The Economic Agenda

Beyond populism and nationalism

THE MIDTERM elections were in part a repudiation of Republican economic priorities. The economy has grown strongly for five years even though it is slowing now, but the fruits of prosperity have not been shared widely. While corporate profits and pay for people at the top have risen, the majority of the workforce has experienced a stagnation of pay that stretches back, with only brief respites, to around 1980. The Republican Party has veered between denying the data and acknowledging middle-class anxiety while offering nothing to assuage it. The Democrats have understood the nation's economic insecurity, and they have been rewarded.

Having diagnosed the problem correctly, Democrats need a prescription. Some remedies that were tested during the campaign are not promising. As Slate's Jacob Weisberg has written, Democrats offered a mixture of economic populism (blaming middle-class insecurity on rich Americans) and economic nationalism (blaming middle-class insecurity on poor foreigners). But a populist drive to impose a surtax on energy companies will guarantee higher energy prices by deterring investment in new sources of supply. A populist attack on pharmaceutical companies will produce a lobbying war without solving the problems of health care. The real waste in the system is not that people overpay for drugs, but rather that they consume tests and other services without regard to their cost.

As for economic nationalism, clamping down on trade might help workers in declining manufacturing industries. But restricting imports would push up prices for people in the service sector, which includes hotel janitors, fast-food workers and other modestly paid groups, so the net effect on poor and middle-income families would probably be negative. Restricting immigration sounds like a good way to push wages up -- if there are fewer workers, surely the price of their work will rise? But economic studies find this effect is either negligible or nonexistent. Restricting the supply of low-wage labor may simply cause labor-intensive industries to shift abroad, or it may drive employers to buy extra tools and machines and so get by with fewer workers. Either way, a reduction in the supply of workers may be matched by lower demand for workers, which would explain why U.S. cities without immigrants haven't experienced more wage gains than cities with lots of them.

The good news is that the Democrats are not tied to these bad policies. One populist promise on which they propose to act promptly happens also to be reasonable: Raising the federal minimum wage makes sense because it is so low that lifting it probably won't hurt job creation. Beyond that, Democrats need to come up with policies that address inequality while not damaging growth, starting perhaps with tax reform. The existing system of tax breaks for savings, homeownership and health care favors the wealthy while draining billions from the government. Restructuring these tax breaks could shrink the deficit while freeing money for Democratic spending plans. Moreover, the Bush administration is on record as supporting tax reform. Here is an opportunity to make bipartisan progress: in a word, to govern.