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Rising insecurity and the rise of Trump and Sanders

Capitalism is the best economic system yet invented for producing economic growth and satisfying the diverse desires of millions and millions of people. The key to its success is the ability to respond quickly to changes in economic conditions.

But this comes with a cost that has been magnified by the failure of our political system to protect the people who pay the price of capitalism's dynamism, a failure that has fueled the economic insecurity that's helping the rise of Donald Trump and Bernie Sanders.

Capitalist economies are constantly adjusting as they respond to changes in the economic environment. When new technology is discovered, it allows us to produce even more goods and services than before with our available resources -- but it also produces winners and losers. When new technology is adopted, some people who did nothing worse than pick the wrong industry to work in will lose their jobs, while others will see their incomes rise, sometimes spectacularly if the new technology serves an important, unfilled need.

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Opening markets to international trade also produces winners and losers as markets adjust to the specialization of production across countries. International trade benefits consumers by making cheaper goods available, but it hurts people employed in industries producing goods that can be made at lower cost in other countries.

A similar thing happens when preferences for getting goods and services change, say, a shift from selling books in bricks-and-mortar stores to selling them online. In such cases, some people will become better off because of it, and others will become worse off as firms go out of business and employees lose their jobs.

Economists have a standard answer to this problem. Generally, the gains that accrue to the winners are larger than the costs that fall on the losers. Thus, in theory, it ought to be possible to make everyone better off by transferring part of the gains from the winners to the losers (for example, if the gains are $1,000 and the losses are $300, transferring $301 or more from the winners to the losers would leave everyone better off).

Thus, redistributive policies can theoretically make everyone better off. But in reality, the gains haven't been transferred from winners to losers. Instead, the gains have gone largely to the winners -- often those at the top of the income distribution, which is an important factor behind the increasing income inequality the U.S. has experienced in the last few decades.

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One way to overcome this is with social insurance programs that redistribute income from the winners to the losers through tax and transfer programs. However, the political right has successfully blocked any attempt to institute new social insurance programs or expand existing ones. Instead, it has pushed in the other direction, with tax cuts for the wealthy and attacks on programs such as unemployment compensation and food stamps.

The political left, particularly under the Bill Clinton administration, bears some of the blame as well. The result has been ever-growing unrest, the perception that the system is rigged against the working class and the populist movements the country is seeing today.

We don't have to abandon capitalism. Sharing the gains from America's dynamic, flexible economy more widely won't kill the goose that lays our golden -- but unequally distributed -- eggs.

But those with wealth and economic and political power must understand that the populist uprising evident in the current election cycle will only get stronger, and the changes to the country's system will be more drastic and unpredictable if these people continue to stand in the way of policies that reduce the economic insecurity and inequities that so many people feel in their daily lives.

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