What Democrats Miss in Bushonomics

By Sebastian Mallaby
Monday, January 9, 2006

The Bush-Cheney combo doesn't do humble, but on Iraq it's at least pretending to reach out to its critics. Meanwhile on the economy, the duo has gone into chest-thumping overdrive, seizing the latest news on the housing-fueled expansion to say what brilliant boys they are.

"It's getting pretty hard for the critics to make the case that somehow these tax cuts weren't good for the economy," the vice president said Friday. Well, how about the fact that no less a critic than Greg Mankiw, the administration's very own chief economist until recently, attacked don't-tax-but-do-spend economics in a Wall Street Journal column three days earlier?

Of course, attacking Bushonomics is too easy, like shooting a lame duck. So I want to focus instead on Democrats' response to the Bush chest-thumping. For, much as on the Iraq war, Democrats are muddled. They are letting the administration off the hook.

Faced with strong growth, full employment and a productivity miracle, Democrats insist that something is profoundly wrong. Responding to President Bush's economic speech on Friday, the Senate's top Democrat complained that "the benefits of economic growth still have not reached many hardworking middle-class families."

Sorry, but that's only half right. It's true that wages have done badly. But in five of the past six years, average compensation -- that is, wages plus benefits -- has risen faster than inflation, according to the Labor Department's Employment Cost Index. The exception was last year, and that was mainly because high oil prices caused an unexpected inflationary spurt.

When Democrats talk about a middle-class squeeze, they mean more than wages; they mean the quality of jobs. As my colleague Harold Meyerson put it last week , corporations used to "impart a structure to people's work lives." But now workers must contend with "a brave new world of short-term employment."

This complaint sounds plausible, but the evidence for it is slight. In a 1998 paper for the National Bureau of Economic Research, Ann Huff Stevens picked through two sets of data going back to the 1970s. She concluded that job insecurity had risen temporarily around 1990 but that old patterns of tenure had probably returned. In a new bureau paper last month, Stevens compared men who neared retirement in 1969 with men doing so in 2002. In both groups, just over half had been with a single employer for at least 20 years -- hardly evidence that things are getting worse.

Perhaps workers face more pressure, even if they're not being fired? Corporations may be ever more productive, according to this theory, but this comes at the expense of workers who are forced to sacrifice work-life balance.

Again, this theory is plausible -- and wrong. In a paper to be released today, a trio at the London School of Economics -- Nick Bloom, Tobias Kretschmer and John Van Reenen -- sort through a hard drive's worth of data on 732 manufacturing firms in the United States and Europe, assessing their policies on work hours, vacation, assistance for child care and so on. Then they test whether the most fiercely productive companies in their sample treat workers badly. They find no such correlation.

In sum, sweeping complaints about the "new economy" are a bad bet for Democrats. The numbers on wages and compensation present a mixed picture; there's little real evidence that jobs are less stable or workplaces harsher. And it's not just that the gloomy claims are debatable. Often the prescriptions they lead to are wrong.

For example, the suspicion that superefficient firms tend to treat their workers harshly leads some Democrats to support trade protectionism, on the theory that dampening competition will create space for gentler management. Less competition might help a few declining industries, but it wouldn't change treatment of employees in the bulk of the economy: Companies have to balance the goal of retaining talent with the imperative of cost control, and erecting a protective wall around them won't change the optimal trade-off. The main consequence of protectionism is to remove a spur to productivity gains, harming the economy in the long run.

Rather than worry about a middle-class squeeze, Democrats should home in on two clearer problems. First, the Bush tax cuts have put the federal government on an unsustainable footing. Running a large budget deficit -- arguably, any budget deficit -- is recklessly imprudent when a roaring economy should be delivering a surplus and when baby boomers are on the eve of retirement.

Second, although the squeeze on the middle class may be exaggerated, the squeeze on the unskilled is not. While finding that job stability has barely declined in the economy as a whole, Stevens reports that there has been such a decline for older and less educated workers. While finding no correlation between productivity and tough treatment of workers, the London School of Economics trio reports a correlation between how well workers get treated and how skilled they are.

Democrats should focus their complaints on these two problems, particularly since the obvious solution is politically convenient. To begin grappling with the budget deficit, the nation must repeal most of the Bush tax cuts; to grapple with inequality, it should begin by making the tax system more progressive -- which would again mean rolling back some of the Bush cuts. In his Post column, Meyerson mused about the need to "alter the terms of capitalism." But what's really needed is to alter who's in the White House: a much easier challenge.


© 2006 The Washington Post Company