Let me be, I hope, totally clear: for Brad, Alan, and any other economist, merit=marginal product. Thus, principle one is very simply arguing that while a central tenet of economics is that your income is equal to the marginal value you add to the economy, reality is otherwise. Your bargaining power—your ability to claim more than your marginal product or get stuck with less—is an ever-increasing determinant of economic outcomes.

The litany of “I see this here and there in today’s economy” in the earlier post responding to Alan was supposed to provide a bunch of examples, ones I don’t think Alan has addressed, but let me be more precise and try to draw Brad deeper into this too.

Something was obviously very different for these workers in the 2000s, and I don’t believe it was their marginal product or skills. In fact, the 1990s gains occurred exclusively in the latter 1990s and early 2000s, when full employment labor markets were boosting the bargaining power of even the least skilled workers (the 1996 minimum wage increase helped too). In the 2000s cycle, labor markets never tightened back up much, and those whose ability to bargain depends less on the tautness of the job market—those at the highest reaches of the income scale—claimed most of the growth for themselves.

Tax Incentives: Alan very usefully adds some empirical meat to the argument about tax incentives, suggesting that an increase in top marginal income tax rates as Clinton and Obama are suggesting (allowing the top rate to reset from 35% to 39.6%) could “lower taxable income by 3 to 4 percent.”

That is not a trivial effect, but I’d like to push Alan to take it further. Whose income are we talking about? Not everyone’s, right? And what might be the impact on jobs and incomes of most workers? And what factors offset this effect in the Clinton years, when taxable income and gov’t revenues went up even as marginal rates were raised at the top?

Also, through what mechanism does this occur? IE, I note you’re citing “taxable” income changes. Does that mean income doesn’t change as much (e.g., we’re not talking labor supply effects), but the part of income that gets taxed does change? If so, that suggests more shifting of income between categories than the incentive effects I’m talking and arguing about: labor supply and investment.

Finally, I need to look more closely at the Gruber-Saez paper, but Jason Furman tells me that the paper is about optimal tax rates and it argues the tax code should be much more progressive than it is today, which seems like a conspicuous omission from your post, wherein you seem to be advocating a less progressive code.

Q: What’s so right and/or wrong about globalization? Am I really hurting American workers if I buy cheap imports? Should I feel lousy about this? Am I supposed to oppose trade deals? Isn’t our loss the gain of some poor person “over there” who probably needs the money even more than we do?

First, allow me to share my latest encounter with the economics of globalization.

I’m a music lover and a critical listener, so when I finally got out of grad school, paid off some debts, and had a little real money, I bought, for many hundreds of dollars, a kickin’ stereo. The components were very high quality and lasted for decades. I had to buy a CD player at some point—that medium didn’t exist when I bought my system—but otherwise, I hadn’t bought any electronic music equipment in about 25 years.

Well, I guess I blasted “Purple Haze” one too many times, and the speakers finally died of old age (the big, clunky tuner is as healthy as ever and is living in my attic—I should give it to the Smithsonian). So I headed out to the big box electronics store to get a new high-quality system.

Not having been in the market for such an item for so many years, I wasn’t sure how much money I was going to need to spend, but I mentally put aside at least $500. That was already a few hundred less than I had spent on my old system in nominal dollars. In real dollars—adjusted for inflation since then—it was probably half as much.

Here’s the clincher: Barring the purchase of a personal recording studio, I couldn’t find a way to pay anywhere close to the amount I’d put aside. I found amazing systems, one of which now sits on my bookshelf, for the mid-hundreds of dollars. (The “I” in that last sentence is literal. The salesperson who helped me in this Best Buy store literally couldn’t figure out how to turn the thing on. I’m not just being snotty—I come back to this point later in the book in a discussion of the big box retailer Circuit City). Oh, by the way, the next day I saw the same system advertised on sale for $20 less, and Best Buy made up the difference. I think I ended up paying about $130 for the system.

So, you don’t have to look far to see the benefits of globalization. In economic terms, globalization—defined here as the increased flow across borders of goods, services, people, and ideas—by increasing the supply of stuff, lowers prices. There are other benefits, of course, accruing both to us and to our trading partners, but for all the lofty talk about expanded trade building bridges to the future and intertwining the fates of countries, most of us encounter and benefit from globalization in much the same way as I did that day.

And clearly, I don’t think there’s anything wrong with buying cheap imports. Yet, in these questions posed by a friend in San Francisco, my spiderlike senses pick up a murmur of guilt, mixed in with a lot of confusion.

That’s not surprising. The U.S. trade debate generates a whole lot more heat than light.

Economists, policymakers, and the punditry are forever going on about the benefits of trade and the horrible folly of protectionism. In large part, they’re motivated by two points, only the first of which is valid. That’s the principle of comparative advantage, a great and centuries-old insight showing that trading partners both end up better off when they specialize in what they do best, even if their best isn’t all that great.

The other motivation, the one that generates all kinds of undesirable yet avoidable outcomes, is the belief that more trade always makes everyone better off.

Journalist Eric Alterman, in a piece in The Nation titled “Dude! Where’s My Debate?” notes that the afore mentioned Thomas Friedman, a highly influential and breathless booster of “free trade” (the quotes are important, as you’ll see), was asked if there was any free-trade agreement he’d oppose.2 Friedman, a guy you would never think of as thoughtless, responded, “No, absolutely not,” adding, “You know what, sir? I wrote a column supporting the CAFTA, the Caribbean Free Trade initiative. I didn’t even know what was in it. I just knew two words: ‘free trade.’”

It’s worse. He didn’t even get the name right: It’s the Central American Free Trade agreement. This guy owns some of the most influential intellectual real estate in the world: He writes two op-ed essays a week for the New York Times. His books are everywhere. Yet because he’s so thoroughly convinced that free trade is always a big winner and that legislation like CAFTA promotes it, he brags that he doesn’t even have to look under the hood.

That’s a shame and a disservice to the debate. And, thankfully, as the untruths of the free-trade uber alles boosters have become clearer to more people, there is now a debate on these issues.

To join that debate, it’s helpful to consider the five myths of globalization:

1. You could stop it or even slow it down much.

The globalization horse is way far out of the barn, and trade agreements have much less to do with its pace than people like Friedman seem to think. Thirty-five years ago, trade volume amounted to 10 percent of our economy; now it’s 30 percent (that’s exports plus imports as a share of GDP). The fastest-growing exporter to the United States is China, and we don’t have any trade treaty with them (yes, they joined the WTO, but research has found little relationship between that and the penetration of our market, meaning much of it arguably would have occurred anyway). Like any other legal negotiation, these trade deals, like NAFTA (the North American Free Trade Agreement) and CAFTA, create a structure that generates winners and losers, with rules that protect some groups relative to others. NAFTA, for example, created lots of opportunities for investors but did little to ensure that workers in any of the three countries would reap the benefits of the agreement.

So trade deals have little to do with whether globalization goes forward. Regardless of these deals, countries will continue to expand trade relations. But that by no means suggests we should ignore trade deals. To the contrary, we need a new architecture, and by “we,” I mean workers the world round (see myth #5).

2. Globalization is wonderfully benign; or it’s all pain, no gain.

Like I said, for years the cheerleaders have derailed the debate, but you also need to be balanced here. You would be hard-pressed to find someone who has not saved some serious money thanks to expanded trade. Nor can anyone deny that there are lots of smart people in other countries who have great new opportunities thanks to globalization.

But you don’t have to look too far to see the pain either. Since 2000 alone, we’ve lost over three million jobs in manufacturing, in no small part due to our unbalanced trade—we import a ton more than we sell abroad. And now, with the offshoring (more on offshoring below) of white-collar jobs, the downward pressure on wage growth is hitting sectors that were previously inoculated. You know all those satellites and fiber-optic cables carrying ones and zeros all over the globe? Well, if your work can be represented by those ones and zeroes, it can be crammed into those nifty cables, and guess what? Don’t matter whether you’re a scholar or a fool, you’re now in competition with smart, cheap people in faraway places.

And all that stuff about low prices? It’s true, but remember, the story of stagnant American wages and incomes for so many workers in the middle and lower rungs of the scale is an inflation-adjusted story—that is, these wages are adjusted for the price-inducing benefits of trade, and they’re still falling. In the horserace of low prices versus low wages, wages still sometimes lose.

3. Its costs and benefits are broadly shared.

Would it were so. In fact, estimates are that U.S. trade with low-wage countries explains 20 to 30 percent of the increase in wage inequality over the past generation.4 That’s less than half, so you could say it’s not a smoking gun, but there are no single factors that explain more. Globalization, American style, is one reason why our economy has become more unequal.

4. Its downsides only affect displaced workers.

It is now de rigueur to acknowledge that—who knew?—a small group of losers are genuine victims of globalization. It’s just a few hard-hatted dinosaurs from the rust belt, but hey, I’m sensitive . . . I recognize that an egg or two had to get broken to make this global omelet.

Wrong. While folks whose jobs actually and visibly went overseas may be the most recognizable victims, tens of millions of incumbent workers—men and women still at work—have lower wages today than they would if trade were more balanced. My colleague Josh Bivens, an economist, estimates that increased trade has cost the typical household about $2,000 over the past generation. That’s not a huge dent, but it’s not trivial either (and remember, this is a net calculation—it accounts for the low-price effect).

5. Its outcomes cannot be shaped.

They must be accepted as is. Once you get that trade deals have little effect on globalization (barring, of course, crazy ideas that wouldn’t fly, like huge tariffs), you are free at last to get smart, creative, and compassionate. Maybe most important, given that their regimes want access to our markets, here’s where we might be able to help the downtrodden in poor countries.

Instead, as Bivens puts it, “Today, access to the U.S. market is contingent upon the developing world adopting a host of policies that map awfully conveniently to what the international corporate class wants.”

Why, exactly, is labor so cheap in what the trade literature calls “less developed countries”? The economist would answer that it’s because their workers are plentiful, with low value added; and, though Chinese productivity, for example, is growing faster than ours, there’s something to that. But lest we get too cozy with our cheap stuff, let us not forget that political repression is another reason. As long as they want access to our markets—and believe me, they do—we should use that leverage to insist on the granting of workers’ rights.

It would thus be a real advance if these trade deals devoted less ink to protecting “intellectual property rights” of first-world producers and more to the rights of workers in developing countries. One good reason to get behind globalization is that we’d like to see the world’s poor realize some of the prosperity that expanded trade is supposed to generate. When we play overly nicely with repressive governments—when we essentially make exclusive deals between their big investors and our big investors—we sacrifice this opportunity.8 Does all this mean we should smugly blast Jimi Hendrix on our cheap but awesome sound systems, slipping into a purple haze while we forget about globalization’s downsides?

Of course not. As I discuss in the book’s solution’s chapter, there’s lots we could do here to offset the downsides without sacrificing the upsides.

Crunchpoint: I know it took a while to get here, but the answer is, there’s lots that’s right and wrong about globalization. Cheap imports help us as consumers but hurt us as workers. Trade deals are not just about globalization, they’re also about power, and they should stop protecting investors at the expense of workers, here and abroad.

Alan found principle #1 ambiguous, and since it’s central to a) the book, and b) my understanding of the economy, let me repeat the principle and try to clarify.

#1: Economic outcomes are generally thought to be fair, in the sense that market forces dole out rewards to those who merit them. But that’s not always the case. Power, whether it’s based on political clout, wealth, class, race, or gender, is also a key determinant of who gets what.

This seems crystal clear to me, but maybe that’s because I view many of the economy’s outcomes through this lens. Simply put, I see evidence of large and growing gap between overall economic growth and the living standards of working families. And I see disproportionate power—not merit, not marginal product, not efficient resource allocation—as one driving force behind it.

I see this in the median male wage, which in real dollars stands at almost exactly the same level as it did in 1973, though the size of economy has more than doubled since then.

I see this in the 23% of market income accruing to the top 1%, the highest income concentration since 1928.

I hear it in the stories Barbara Ehrenreich tells of and writes about.

I see the power dynamic being played out in real time in the “heads we win, tails you lose” bail outs occurring in financial markets.

I suspect Alan and I could argue about the etiology of each one of these, but they’re all real, they’re all occurring—that cannot be denied. And they’re at the heart of the Crunch.

Getting back to econo-turf, I don’t believe there should be a lockstep growth between productivity and median wages or incomes, though amazingly, there used to be: between the mid-1940s and the mid-1970s, they both precisely doubled. Since then, median family income has grown less than a third as fast as productivity growth. Inequality is a main cause of the disconnect—that’s all I’m saying, and I don’t think that’s at all controversial among analysts of these trends.

Re Alan’s “thought-experiment”—“I doubt that he would be nearly so concerned if cash wages were growing more rapidly than labor productivity”—I suppose he’s right. When the wages and incomes of the bottom two-thirds increase in some measure—not lockstep—with overall growth, and do so consistently, i.e., for more than a few years, I’ll shut up (which might be enough to get Alan and his AEI colleagues to pray for a lower Gini coefficient!).

Now, re “supply-side mumbo-jumbo:” I don’t mean any disrespect to the very smart economists one encounters in Alan’s world—him, of course, but also Greg Mankiw, Glen Hubbard, and others, but my experience is that they all far, far overstate the extent to which people respond to tax incentives.

I suspect their debate is a lot more nuanced than the ones I get into, say, over at CNBC with Larry Kudlow and Stephan Moore (he’s on the Wall St. Journal editorial board). But in the hurly-burly of tax policy debates, the conventional discussion maintains that minor tweaks in the tax code—e.g., raising the top marginal income tax rate from 35% to 39%—will devastate the economy as wealthy people stop working and investing. You can say I’m being hyperbolic, but I hear this mantra constantly on CNBC, in the WSJ, and from the highest ranking politicians, including candidate McCain.

Alan writes that I am “…far too dismissive of the statistical and theoretical evidence that tax cuts do affect incentives.” It’s true: I really don’t care about the theoretical evidence. But if you’ve got compelling empirical evidence that tax changes of the magnitude we are contemplating in the current debates in which you and I are engaged—e.g., the ones proposed by Hillary and Obama—will be seriously damaging to the economy, please show me…quick (I don’t doubt that the statistical signs of the effects go the way you suggest, btw—it’s the magnitudes about which we disagree).

Tomorrow (Wed), I’ll post a globalization question and my answer. Look forward to your take, Alan, and thanks again for playing along.

“Crunch” really does purport to be more about how the economy should work than about how it is working. And that’s important, because it’s pretty clear that it’s not working and has been broken for awhile. It has, as you say, “fallen down on the job.”

Right now, we see that through the lens of the housing meltdown, its spillovers into credit, financial, and now labor markets, and the resultant recession. But the distributional failure—the failure of growth to reach so many of those that helped to generate that growth—has been with us for most of the past few decades.

Of course, you’ve been writing about this market failure with great resonance for years.

I think there are two important questions to ponder: how did we get here and how do we get “back to the garden,” as we said in the ‘60s (that’s the 1960s, not the 1860s—we’re old, not ancient). I’ll address the how we got here question in this post and save the “where to from here” for a later one. But I’d love to hear your thoughts, Barbara, on both of these questions too.

Critically placed persons are structuring government practices, policies, and philosophies to meet their economic agenda. What makes up that agenda depends on who’s running the show. But for the past few decades—and note, this is not simply a George W. Bush critique—that’s largely, though not always, been an agenda with two parts: (1) to unleash market forces from the alleged handcuffs of regulation, and (2) to redistribute wealth and power to those at the top of the wealth pyramid.

I wrote about this (d-)evolution in my last book, under the heading of YOYO economics. That’s an acronym for “You’re on your own,” and it embodies a political philosophy that got us in our current mess. Under YOYO economics, the sole plan to meet any economic challenge we face, from globalization to health care, is a tax cut, a private account, and a solid push off the plank into the deep and murky waters of competitive market forces, where “you’re on your own” to sink or swim.

Operating in this mode leads its proponents to oppose worthy ideas that strengthen the diminished bargaining power of most working persons— ideas like minimum wages; a level playing field for those who would organize unions; a universal, nonmarket-driven approach to health care and pensions; progressive taxes; and less porous safety nets. Each of these ideas strikes at the heart of YOYOism, as they seek to pool the risks of economic insecurity over large groups of people, while unifying less advantaged groups under a WITT (“We’re in this together”) agenda.

The point is that a WITT agenda obviously leads to a very different political economy than does a YOYO agenda. In fact, the history of economic policy is nothing more than a ride up and down this continuum.

As I write these words, the failure of YOYOism to meet the challenges of globalization, the growing health care crisis, not to mention category five hurricanes, has the YOYOs on the ropes. We may be poised—I’m confident that we are—to start moving down the continuum away from YOYO toward WITT. This cannot occur, however, if the YOYOs are dictating the terms of the debate.

In that spirit, “Crunch” addresses some of the YOYOs most common arguments and objections to a new political economics, one based on the WITT agenda. Needless to say, I find them wanting, which is a nice word for “lame.”

There may be a real political opening to make this case right now. Interestingly, both Democratic candidates for president have adopted this YOYO/WITT framing, Clinton months ago, and Obama more recently. And when the Treasury secretary in this Bush administration starts talking about regulating banks, even if his ideas are far from adequate to the task, something different is in the air.

There is a growing recognition that it’s not OK:

--to cut taxes quite massively and finance a war with years of “emergency supplementals” to the federal budget;

--for policy makers to watch huge speculative bubbles inflate and even nudge them along;

--for financial firms to keep some of their riskiest transactions off the balance sheet, or to take out derivative contracts worth much more than the underlying equity or bond from which their value is derived, so that a hedged position becomes a big, speculative bet.

--for almost all of the productivity gains to bypass those who are partly responsible for them--to end a productivity rich business cycle with higher poverty and lower real median family income;

--that extremely high levels of income inequality and downward mobility vitiate the principle of a fair chance for all;

--to ignore the spiral in health care costs until they’re swallowing up much more GDP than those of other advanced economies who have workable, attractive solutions to this challenge.

Today’s economists and the policy makers we advise either failed to recognize these deep policy failures or failed to correct them. So, we need a new economics that bespeaks a new policy agenda. Stay tuned for upcoming “Crunch” posts on that very point.