02/29/2008 12:42 pm ET Updated May 25, 2011

Economics and Presidential Politics -- "It's Globalization, Stupid"

Presidential campaigns are not well-suited for rational or sophisticated discussion of economics -- and this year's race is not any different.

Already we have seen candidates blaming trade with Mexico or exports from China for the nation's economic woes, and for the decline of the middle class. In the Ohio primary, Senators Clinton and Obama have singled out NAFTA -- the North American Free Trade Agreement -- as the culprit in the state's economic troubles. In turn, President Bush and the editors of the Wall Street Journal have attacked both Democrats as protectionist, acting like global bullies who demand to unilaterally rewrite trade agreements.

As David Leonhardt, the New York Times economics columnist, pointed out it is not trade with Mexico or Canada that has decimated Ohio's manufacturing sector; rather, it is the rise of other international producers such as China, India and Russia. It is the competition from the post-Cold War global economy that has created both winners and losers in Ohio and elsewhere in the US.

In the past year, I have given lectures on globalization in a number of countries -- and in each I have been asked by government officials and business leaders if the Democratic Party has become protectionist and if a Democratic president would abandon future trade agreements. I have explained to the Treasury in New Zealand, to the foreign ministry in Kazakhstan, and to the business leaders in Chile that it is not trade and the international economy that Americans fear, but the prospect of economic insecurity that worries them. I pointed out that in the US, when workers lose their jobs they lose their health insurance. This makes a plant closing or office relocation a traumatic family happening.

Unemployment insurance is difficult to obtain, not generous, and not linked to retraining.

American workers like the low prices at Wal-mart and other consumer benefits of the global economy, but they don't want to sacrifice their family's overall well being to the altar of free trade.

In 1992, James Carville, a Clinton campaign operative, famously taped the phrase, "It's The Economy, Stupid" over his computer. His point was that the campaign should focus on voters' worries over the state of the economy -- and that his candidate Bill Clinton should make it clear every day that he felt their pain and shared their angst. Clinton was effective in displaying his concern, and incumbent President Bush was hapless. In one debate, a voter asked each to list the price of a gallon of milk, a loaf of bread, and a dozen eggs, and Clinton rattled them off while Bush floundered.

While the campaign made sure that Clinton maintained his message focus, policy advisors, myself included, tried to spell out exactly how a Clinton administration might address and ameliorate economic anxiety. Three friends from university days -- Robert Reich, Ira Magaziner, and I drafted a campaign program that I titled "Putting People First." We put forward an economic strategy that accepted the reality of the global economy, but proposed ways that the government would help all Americans to prosper -- in Bill Clinton's words, to make globalization a win-win proposition. Clinton did support NAFTA, but he argued in a speech before a union audience that I helped to write that there would be strong labor and environmental standards, and a new improved safety net at home-crafted so that those adversely affected by trade would not be permanent losers.

The Clinton-Gore program of 1992 included such progressive measures as worker retraining and education, universal health insurance, an earned income tax credit for low wage families, revamped unemployment insurance, a more progressive tax system, stronger consumer regulation, and a new National Economic Council in the White House to oversee these reforms. It also included a progressive version of NAFTA -- and a plan for greater public investment in rebuilding the nation's infrastructure and support for development of alternative energy sources -- both potential sources of job creation.

Unfortunately, only a few pieces of this program were carried out. Robert Reich became Secretary of Labor, but he was not terribly effective and by his accounts was checked at every turn by Robert Rubin, the Wall Street banker whom Clinton named to head the newly formed National Economic Council. Ira Magaziner ran the health insurance reform effort for First Lady Hillary Clinton -- and as is now well known, that effort was handled ineptly by the White House political team and defeated handily by conservative forces. I was sidelined as an economics official at the Commerce Department, and soon left in frustration to become an ambassador in Europe and focus on security issues.

Clinton did pass the Earned Income Tax Credit, but had to focus on deficit reduction because of the budget mess inherited from the Bush administration. Rubin became his mentor, not Reich. And on NAFTA, the unions made a decision -- a wrong one in my estimation -- to oppose the agreement rather than to work with the Clinton White House to strengthen it. As a result, Clinton ended up passing NAFTA with Republican votes over the opposition of liberal Democrats in Congress, and of course, it was a much weaker agreement than we had proposed during the campaign. The loss of control of Congress in the mid-term election assured that the rest of the Clinton presidency would be one of damage control and guerrilla warfare against Newt Gingrich and his conservative forces rather an era of progressive change.

Fast forward to the present -- Democrats are in danger of repeating this history unless they think strategically about the international economy and frame the issue of trade in a progressive context.

As my friend Bruce Stokes, the leading trade journalist in Washington, D.C., writes in the February 28 issue of Congress Daily, only a comprehensive social safety net of universal healthcare, universal retraining and education, and universal unemployment insurance -- will assuage Americans' rising economic insecurity and stem the anti-trade sentiment among the American electorate. It is an important piece and I reprint it below. The message is clear -- and one that the leading Democratic candidates should heed. A win-win globalization requires strong domestic programs at home.

February 28, 2008


Homeland Insecurity

Americans are struggling against a rising tide of economic insecurity that engulfs them from all sides. To date, the debate in this year's presidential election has addressed this insecurity piecemeal, with proposals to expand healthcare coverage or improve retraining.

Republican and Democratic presidential candidates have failed to recognize that a patchwork of measures will not provide the comprehensive social safety net Americans need in a world of intensifying economic competition and rapid change in which individuals feel increasingly on their own.

With the nominees likely to be preoccupied with Iraq and recession fighting between now and the November election, it will be up to individual members of Congress to frame the public policy response to the economic stress their constituents face.

Congressional candidates must articulate a broad new social compact that creates for Americans a safe harbor in an increasingly turbulent world.

Such a vision is good psychology because it will reassure an increasingly insecure people that they are not alone.

It is good practically because it would strengthen the threadbare American social safety net. And it would be excellent politics.

The looming recession has brought the economic struggles Americans face into sharp focus. Over the last generation, 95 percent of wage earners have seen their wages decline, after adjustment for inflation, according to a study published by the National Bureau of Economic Research last year.

Forty-seven million citizens already lack health insurance, nearly one in six Americans. And the fear of losing their healthcare coverage is the principal concern people express when they face unemployment. To add insult to injury, when people lose their jobs, they have only a one-in-three chance of qualifying for unemployment insurance.

Struggling to maintain their standard of living in the face of these challenges, Americans have borrowed more and more money. Living beyond their means has finally caught up with them.

The ratio of household debt to disposable income, which between the mid-1960s and the mid-1980s was fairly stable at a little over 60 percent, has reached 130 percent.

Moreover, Americans' faith that however bad times are today, the future will be better for their children, now seems tragically misplaced.

A man in his 30s today has 12 percent less income, after adjusting for inflation, than a similarly aged American male did a generation ago, according to a study last year by Isabell Sawhill of the Brookings Institution and John Morton of the Pew Charitable Trusts.

The rags-to-riches Horatio Alger success story is little more than a myth. Only six percent of children born into the bottom fifth of the income distribution now make it to the top fifth. And a third of Americans are actually downwardly mobile, making less than their parents.

Compounding people's sense of instability, a job in America is hardly a security blanket. In the early 1990s, it was thought that the average American held six or seven jobs in his or her lifetime.

An ongoing Labor Department study now suggests Americans hold between 15 and 18 jobs over their lives. That means coping with a new job, a new boss, a new work environment and a risk of making less income every three years, on average. Twentysomethings thrive on such change. Fortysomethings -- with children and a mortgage -- crave job stability and, absent that, need help weathering the constant flux in their work lives.

But the economic safety net America affords its citizens is weak and porous. The United States is the only major industrial country not to provide universal health care. Unemployment insurance replaces only about 30 percent of the lost income of low-wage jobless workers in the United States.

By comparison, the average low wage unemployed worker in other industrial countries gets benefits totaling 55 percent of their lost income. And Washington spends a fraction of what Germany or Great Britain spend on retraining.

All of these issues -- especially health care -- have been raised in the presidential campaign. But no candidate has attempted to allay voters' fears about the future by offering them a comprehensive vision of what can be done to help them deal with their economic insecurity.

Growing competition at home and abroad is a fact of modern life, generating great economic benefits through added productivity and affording Americans a range of goods and services their parents never dreamed possible.

The economic cost of inhibiting that competition -- through some "stop the world I want to get off" protectionist trade barriers or onerous regulation -- would be doomed to fail. But government can help Americans endure inevitable ups and downs in their pay, help them mitigate the costs of ever more frequent shifts in their careers and help them weather the overwhelming costs of medical emergencies.

This requires a new, comprehensive, three-pronged social compact: universal health care, universal unemployment insurance and universal retraining.

A social safety net built on those three pillars will provide Americans with the reassurance they need to go forward in an increasingly uncertain world. And it could be a winning theme in the fall election.