Format for APA References: Pethokouskis, J. (2007, January 1). The income gap. U.S. News and World Report. Retrievedfrom Academic Search Premier database.

Is globalization to blame? Only in part

Big financial institutions pay David Smick a lot of money to find out what issues are on the minds of Washington's policymakers.

So what is he telling them now as the Democrats take over both houses of Congress? "Globalization is the sleeper issue for 2008," is the answer given by Smick, a onetime aide to Republican Congressman Jack Kemp.

Indeed, "globalization pushback" is the new talking point on Capitol Hill, among K Street lobbyists, and on newspaper op-ed pages. Democrats have seized on the issues of rising inequality of incomes and jobs lost to overseas outsourcing, targeting globalization as the culprit. James Webb, the newly elected U.S. senator from Virginia, summed up his party's attitude in a November Wall Street Journal piece. "In the age of globalization and outsourcing," Webb wrote, "… the average American worker is seeing a different life and a troubling future." Fellow Senate Democratic newbie Sherrod Brown of Ohio, along with Sen. Byron Dorgan, a North Dakota Democrat, declared in the Washington Post that globalization has caused "downward pressure on income and benefits for American workers."

Smick's "sleeper issue" may have already awakened. When Congress passed the North American Free Trade Agreement in 1993, Senate Democrats were split 28 to 27 against, while House Democrats voted 156 to 102 against. But when the Dominican Republic-Central American Free Trade Agreement came up in 2005, Senate Democrats-including potential 2008 hopefuls Hillary Rodham Clinton and Barack Obama-voted against the bill 33 to 10, while their House counterparts were a lopsided 187 to 15 opposed. And that was before the 2006 midterm election ushered in a legion of new Democrats, including Webb and Brown, noted for their hostility to free trade.

Since the election, House Democrats have voted against normalizing trade relations with Vietnam. And the odds of Congress voting to renew presidential fast-track trade authority look long. No wonder Morgan Stanley economist Stephen Roach-who blames the $800 billion U.S. trade deficit more on Americans' failure to save than China's trading practices-warned his clients last week that "an intensification of protectionist pressures [in Congress] is a distinct possibility … a lose-lose response to … growing frustrations with the win-win rubric of the globalization debate."

The Democrats' turn is a rejection of the position the party held the last time it occupied the White House. "Clearly, Democrats have moved away from the Bill Clinton position on trade toward the Dick Gephardt position," says political analyst Stuart Rothenberg, referring to the former Missouri congressman and would-be president known for favoring trade unions more than trade agreements. Ex-Iowa governor and 2008 White House aspirant Tom Vilsack, who says his trade views combine the best of Gephardt's and Clinton's, says Americans believe the country has "not benefited as much from trade as we should have," and he fears the nation risks "closing the door on trade."

In November, 59 percent of voters who rated the economy as an "extremely important" issue pulled the Democratic lever. Tough talk on trade and outsourcing is where the votes are right now, as the midterm results vividly confirm. Outside the Capital Beltway, "the pushback against globalization is real," says political scientist Daniel Drezner at Tufts University's Fletcher School. A recent Pew Research Center poll found that 44 percent of respondents thought globalization led to lower wages; just 11 percent thought free trade boosted wages. Likewise, 48 percent thought globalization resulted in job losses for Americans; just 12 percent considered it a job creator.

Yet even if globalization pushback is a political idea whose time has come, do the economic facts support it? The consensus view is that there has been a big increase in income inequality, notably at the very top. The portion of earned national income going to the top 1 percent, according to economists Thomas Piketty and Emmanuel Saez, has nearly doubled from the high single-digits three decades ago to 16.2 percent in 2004. Meanwhile, the share going to the top one tenth of 1 percent has more than tripled to 6.9 percent. Include capital gains from stock and bond sales, and the numbers are even more dramatic: The top 1 percent grabs 19.5 percent of income, and the top 0.1 percent snags 9.2 percent.

In essence, the first set of numbers represents wage inequality, while the second-including gains from financial assets-represents broader income inequality. The difference between the numbers gives a big clue to how globalization is affecting wages and income. Saez, an economics professor at the University of California-Berkeley, notes that the first set of numbers has been "relatively stable" since the early 1990s, though gradually moving higher. But if you include capital gains, inequality increased at a brisk clip throughout the 1990s-particularly for the top tenth of 1 percent-until the 2001 recession and bear market.

Talent search. "At the top, what you primarily have is executives at large companies who are paid very large salaries with bonuses and stock options," Saez says. "It has really become a truly global market for the talent of executives." So it's not so much that globalization has driven down wages because the average U.S. worker has to compete with a low-paid competitor in China or India. (About a quarter-million jobs are lost annually to offshoring, which works out to only 0.18 percent of the workforce.) Rather, globalization has increased the demand for top corporate managers, and it has made companies more valuable as it has spurred economic growth and higher stock market values. That has boosted executives' income-from salaries, stock options, and capital gains.

Consider this: The stock market has boomed far in excess of overall economic growth for the past quarter century. So, anyone who derives income from wages alone probably can't keep up with those who have big stock portfolios. Since 1981, U.S. gross domestic product has doubled to $11.4 trillion, while total stock market capitalization has increased 14-fold. The real economy-the one that pays wages-just isn't growing as fast as the financial economy. "Globalization has been a magic wealth machine," says Smick. "But you can't keep up if you are only tied to wages."

Rapid technological change, which itself is driving globalization, is also pushing wage inequality. "Inequality is related to technology, and … you really require more skills to operate in a challenging economy driven by technology," says Daron Acemoglu, an economics professor at MIT. According to the liberal Economic Policy Institute, inflation-adjusted wages for male high school graduates have slipped 6 percent since 1980, while rising 20 percent for college graduates and 35 percent for those with an advanced degree. Technology places a premium not only on computer skills but on the managerial and organizational abilities needed to run a modern, networked company. The continuous pace of technological change means that as one new invention enters the market, Columbia University economist Jagdish Bhagwati says, workers can barely adjust before another arrives. Better education means quicker adaptation-and higher incomes.

Then there's the claim that workers' wages have been flat since the 1970s. According to the Labor Department, average hourly earnings, adjusted for inflation, have been flat overall since 1977. But there are two problems with this commonly heard statistic. For starters, there's a strong case to be made that government inflation statistics overstate rising prices by about a percentage point, failing to take into account the rising quality of goods and the ability of consumers to shift to Wal-Mart when prices go up at their local supermarket. If true, earnings have actually risen by 35 percent or so. Second, the Labor Department numbers do a poor job at tracking the earnings of "knowledge workers," notes economist Edward Yardeni, and are scheduled to be phased out in a few years and replaced with a more comprehensive measure. Better to look at overall compensation, including benefits such as healthcare coverage and 401(k) matches. Compensation has been rising at a far faster pace than wages in recent years.

Bashing. How will Democrats choose to deal with income inequality, wage stagnation, and-just as important-the less-noticed rise in income volatility? (Big swings in family incomes have tripled since the '70s, according to Yale University political scientist Jacob Hacker.) Jason Furman, director of the Hamilton Project, a centrist economic group, thinks there will be plenty of China-bashing rhetoric and talk of trade barriers-like one proposal to slap a 27.5 percent tariff on Chinese goods because of the weak yuan--over the next few years, not to mention a pause in new trade agreements. But in the end, he speculates, Democrats will mostly push for greater social insurance, such as vastly increased unemployment benefits. "Social insurance," he says, "can lead to a more dynamic society by letting people feel more comfortable taking risks."

Sen. Max Baucus, a Montana Democrat who is the new chair of the Finance Committee, advocates "global adjustment assistance," expanding wage and health benefits to workers displaced by all aspects of globalization, not just trade agreements. While emphasizing that future trade agreements must have better environmental and labor provisions, Baucus says it's important that Americans remember that trade "creates opportunities for economic growth and encourages innovation." (It has been estimated that global integration has added $1 trillion to the U.S. economy.) He guesses that the 2008 Democratic presidential nominee will sound a lot more like him than Brown or Webb. As for the protectionist measures that Wall Street worries so much about, Smick thinks there will be more talk than action, "unless we get a recession-then all bets are off."