Who Screwed the Middle Class?

I've written several times before about Winner-Take-All Politics, in which Jacob Hacker and Paul Pierson argue that middle-class wage stagnation and growing income inequality are due as much to political decisions over the past 30 years as they are to broad economic trends. I find their arguments persuasive, but there's no question that it's a tough case to make. After all, exactly which political decisions are we talking about? Can we point to specific pieces of legislation or specific agency decisions that have retarded wage growth? In fact, we can—things like tax policy, financial deregulation, the decline of antitrust enforcement, and anti-union rulings by the NLRB all played a role. By themselves, though, these just aren't enough to account for what's happened. So what's the smoking gun when it comes to the impact of politics on wage stagnation and growing income inequality?

I think Lane Kenworthy fingered the right culprit a few weeks ago: the abandonment in recent decades of full employment as even a rhetorical goal of American economic policy:

The post–World War II experiences of the rich democracies suggest three routes to rising working- and middle-class wages. One is an environment in which firms face only moderate competition in product markets and limited pressure from shareholders, allowing them to pass on a significant share of growth to their employees. This characterized the period from the late 1940s through the mid 1970s, but it’s now long gone. The second is strong unions. I see little hope of that in America’s future. The third is full employment.

But full employment is only possible if the Federal Reserve is committed to it, and this is decidedly no longer the case: "Since the late 1970s, independent central banks such as the Fed almost always have prioritized low inflation, rendering low unemployment difficult to achieve. If the Fed isn’t on board, even a workable plan for full employment supported by the American public and our elected officials probably won’t be enough."

Following the stagflation of the 70s, conservatives decisively took over Fed policy and put it in the service of the wealthy, prioritizing low inflation over low unemployment and tacitly promising bailouts whenever Wall Street found itself in danger (a practice charmingly known as the "Greenspan put"). Matt Yglesias has a useful piece in Democracy this month arguing that progressives need to take the Fed far more seriously if we ever want to have any chance of reversing this:

Central banks and monetary policy are the primary determinant of short-term economic conditions—of the unemployment rate, and thus of workers’ ability to bargain for wages. This is, clearly, a hugely important subject in its own right. But it’s also a critical determinant of overall political conditions.

....But when Barack Obama was elected in 2008, he rather hastily chose to reappoint [Ben] Bernanke, creating a situation in which no Democrat has held the most important domestic policy job in the land since 1987. He inherited two vacancies on the Board of Governors that he left open for over a year, only putting names forward after a third vacancy emerged in 2010....Of course, no one can know for sure what the Fed would have done had Obama picked someone other than Bernanke to chair it or filled the vacancies more rapidly. But it’s certainly plausible that different personnel would have led to swifter and more forceful moves toward monetary stimulus, a more rapid end to the recession, and a lower unemployment rate.

A lot has happened over the past 30 years, but if you're looking for a single political sea change that's had the biggest impact on middle class wages—more important than union decline, more important than NAFTA, more important than the end of Glass-Steagall—it's the political consensus that underlies the Fed's reluctance to allow labor markets to stay tight enough to generate wage increases in the real economy. And it's something we're seeing all over again right now, as the DC chattering classes have almost unanimously decided that inflation is our real enemy right now, even though core inflation is running around 1% and unemployment is still near 9%.

This is a policy beloved of the business community, which prefers loose labor markets that keep wages low and executive compensation high, but it hasn't always been the Fed's policy and it's not written in stone that it has to be now. Tight labor markets and rising middle-class wages are, to a large extent, a choice we make. Politics took them away 30 years ago, and politics can return them to us if we want.

Front page image: Celine Nadeau

Tight Money, Lousy Economy

Economist Scott Sumner is aghast at his profession:

If pressed, Keynesians will usually point to real interest rates as the right measure of monetary ease or tightness. By that criterion the Fed adopted an ultra-tight monetary policy in late 2008. Monetarists will usually say that M2 is the best criteria for the stance of monetary policy. By that criterion the ECB adopted an ultra-tight monetary policy in late 2008. And yet it’s difficult to find a single prominent macroeconomist (Keynesian or monetarist) who has publicly called either Fed or ECB policy ultra-tight in recent years. Maybe tight relative to what is needed, but not simply “tight.”

I’m calling out my profession. Do they really believe what they claim to believe about good and bad indicators of monetary tightness? Or in a crisis do they atavistically revert to the crudest measure of all, nominal rates.

Tight money and inadequate fiscal stimulus, two terrible tastes that taste even worse together. It's almost as though we want our economy to suck for as long as it possibly can.

Europe's Problem

Ryan Avent is nervous about Europe:

It seems clear that Greece is insolvent, and Ireland probably is too. Portugal is more of a borderline case, but it's becoming less so by the day. Angela Merkel is demanding austerity in exchange for a bail-out; well, the government just revised down expectations for the economy this year. It now says that Portugal's economy may shrink by 0.9% in 2011, where before it was expected to grow at a 0.2% pace. Austerity will likely slow the economy further, reducing Portugal's ability to pay its debts. And remember, the European Central Bank is about to raise interest rates.

There are several big problems to handle here, but one big one is obvious—Greece, Ireland, and Portugal are probably all busted. They simply can't meet their obligations. Their debt will almost certainly need to be restructured. The euro zone isn't excited about doing this now, partially because it's worried about its banks and partially because it's hoping it won't come to that. But default looks inevitable.

It's easy to say this from a distance, but Merkel and other European leaders have their heads in the sand. They don't want Greece, Ireland, or Portugal to default because that would mean big losses for banks in their own countries, which would then have to be bailed out. But they also don't want to directly bail out the insolvent countries, because voters wouldn't like that much. So they're kicking the can down the road with half measures and hoping that somehow things turn up. It's a recipe for stagnation at best and disaster at worst.

Chart of the Day: Who Are the Rebels?

So who are the Libyan rebels that we're now supporting in their fight against Muammar Qaddafi? Mark Thompson reports that a lot of them are the same folks who were fighting us in Iraq four years ago:

A West Point analysis of the foreign fighters involved in the increasing carnage showed that the nation sending the most militants to Iraq from August 2006 to August 2007, was, on a per-capita basis, Libya....Drilling down into the data, the December 2007 examination from the U.S. Military Academy's Combating Terrorism Center showed that nearly all of the Libyan fighters came from the northeastern part of the country [Darnah and Benghazi in the pie chart above], which is where the rebels we are now helping hail from. It's a small sample, but something to keep in mind.

Just another data point to tuck into the back of your mind as all this stuff unfolds.

The Coming GOP Spectacle

Speaking of Sarah P., I just want to say that I am so looking forward to the Republican primary campaign this cycle. It looks like Michele Bachmann is going to run, Palin might run, Newt Gingrich is probably going to run, Jim DeMint seems like he might run, and I suppose Ron Paul will run again too. This is a freak show of stupendous proportions, and it would be perfect if Donald Trump really did decide to join all these nutbags on the stage during the debates.

I guess I'm wondering how these debates are going to go. I mean, the party line even among the relatively sane wing of the GOP holds that Obama is a socialist Kenyan sleeper agent, global warming doesn't exist, millionaires are taxed too highly, and Ben Bernanke is courting hyperinflation. Parroting those positions won't make you stand out from the pack, so the crazy wing is going to have to up the ante. But how? Obama needs to turn over a DNA sample to prove he's not a mutant mole? Our real danger is the potential for ice caps to start forming in Los Angeles by the middle of the century? We should take a cue from the airlines and give rich people a million-dollar-club card from the government that exempts them from all taxes for the rest of their lives?

Can the Republican Party survive a spectacle like this? Sadly, yes, it can. Can Mitch Daniels and Tim Pawlenty and Mitt Romney? Probably not. But at least it should be entertaining.

(And just for the record, I can afford to take this lightly because I believe Obama is a shoo-in for reelection. Short of Great Depression 2.0 or something like that, Republicans have zero chance of regaining the White House next year.)

Quote of the Day: No More Whining For Sarah

From Sarah Palin, promising to turn over a new leaf:

I'm through whining about a liberal press that holds conservative women to a different standard, because it doesn't do any good to whine about it.

Well, OK. But what does she have left to talk about if whining about the media is now off her plate?

Stimulus vs. Anti-Stimulus

See update below.

Matt Yglesias reminds me of something this morning. He says:

Federal spending cuts shrink the federal budget deficit and constitute a negative shock to aggregate demand. States have to balance their budgets, so the alternative to a lower level of spending would be a higher level of taxes. In [aggregate demand] terms, it’s basically going to be a wash either way. It's the failure of congress to enact some kind of state/local bailout appropriation that’s forcing the anti-stimulative state level stuff.

This is based on the basic GDP formula: GDP = Consumption + Investment + Government Spending - Taxes + Net Exports. If state spending goes up, that represents an increase in GDP, but if it's matched dollar for dollar with increased taxes, then it's a wash. Ditto for spending cuts. It's different for the federal government, of course, because the feds can raise spending without raising taxes. States can't.

This comes up because I posted a chart a couple of days ago showing reductions in state spending over the past four years and commented that these reductions "wiped out nearly the entire effect of the federal stimulus package." A reader emailed to say this was wrong, that they were actually neutral if they were accompanied by reductions in tax revenue. I realized he had a point, though this depends a lot on details, especially on whether state spending reductions have outpaced declines in tax revenue; whether states can increase their bond issues instead of raising taxes; and whether states have been dipping into their rainy day funds sufficiently. Still, it's a good point, and I'd like to hear a response from some of the economists who have said otherwise. Is there something missing here that complicates the picture?

In any case, it's true that the real failure is the federal government's failure to bail out the states temporarily, which would have been one of the most effective stimulus measures possible. Surely states deserve a bailout at least as much as AIG and Citigroup did?

UPDATE: Robert Waldmann writes in comments that I'm wrong. Taxes don't show up in the GDP identity. He's right. So this whole post is screwed up and you should ignore it.

But.....there's still something off here. Increasing federal spending is stimulative because you can do it without raising taxes. Likewise, decreasing it is anti-stimulative if taxes stay the same. But state spending generally has to match taxes, so raising or lowering state spending has no stimulative or anti-stimulative effect except at the margins. Right?

Or not right? Somebody help! It's true that states have a certain amount of borrowing capacity (bond issues, spending down rainy-day funds, etc.), and also true that higher spending balanced by taxes on the rich might be mildly stimulative. But that's a fairly small effect.

Anyway, for now, ignore all this. If someone provides some kind of definitive answer, I'll link to it.

Libya's Thousand-Man Rebellion

The New York Times reports on what an insider says about the state of the rebellion in Libya:

After the uprising, the rebels stumbled as they tried to organize. They did a poor job of defining themselves when Libyans and the outside world tried to figure out what they stood for. And now, as they try to defeat Col. Muammar el-Qaddafi’s armed forces and militias, they will have to rely on allied airstrikes and young men with guns because the army that rebel military leaders bragged about consists of only about 1,000 trained men.

A thousand men? If that's true, then there's virtually no chance of Qaddafi losing this war. For this and other reasons, Adam Garfinkle believes it's almost a certainty that the French and British will have to send in ground troops if they're genuinely committed to expelling Qaddafi, and this in turn could spell trouble for us:

So what happens if the French and British try but do not succeed in a reasonably expeditious way? What happens is about as obvious as it gets: not Suez happens. The Americans come and save the day, as they demurred from doing in October 1956. The French and British know in their heart of hearts that we cannot let them fail miserably at this, or that’s what they suppose. I suppose they’re right.

What this means is that the President may before very long be forced to make the most excruciating decision of his life: to send American soldiers into harm’s way to save the Western alliance—even from an operation that is not explicitly a NATO mission!—in a contingency that has no strategic rationale to begin with; or not, leaving the alliance in ruins and Qaddafi bursting with plans to exact revenge.

What's worse, even if Garfinkle is being unduly pessimistic and we manage to oust Qaddafi successfully, we still don't seem to have any idea whether the rebellious tribes are really any better for Libya or for us than the tribes currently aligned with Qaddafi. Helluva war we have going here.

How Many Birds?

OK, so how big is our bird predation problem? Did I get an answer to my question from last night?

Probably. But first a few related items that multiple people pointed out in comments. First, habitat destruction is a way bigger problem than cats, so if you want to worry about the fate of North American birds, that's #1 on your list. Second, overall numbers are only part of the story. Even if cats aren't responsible for wholesale decimation of the bird population, they might still be responsible for serious damage to specific species in specific places. Third, although it's true that it's natural for cats to kill birds, the cat population in the United States is artificially high thanks to all of us cat lovers who keep them as pets. So the total amount of feline bird hunting is higher than it would be in a state of nature. There's more in the comment thread if you're interested.

Still: how many damn birds are there in the United States? John Trapp rounds up the literature here and figures the best guess is around 10 billion birds in spring and 20 billion in the fall. Meanwhile, the aptly named book, "How Many Birds Are There?" estimates 200-400 billion birds for the entire world, which is pretty consistent with 10-20 billion in the U.S.

So, assuming once again that cats really do kill 500 million birds a year, as the American Bird Conservancy claims, it means they kill something like 3% of the total bird population of the country. The error bars are probably fairly large on this number, but at least it provides the right ballpark. So now you know.