Josh Barro does an excellent job describing many of the key points about the challenges of crafting what politicians are calling “middle-class economics.” As I see it, they’re talking about policies that reconnect overall economic growth and the prosperity of the middle class. Though median household incomes have been rising in recent years, as best we can tell, they’re still down 1.5% in real terms over the recovery and about 3% below their pre-recession peak (these are not gov’t data; they come from the private firm Sentier Research). Meanwhile real GDP’s up 14%, corporate profitability is up about 50%, and equity markets have about doubled in real terms.
Barro points out that in recent years, the federal government racked up quite a good track record of insulating the poor from the ravages of the Great Recession (see here, e.g., and here for longer term evidence). And minimum wage policies, supported by states both blue and red, as well as President Obama and Congressional D’s, have a good track record of boosting the pay of low-wage workers with few of the unintended consequences opponents rail about.
But that’s the poor. Which gov’t policies can replace the eroding glue that in earlier periods linked middle class earnings to rising productivity?
Well, the first thing, as I and every other Keynesian-oriented economist have endlessly stressed, is Congress could maybe not screw things up, i.e., stay out of the way, i.e., do no harm. No austerity—premature deficit reduction—which shaved 1.5% off of real GDP growth in 2013, no fiscal cliffs, debt ceiling, government shutdowns. If you can’t get out and push, then just go name a post office or something.
Second, bless his heart, Barro emphasizes full employment. Working-age households have no better friend than tight labor markets that push employers to raise compensation to get and keep the workers they need to meet strong demand or risk leaving profits on the table.
However, Josh also emphasized that it’s not clear what government can do to help achieve that goal. It’s mostly the Fed, he argues. Here I think he overlooks something important, as I’ll explain in a moment.
But here’s a lovely passage about what government can do, one I haven’t seen prominently displayed outside of Dean Baker, who won’t shut up about it:
Another way Washington can push up wages is by making it easier to work less. The Affordable Care Act is already doing this by decoupling health insurance from full-time work, making it affordable for more parents to work part-time and more workers to retire before they reach Medicare eligibility at 65. If people no longer feel the need to work just for the health benefits, employers will have to induce them into the labor market with higher wages or other improvements.
In the hands of relentless Obamacare critics, “making it easier to work less” is an abomination because it lowers GDP. But when it’s voluntary, as is the case here, it raises national welfare, an obscure way of saying it makes people happier! What the *$??!!#* do we care about: GDP or happiness!
As noted, I think there’s one thing Josh misses that government could do to make a real difference in the economic lives of middle class workers: lower the trade deficit by pushing back against competitors who manage their currencies in order to subsidize their exports to us and tax our exports to them.
As I argued in various pieces, there’s a lot the government could do to realign exchange rates to enhance our competitiveness. Most timely would be a chapter on actionable steps against currency manipulation in the Trans Pacific Partnership trade agreement currently under negotiation. Other ideas include “a tax on the imports of offending countries, fines, the temporary canceling of certain trade privileges and my favorite, reciprocal currency intervention: If countries can go into currency markets and buy dollars, then we must be able to do the same with their currency. That’s not currently possible with China and other countries, which use capital controls to block such large purchases.”
But would this really help the middle class? Absolutely, and through the key channel discussed above: it’s just very hard to get to full employment when you’re dragging around trade deficits of the magnitude we’ve run for decades now.
Allow me to share two slides on this, both of which I’ll bet you’ve never seen before, with the caveat that a few lines obviously don’t tell the full story; they’re suggestive, not dispositive. The first shows that over the period when the trade deficit averaged about zero as a share of GDP, we were at full employment (meaning the actual rate was at or below CBO’s estimate of the full employment rate) 69% of the time. But since the latter 1970s the trade deficit has averaged -2.5% of GDP (3% since 2000) and we’ve only been at full employment 29% of the time (!!).
Second, since our trade deficits have always been in manufactured goods (we maintain a small surplus in services), I’ve plotted the same trade deficit/GDP against the real manufacturing compensation of blue-collar workers. When the trade deficit averaged zero, manufacturing comp rose at a steady clip. Once we started running persistent deficits, it stagnated.
Again, these relationships are not as simple as the figures suggest, but much careful research confirms the facts and assertions I’ve made: our persistent trade deficits make it a lot harder to get to full employment, and as such, they’ve contributed to the challenge of middle class economics. Furthermore, government action against manipulation must be part of a reconnection agenda (a subtle plug for my new book, out soon, which devotes a phat chapter to this issue).
One last point. Does anyone know who coined the term “middle-class economics?” As far as I can tell, it comes from the writing of the Seattle entrepreneur and generally cool guy Nick Hanauer.
Reprinted with permission from jaredbernsteinblog.com