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Can the Democrats Resurrect the Middle Class?

A man waiting for a bus in Windber, Penn., which was once a thriving coal town.Credit...Mark Makela/Getty Images

With the likelihood of major gains for their party on Election Day rising, the most important task facing Democrats is the development of a coherent economic agenda that addresses issues that were central in both the Republican and Democratic primaries.

There are preliminary signs that Democrats and their allies are willing to put together just such an agenda.

The Brookings Institution, for example, has produced a series of essays, “Election 2016 and America’s Future.” One of the most illuminating was published on Friday, “An Agenda for Reducing Poverty and Improving Opportunity,” by Isabel V. Sawhill and Edward Rodrigue, a senior fellow and senior research assistant at Brookings.

The two authors outline numerous proposals, including some that would be risky for Democrats, particularly those that call for the redistribution of resources from the party’s upscale wing to downscale voters.

These proposals include changes in the Child and Dependent Care Tax Credit to benefit families with incomes of less than $100,000 (while reducing the benefits of the tax credit to the affluent) as well as the reduction or elimination of tax breaks in education savings plans for the affluent to generate revenues to boost Pell grants for poorer students.

Sawhill and Rodrigue don’t shy away from what they see as a necessary step in combating economic inequality:

If we could empower young adults to only have children when they themselves feel ready to become parents, we could reduce unplanned pregnancies and out-of-wedlock births. That alone would reduce poverty and lack of mobility. The solutions here are often nongovernmental and involve changing social norms around the importance of responsible, two-person parenthood.

They go on:

Some have called for a new generation of government-sponsored marriage or relationship programs and for reducing marriage penalties in tax and benefit programs. But with some exceptions, these do not appear to be a cost-effective way to bring back the two-parent family. More promising are efforts to make the most effective forms of birth control (IUDs and implants) more widely available at no cost to women.

An additional contribution to a progressive economic agenda comes from Lawrence Summers, an economist at Harvard who is a former secretary of the Treasury. Summers has emerged as a leading advocate of major government infrastructure investments — in roads, bridges, airports and other public facilities.

In Sunday’s Washington Post, Summers contends that

the specter of secular stagnation and inadequate economic growth on the one hand, and ascendant populism and global disintegration on the other, has caused widespread apprehension

amid fears that “the global economy is entering unexplored and dangerous territory.” And when economies worldwide stagnate, the result, Summers writes, is that “electorates turn surly.” The way to counter these negative trends, in his view, is to abandon “austerity economics in favor of investment economics.”

Some of the most interesting developments in the formation of a Democratic agenda can be found in the evolving work of Jason Furman, the 46-year-old chairman of President Obama’s Council of Economic Advisers.

Furman focuses on a pair of crucial factors underlying slow growth: a lack of corporate dynamism and the weakening of competitive forces in the marketplace. Diminishing vitality in the marketplace has become a mounting concern among economists and policy makers.

One advantage of Furman’s approach is that it cuts across ideological boundaries.

In a speech in Chicago last month, “Beyond Antitrust: The Role of Competition Policy in Promoting Inclusive Growth,” Furman made the case that there has been a dangerous reduction in competition in the United States because of growing corporate concentration, barriers to entry facing new firms, restrictions on worker mobility, excessive legislative protection of patents and intellectual property, and developments in technology that give huge market power over potential challengers to such internet platforms as Facebook, eBay and PayPal.

To support his case, Furman cites a wide range of data and reports. These include the finding that “in 42 percent of the roughly 900 industries examined, the top four firms controlled more than a third of the market in 2012, up from 28 percent of industries in 1997” and that in financial services, “the loan market share of the top ten banks increased from about 30 percent in 1980 to about 50 percent in 2010.”

If the creation of new firms is a marker of a thriving competitive economy, Furman argues that the trends are not favorable. The accompanying chart shows a sharp decline over the past 30-plus years in the percentage of companies that are five years old or less, from just over 50 percent in 1982 to roughly 33 percent now, and a decline in the share of total employment provided by these young firms, from roughly 21 percent in 1982 to about 11 percent now.

The decline in corporate dynamism has been accompanied by a decline in labor dynamism, with “workers less likely to move between jobs, industries, occupations, and locations,” Furman writes.

What Furman describes is a nation suffering from what amounts to economic arteriosclerosis. This has not hurt corporate management and the owners of capital — stockholders — but it has been disastrous for workers.

Furman argues that “both market concentration and frictions that reduce worker mobility can lead to greater monopsony power for employers" (monopsony is a buyer’s monopoly). “With fewer firms competing for a given type of worker,” Furman contends,

each firm is more likely to exercise local monopsony, and their smaller numbers may also facilitate tacit or explicit collusion. If, on top of that, employees face greater search frictions or costs of moving, then this reduces their ability to raise their wages by changing jobs and thus also reduces their bargaining power with their current employer.

The growing strength of businesses to bargain for low wages, bolstered by the decline in unionized employment and the falling value of the minimum wage, has contributed to the declining share of total income going to workers. Furman describes the trend as follows:

Starting around 2000, the distribution of income between labor and capital shifted noticeably away from the former and towards the latter. Today, the labor share of income is in the mid-50s, compared to the mid-60s two decades ago.

Despite rising returns to capital, there has not been a parallel increase in business investment. “One explanation,” Furman argues, “is that monopoly power has increased — which is consistent with higher returns and lower output.”

Together, “declining firm dynamism, high returns and low output, and disparities in the rate of return on investment are all potential consequences of increasing barriers to entry” and restraining the operation of a free and open market.

With these findings in place, Furman has laid out the groundwork for a liberal Democratic agenda:

To the extent that these macroeconomic trends are related to decreased competition, then procompetitive policies have potential to not only benefit consumers but also improve the state of the macroeconomy by, for example, increasing productivity and ensuring that the benefits of growth are widely shared.

Furman describes four areas where pro-competitive reforms are possible — and in some cases have already been initiated.

The first is intellectual property and patent reform, areas where there is growing bipartisan agreement that excessive and often frivolous patent claims and the emergence of a new breed of patent tort litigators have held back innovation, especially technological innovation.

The second is the need to increase the bargaining power of workers, whose leverage has steadily declined. More stringent antitrust enforcement could break up some business consolidation, giving workers access to job mobility; the practice of requiring employees to sign noncompete agreements should also be restrained.

The third area is reform of state laws requiring occupational licensing, which Furman describes as an “example of policies that create inefficient and inequitable rents,” and which have grown fivefold in the second half of the 20th century, from less than 5 percent of the work force in the early 1950s to 25 percent by 2008.

While such licensing is needed in the case of health and safety occupations, in others

licensing requirements create economic rents for licensed practitioners at the expense of excluded workers and consumers — increasing inefficiency and potentially also increasing inequality.

Insofar as the licensing serves a legitimate need, the federal government can press for cross-border portability, giving licensees more opportunity to cross state lines for better jobs.

The fourth is reform of land use regulation.

“Overly burdensome land-use restrictions — like minimum lot sizes, off-street parking requirements, height limits, prohibitions on multifamily housing, or lengthy permitting processes — can instead artificially reduce competition by acting as supply constraints,” Furman contends. “In doing so, such policies both allow a small number of landowners to capture economic rents and reduce the stock of available affordable housing.”

Furman notes that land use constraints limit productivity growth and labor mobility by making it more difficult for workers to move to higher-productivity cities.

One of the most vexing problems facing those seeking to develop a liberal, pro-competition agenda is the emergence of the digital marketplace.

The complexity of the economics of the internet is, according to Furman, reflected in the following contradiction. On one hand, internet markets “have tended to favor digital giants that hold high market shares” and digitalization also poses an increased danger of opaque price fixing through the “use of advanced machine learning algorithms to set prices and adapt product functionality.” On the other hand, the digital marketplace has encouraged competition by lowering “many costs for small businesses, increasing their ability to rapidly and inexpensively scale up, collect information on potential consumers, and create new products and ideas.”

There is disagreement among economists concerning Furman’s work.

Lawrence Katz, an economist at Harvard, wrote me by email: “I am a big fan of Jason Furman and think the directions he has been sketching on technology, competition, and globalization make a lot of sense.”

David Card, an economist at Berkeley, conversely, wrote that he does not think Furman’s proposals “will amount to more than a couple of percentage points higher wages (or a few percent lower prices) for low to middle income folks.” Overall, Card said, “I am deeply skeptical, to say the least.”

I would argue that even if Card is right, wages that are a couple of percentage points higher are nothing to sneeze at.

Furman’s proposals should not be viewed in isolation, but as one piece of a broader liberal agenda — an agenda that could include some or all of what Larry Summers, Isabel Sawhill, and others, have proposed.

Hillary Clinton has already declared in campaign speeches that she intends to promote the kinds of reforms Furman and Summers are calling for.

President Obama has presided over a credible recovery from the 2008 crisis and he has amassed a number of achievements, including, according to an ongoing compilation by Factcheck.org, the following:

The economy has added nearly 10.7 million jobs; median household income has gone up $1,140, or 2 percent; the buying power of the average worker’s weekly paycheck is up 4.2 percent; the median sales prices of existing single-family homes are up 23 percent; the unemployment rate has dropped well below the historical norm; job openings are at a 15-year high; corporate profits and stock prices have both soared to record highs; the number of people lacking health insurance has gone down by 16.5 million; the murder rate is down nearly 5 percent, despite an increase in 2015; and the number of unauthorized immigrants estimated to be living in the U.S. is down, according to demographers.

There have also been a number of failures, as Factcheck.org also pointed out, perhaps most notably a 36 percent rise in the number of Americans on food stamps and a 0.3 increase in the poverty rate.

Assuming for the moment that Clinton is Obama’s successor, it will fall to her to build on his record and to address the yearning of those hard-pressed voters who have felt for far too long like beggars at the banquet.

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