Back in 2000, the Clinton Administration held a conference to congratulate itself on its skillful economic management.[1] The participants foresaw the opening of a new era of rapid economic growth. Low inflation would run in tandem with stable growth in what some saw as a “Great Moderation.” Markets behaved rationally most of the time. Technological innovation increased labor productivity. Increasing international trade through agreements like the North American Free Trade Agreement expanded high-end American exports while providing American consumers with low-cost imports and stimulating the shift of factors of production (capital, labor) out of low-end industries. China, in particular, tantalized businessmen and economists alike. More education and geographic mobility offered the best means for displaced workers to adapt. Investors faced a host of “staggering high-quality investment opportunities.” Central bankers could manage the economy with relatively small changes in interest rates.
Like many another rosy dawn, this one failed to arrive. The host of “staggering high-quality investment opportunities” turned out to be the “tech bubble” that collapsed almost as soon as Bill Clinton handed the White House keys to George W. Bush. “The China Market” turned out to be just as much of an illusion now as in the past.[2] Indeed, China’s enormous labor force multiplied by rising productivity multiplied by low wages created an export giant unlike anything ever seen before. (A 2016 paper by three economists calculated that between 1999 and 2011, Chinese competition ate up 2.4 million American jobs.) The financial crisis at the end of the Bush administration showed that at least some markets were far from rational and self-correcting. More education has not guaranteed a better adaptation to a changing economy, while fewer start-ups are creating new businesses and many displaced workers have been reluctant to relocate toward growth areas. Technological innovation has destroyed far more jobs than it has created. Indeed, one economist argues that there is a shortage of investment opportunities to provide either an outlet for savings or new jobs.
The rewards of economic change have flowed disproportionately to the upper levels of American society. In 1990, the top 20 percent of families earned 44.3 percent of total income. In 2014, the top 20 percent of families earned 48.9 percent of income. In 2000, wages, salaries, and benefits accounted for 66 percent of Gross Domestic Product (GDP), while business profits accounted for 8 percent. By 2010, wages, salaries, and benefits accounted for 61 percent of GDP, while business profits have now risen to 12 percent. Between 2000 and 2015, median family income fell by 7 percent. One recent poll reported that 91 percent of Bernie Sanders supporters and 61 percent of Donald Trump supporters think that the economy favors powerful interests. (More likely it favors certain skills and behaviors, but no one is buying that line.)
Those job losses and income shifts now are having a political effect. Of the 100 counties with industries worst hit by Chinese competition, 89 voted for Trump in the primaries. Of the 100 counties with industries least hit by Chinese competition, only 28 went for Trump. Faced with losing their own jobs, many Republican leaders are re-thinking their positions. A former Treasury official in the Bush II administration reflected that “Washington and we in the establishment spent too much time celebrating the efficiency gains of trade and not enough time thinking about the people who were impacted.”
[1] John Hilsenrath and Bob Davis, “Unkept Economic Promises Drive Stormy Election,” WSJ, 8 July 2016.
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