as the most efficient route to helping the poor—particularly since not all minimum-wage workers are poor [many are kids of middle-class and wealthy families working part-time].
In sum, today's Democratic politicians care more about embracing empty symbolism than crafting effective policies. Not only do they fail to push ideas, such as EITC expansion, that are known to work; but they have also avoided intellectually tougher debates, such as how to revamp health-care or counter the rising elitism of the universities.
As often is the case, the Economist mostly echoes my thinking. In the 1950s and 1960s (and I would add the 1990s), we made great strides in building a middle class and helping lift Americans out of poverty. But the strategies we used to do that were new strategies, because we were facing economic realities that the world had never seen before. When faced with a new situation, we tried new things, and they worked. Now we're again facing a whole new world, and yet many Democrats think that all we need to do is fall back on old strategies, like strengthening unions and raising the minimum wage.
But we are no longer a nation of low-paid factory workers. Those solutions just aren't suited to the challenges we face. But crafting something new will take vision and risk, and that's just not something that the Democrats - or the American people - seem to be in the mood for, in these troubling times. Too bad.
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