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Home Publications Blogs Beat the Press Bad Macroeconomic Policy Disproportionately Hit The Middle Class and Poor

Bad Macroeconomic Policy Disproportionately Hit The Middle Class and Poor

Friday, 31 August 2012 05:14

The NYT notes that the new jobs being created in the upturn tend to be low-paying jobs. This is not surprising. The jobs that are created in large part reflect the state of the labor market. No one will work the midnight shift at the local 7-11 for the minimum wage if they have the opportunity to get relatively good paying jobs in manufacturing, construction, or health care.

High unemployment leads to lower wages for most workers both by lowering the wages in their jobs and leading to a mix that has more lower paying jobs than would be the case if the economy was near full employment. (This was the point of my book with Jared Bernstein, The Benefits of Full Employment.)

High unemployment tends to have less effect on the most highly educated workers since few doctors and lawyers are laid off when the economy goes into recession. (Although this downturn may have had some downward effect even on the wages of lawyers.) This is why macroeconomic policy has to be very much understood as a class biased policy. When the ineptitude of the Fed allowed the housing bubble to grow to incredibly dangerous proportions, it was the livelihoods of tens of millions low and middle-income workers that were being put at risk, along with their savings, which were overwhelmingly in their homes.

In the same vein, the Fed's new commitment to target 2.0 percent inflation, implicitly at the cost of higher unemployment, is a promise to throw low and middle class people out of work in order to put downward pressure on their wages to keep inflation from rising above its target level. The impact of this policy is likely to dwarf the impact of federal tax policy in its impact on most non-rich Americans. 

Comments (8)Add Comment
2000s policy
written by bakho, August 31, 2012 5:39
The monetary policy only in part created the housing bubble. It was the bad and inadequate regulatory that allowed housing to expand. Monetarists have for years argued that fiscal policy should not be used to manage an economy, that the Fed should "Go it alone". This philosophy and bad fiscal policy that put too much money into tax cuts for the wealthy and not enough money to public goods and services kept employment and wage growth too low.

There was no response to the 2001 recession that used Federal dollars to create jobs by increasing infrastructure spending or giving money to the States to keep projects on track. The movement away from job creating fiscal policy is the wrong road.
Understatement of the week:
written by LSTB, August 31, 2012 7:31
(Although this downturn may have had some downward effect even on the wages of lawyers.)

My two favorite examples?

The Boston firm Gilbert & O'Bryan put out an ad for an associate. The salary? $10,000 per year. According to SmartMoney, they received at least 35 applications. (http://www.smartmoney.com/plan...rticleTabs)

Then of course there's the government's hiring freeze, which makes sense given the political climate, but it didn't stop the DOJ from posting ads in various districts (e.g. Western VA) for Special Assistant U.S. Attorneys. The compensation? $0.00.

Those who combed the ABA's graduate employment data found that 15% of the class of 2011 were working in "Business and Industry" (non-law jobs) and 17.5% were unemployed or not in the labor force (e.g. doubling-down on LL.M.s).
written by Ellis, August 31, 2012 11:27
You say that high unemployment leads to lower wages. No, it is the employers who take advantage of the high unemployment to pressure their employees to accept less so as to make higher profits.
Later on, you refer to the "ineptitude" of the Fed to "allow" the housing bubble to grow. No, the real role of the Fed is to help the banks achieve greater profits... and the housing bubble was spectacularly profitable. Then, when the bubble burst, the Fed once again helped out the banks by putting trillions of dollars at their disposal.
Once again, Dean Baker, like every other economist, ignore what is most obvious: that what drives the economy is profits.
Fed policy is NOT middle class friendly
written by Mike_in_FL, August 31, 2012 12:58
Look at what has happened in the markets since this morning's QE-friendly speech by Ben Bernanke. Stocks up, which is good for Goldman Sachs bankers. But virtually every commodity across the board is up too, with gasoline, heating oil and crude leading the way. This is exactly what happens EVERY SINGLE TIME Bernanke or another Fed member talks about more easing.

Can someone please explain how it's "good" for the Middle Class that the Fed's promises of easy money serve only to juice commodity prices ... while real wages don't go anywhere? What's that? Silence? What we should be asking for is LESS Fed. That would stop the erosion of real incomes that this Fed has engineered.
dual mandate a disaster
written by pete, August 31, 2012 2:50
The dual mandate regime has been a disaster for the working class...case is closed. It was a bad idea whose time has come...the main thing that activist monetary policy does is add uncertainty and arbitrary wealth transfers to a complex economy. The information necessary to manage a 300M person economy is simply overwhelming. I picture Bernanke or Krugman as the man at the controls of the universe in Diego Rivera's mural. Sinful arrogance.
written by Calgacus, August 31, 2012 7:40
Pete, to repeat myself too, the idea that the "unemployment" part of the dual mandate somehow led to inflation post-Bretton Woods is just weird. In the real world, post-Bretton Woods, post-70s is just when the Fed & much worse, everyone else, the Congress, the Treasury & the people decided to ignore unemployment. If anything the interest rate increases (mis)targeting the anti-inflation mandate - and ignoring the unemployment mandate, were inflationary over this long run.

In other words, when the unemployment mandate was added was exactly when it was ignored. Before that, under an informal but not ignored unemployment mandate, Fed policy tended to be less activist and less destructive, with low rates as Keynes had argued for.
informal unemployment mandate?
written by pete, September 01, 2012 11:31
I think not. Unemployment was the target for fiscal policy. Bretton Woods was the explicit Fed policy/mandate. When gold started leaving the country in exchange for VWs, the Fed should have responded by printing fewer dollars. This straying from a policy which would have maintained Bretton Woods was the beginning of the Feds destructive activism, the accommodation of the oil shock, which gave us a housing bubble and then Volker's crash...another housing bubble, and then another. Sickening. Now we are likely starting another, with housing prices rising even though prices are still too high relative to incomes, i.e, expectations are (too) high, the germ of the next bubble.
Doctors the most highly-educated? Some of them. Mostly, that notion masks another failure
written by Rachel, September 01, 2012 9:38
Doctors are as highly paid as they are in the US because they have managed to restrain the competition. It is not because they are better educated than most chemists, for instance, or some of the brilliant economists we know. In other countries, where there is less deliberate restriction of medical education, doctors' incomes are more reasonable.

This overpricing of medical services is another factor which is making life worse for the middle and lower income people. Can't blame it all on the Fed.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.