Middle Class Economics: Josh Barro nails some critical points

February 26th, 2015 at 11:16 am

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).

Full Employment and Trade Deficit

Trade Deficit and Manufacturing Comp

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.

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20 comments in reply to "Middle Class Economics: Josh Barro nails some critical points"

  1. urban legend says:

    Questions:

    1. How could a couple hundred billion for an indefinite term directly creating jobs on long-needed infrastructure projects (and help to states for re-hiring laid off teachers and public safety employees not help us move towards full employment and more upwards pressure on wages? It should be more than just the pro forma toss-off line that Barro gives it, shouldn’t it?

    2. How could Democrats not win politically by shouting “full employment” as its No. 1 policy priority? And saying “full employment comes first” every time someone starts whining about deficits? Which do we think comes first with voters, plentiful jobs and higher wages for them — and economic growth for the country — or Federal budget deficits that are abstract and of little if any current consequence? And reminding those who worry so much about deficits that their first priority should be getting everyone back to work making money, spending to create other jobs, and — wow! — paying taxes instead of collecting unemployment benefits?

    3. Why have Democrats been unable to make the case to voters — or even present the case — that high levels of poverty drag down the whole economy and the incomes or everyone in the middle class? And that because the overwhelming majority of people living in poverty are not lazy and want work if they can find it, what Democrats stand for most in dealing with poverty, before welfare programs or even unemployment insurance, is full employment? And that, accordingly, the Republican claim that Democrats just stand for more welfare for the poor is a flat-out lie?

    These should not be hard things to say. So why do Democrats refuse to say them?


    • Jill SH says:

      YES, u-l. I totally agree.

      Here’s what I’ve said for years: We need jobs, more jobs, better jobs, better paying jobs. Then we can all help pay off the deficit!

      Infrastructure — we all need it, in all states, at all levels. What are we waiting for? Interest rates to go back up?


    • Smith says:

      Democrats are concerned with keeping their jobs, being elected and retaining the benefits and campaign contributions of incumbency. How could they not? While Republicans run ever rightward, Democrats are able to position themselves just to the left of the Republicans to win office and keep winning elections. If Dems move left the Republicans pick up the votes from the ceded space. The country changed from independent farmers to industrial workers to post industrial service economy. Also even in a downturn, there is less starvation and more bread and circuses (McDonalds and Super Bowel) Politics has changed. Liberals are only now coming to grips with the new reality (as in Piketty analysis). It is not as Krugman cited just the abandonment of Southern Democrats responding to Civil Rights. J Bush vs. H Clinton hardly seems to promise a new beginning, but look at E Warren’s book for starters.


      • urban legend says:

        The two worst mid-term disasters in modern times, creating deadlock in DC and little ability to put into effect progressive reforms that Obama advocates, is not exactly “winning elections.” This last election should be the wake-up call that finally drives the message home: positioning just to the left of wherever Republicans are loses elections. Anyone who still thinks that is a winning strategy has no concept of who wins elections for Democrats. It’s the Democratic base who get out and pound the pavement and do cold-calling who are the ones who get out the vote. DC centrists do zero of that — probably less than zero because they (with the money) push local candidates into weak-tea, Republican-lite Democrats, removing any incentive for many members of the Democratic base — many (and probably a majority) of whom consider themselves progressive and liberal — to do that hard work with any enthusiasm.


        • Smith says:

          The winning presidential elections of Clinton and Obama were all about positioning just to the left of the Republicans, which is four out of six. The Democratic win in 2006 was also a triumph of centrist Democrats running just left of Republicans (as well as Bush fatigue, poor opposition, and normal second term party trends). The leaders of the Democratic party in 2010 and 2012, think ex Speaker Nancy Pelosi and ex Majority Leader Reid, purposefully made the campaigns about a battle for the center (Democrats just to the left of Republicans). That they lost the majority doesn’t take away from the fact the strategy may still be a winning or safe strategy for most incumbent Democrats. One example is liberal New York’s very powerful (third ranking) Senator Schumer fighting to retain Bush tax cuts for poor families making $250,000 to $400,000 a year.

          To summarize, Democrats don’t promote progressive policy because it would cost them campaign contributions. This was true even before Supreme Court decisions that gave corporate money and the 1% more influence. The Clinton way is to sell everything as a win win, growth will cause painless prosperity for all, rising tide etc. The truth is if labor and the lower two thirds of wage earners are to gain a substantial share of productivity growth, the 1% and .1% stand to lose enormous income, even though they don’t need it!

          Yet that is a very radical idea, that no one needs to earn over $1 million dollars a year. Very simple to understand. Debate that. Always start the conversation there.


          • Smith says:

            Whoops again, 2014 midterms was about trying to save centrist Democrats, and though it didn’t work, most incumbent Democrat congressman manage to retain office, and with healthy margins.


          • urban legend says:

            Just to the left of Republicans (wherever they are at the time) means the Democratic message is nothing more than, “We’re not as crazy as Republicans.” We could have a long discussion about what being in the center means, but it most certainly does not mean, for example, cutting Social Security benefits by a sneaky method, bragging about a labor market with a U-6 over 11%, or being ho-hum or pro forma advocates of job creation through infrastructure development. Most traditional Democratic positions, even including the “class warfare” of asking the wealthy to pay higher taxes rather than strapped members of the rest of society, are generally very popular.

            With all the money Democrats in key races spent — and people like Brad Schneider in the Illinois 10th who lost despite spending a ton on commercials with essentially no message — it did not get people to the polls. Money or votes? Without the latter, the money is wasted. The opponents of Rahm Emanuel in Chicago had virtually no money.

            2006 was not a victory for centrist Democrats. It was a victory over an overwhelmingly disastrous administration. We won’t have an opponent that weak anymore — unless we make them weak. You can only make them weak if you have a message that demonstrates how weak they are.


  2. Jill SH says:

    “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 …”

    My own little story: About 25 years ago, when my son fit in a back pack and I was freelance graphic designing at home, I would occasionally take him along when I had to drop off projects at clients’ businesses. At one such, the secretary could barely keep her hands off of him; she had a newborn in day care and was pining for her own child. (Yes, I used the word “pining.” An emotional heartache that is almost physical, felt by many mothers separated from their children.) She had the full-time job with the health insurance, the husband was a construction contractor who couldn’t get affordable coverage, and they couldn’t be without it. If they’d had the ACA back then, I bet she could have stayed home with her new baby, or at least taken a part-time option. I’ve meant many folks like that: health insurance slaves. The ACA has now made that calculation unnecessary. I think it will also prove to be a boost for the viability of small businesses.

    A strong hope of mine is that the ACA will make the labor market more fluid, and that will have the effect of raising wages, while weakening the grip that large corporations have on the overall labor market.


    • William Monette says:

      A point of terminology. Those the ACA are freeing from full time employment are job creators! How many have been sitting in their cubicles dreaming of starting a business and unwilling to take the risk without medical coverage?

      Of course, there will be many reasons people chose to leave full time employment, early retirement, family care, etc. However, let’s not leave the myth of job creation only in the hands of the big money capitalists and their Republican allies.


  3. Tcatman says:

    What is the argument for not cracking down on currency manipulation? I have heard both yourself and Perter Morresie?? debate and critique these kinds of mercantilistic policies. Historically the US allows this behavior… Why?. Currently, the Obama admin seems to be opposed to including a currency chapter in the TPA. Certainly the Bush administration did nothing about this when the global economy was cooking along pre meltdown…. Why?

    Until the politicians implement real solutions to matching rising living standards with growth in productivity.
    And rebalance the tax treatment of income derived from labor versus income from capitol we should attempt to hold their feet to the fire…
    Policies that increase immigration caps should be opposed because they coverup this core problem with growth driven by sheer numbers of people.

    ( If one more democrat extolls the virtues of STEM education without noting that half of the STEM grads don’t work in the field and a huge percentage flush out of STEM as their skills become dated doing the “job” I will scream!]

    The nature of the global economy and our competitors requires new solutions and hard nose enforcement.


  4. Tom in MN says:

    So what changed in 1980 for trade? I do know that’s when top tax rates started down. You want to fight this by going after currency manipulation, but you’d have a better case if you could point to a change in exchange rates that started at the same time.


  5. dwb says:

    Graph # 1 is extremely important, but not for the reason mentioned here.

    % of time spent at full employment from 1980-2014: 30%

    The real story here, again, is the Fed, which actively sought to disinflate the economy. Since 1998 we have had two major recessions even though inflation barely budged. On average monetary policy has been too tight.

    The trade deficit is just a reflection of the fact that on average we have been importing unemployment to combat inflation. The way to combat this is for the Fed to get in gear. Currency “manipulators” will be forced to choose between importing inflation, or adjusting the exchange rate.

    On the other hand, if you think that perhaps we are in a permanent regime where we fear even the shadow of 1.999% inflation, then I think you are sort of on the right track with the “making it easier to work less” meme.

    The real issue here is labor (and resource) productivity. We need to make it less expensive to educate and house people (less expensive in terms of labor/land resources, not $$), so that the same $ stretches farther. I also would include reform in infrastructure to make it less costly to build (we are vastly more expensive than our peers here). Nobody wants a road (or metro line) in their neighborhood , nobody wants a dense housing development. So we endlessly review and restrict development looking for obscure crustaceans. Time is money. When things take less time, they cost less, and people can work less too.


    • Smith says:

      I thought the real issue actually is the annual gains in productivity (1 to 2%) are all accruing to the 1% and .1% instead being shared with workers. I do contend that GDP is inflated and productivity gains of recent times are somewhat illusionary, but that is a separate issue.


      • dwb says:

        You cannot make a claim that “productivity gains of recent times are somewhat illusionary” then simultaneously claim that the top 1% are accruing all these illusory gains!

        It’s very hard to disentangle the distributional and generational effects of underemployment and disinflation from other things. Unexpected disinflation benefits the holders of financial assets with little default risk (like Treasury bonds). Inflation is just a tax on savings, disinflation lowers the tax. What would the world look like if we spent most of the time at full employment? I’d like to find out!

        The flip side of the productivity question is: Are the living standards of people in the lower two fifths of the income bracket higher than they were in 1980? The intellectually honest answer is that they are – goods and services are significantly higher quality now than in 1980. Would anyone really take a time machine and go back to 1980? I highly doubt it.


        • Smith says:

          “You cannot make a claim that …” Obviously I can and did.
          It should win a Nobel Prize (if it was true). GDP is inflated due to overvaluation of the production of intangible items (we live in a service economy).

          Whether the new app produced by company A is really worth $1 million dollars, which the non-inflated GDPers would claim, or is in fact the emperors and 1%’s new clothes, and of dubious value to anyone, doesn’t mean all of Company A’s profits can’t go to the 1%. Inflated GDP and rising inequality are hardly exclusionary. Each helps the other in a dialectic, a spiral, a dance in the gallery of consulting and marketing, the art worldization of macro.


          • dwb says:

            You are right, we are in a service economy, and I can put any price tag on services and new apps I want.

            But, I can also do that for luxury goods. Is the $86 million $ 196-foot J’Ade CRN Superyacht really “worth” $86 million? It is to someone. Does that make GDP “inflated” ?

            You argument that GDP is “inflated” sounds to me as though you are arguing that the existence of vleben goods (A vleben good is one whose utility is proportional to the price one pays, because it conveys status) inflates GDP.

            1- that’s a value judgement economics does not make; An $86 million yacht goes into GDP at $86 million regardless of the dubious value of the yacht.
            2- we measure GDP two ways: GDP, and GDI. The expenditure counts goods, the incomes approach counts essentially value-added (incomes to various resources). The amount spent on goods should equal (roughly) the cost/incomes to the various factors of production. Generally GDP and GDI are pretty close, but there is some discrepancy and measurement error.

            The flip side of the $1 million app is the cost to produce it. The flip side of the $1 million app- assuming someone actually pays $1 million – is the cost to develop it (most of which are payments to developers as income). Whatever is left over is profit.

            If “profits” are abnormally high, who is paying $1 million for this app? Why are companies (or people) buying the $1 million app and not the functionally equivalent $950,000 app? Businesses are not charities, they do not throw money away.

            If you think that there is too much profit, the real question you should be asking about the $1 milllion app is why. Are there monopoly profits accruing to Company A?

            If your argument boils down to: GDP is “inflated” by monopoly profits, which lower productivity I would 100% agree with the spirit of the point. GDP is not inflated per se – it is what it is – but companies (particularly software and pharmaceutical companies companies) certainly try to engineer small niche monopolies to boost profits. Often they are aided and abetted by intellectual property law.


          • Smith says:

            Kudos to dwb for injecting Veblen into the discussion, by bringing up veblen goods. Veblen’s Theory of the Leisure Class (1899) has much to tell us about current economic conditions and the concern over rising inequality. The last chapter “The Higher Learning as an Expression of the Pecuniary Culture” which includes a Saturday Night Live like send-up of college sports should be required reading, though admittedly not an easy read. Galbraith’s “The Affluent Society” covers some similar ground but in a twist shows how higher education could also be viewed as an eventual solution to excess capacity and production of superfluous goods.

            But in response to the last post, I would posit it is not traditional monopolies and IP law, nor luxury goods that necessarily create the inflated GDP. It is the service economy and price structure of the controlling interests of business. Galbraith in the 1970s outlined the power of oligopolies (see oft cited by me “Economics and the Public Purpose” for the problem, not the socialist solution however), and in addition today we have too big to fail banks, hedge funds, high speed trading, and asset bubbles. In a computerized and service economy where values are assigned to intangibles, where the top 10% and 1% economic actors trade their services with each other for values they arbitrarily assign to themselves and cohorts, GDP becomes ever more suspect as a measure of economic health.

            Focussing on monopolies and IP law would be a mistake, although I’d favor more government funding of medical research to combat the control big pharma has over our health, curbing of excess profits, and the consolidation of the industry.

            Somewhat orthogonal to discussion, Obama and a Democratic Senate passed the most corporate favorable IP law ever wiping out over 200 years of innovation with first to file replacing first to invent, stifling science forever, and inhibiting disclosure.


  6. Bud Meyers says:

    Sentier Research: Median annual household income in December 2014 was $54,417 (still lower than 1995)

    FRED: Real Median Household Income as of 2013 was $51,939 (still lower than 1995)
    http://research.stlouisfed.org/fred2/series/MEHOINUSA672N

    What is middle-class?

    Social Security Administration: “50 percent of wage earners had net compensation less than or equal to the median wage, which is estimated to be $28,031.02 for 2013.”
    http://www.ssa.gov/cgi-bin/netcomp.cgi?year=2013

    If you doubled this median wage, you’d have about what is the current “median household income” — because most households now rely on two or more incomes. Sentier Research shows the annual “median household” income to be $54,417

    A more reasonable assumption of a “middle-class wage” might be (at the very least) $50,000 a year before payroll taxes (double what the “median” wage currently is.)

    “…in which case, only 19.4 percent of all wage earners would generate a true middle-class income — meaning most others don’t even come close. Whether they admit it to themselves or not, they are either lower-middle-class, lower-class, or poor.”
    http://www.economicpopulist.org/content/only-20-are-middle-class-most-dont-come-close-5679


    • Smith says:

      Great point, but adding insult to injury is the fact that
      1) Even looking at household income, that distribution is greatly skewed towards the bottom, with a concentration of households making much less than median, curve looks likes a children’s playground slide instead of a camel’s normal curve.
      2) Poverty is a story about the number of household wage earners (unemployment? childcare for single parents? part time or temporary work?) , and not skills and wage levels

      I left in a comment on this blog June 16th, 2014:
      When you look at the table here, the thing that should jump out at you is “Mean Number of Earners”
      http://en.wikipedia.org/wiki/Household_income_in_the_United_States#Household_income
      “Not only is it below one until income levels reach $35,000, but it continues to climb as income climbs reaching 2 at $105,000 , which might be made up of two modest $50,000 incomes, but could also be a $90,000 supplemented by a spouse selling real estate earning $10,000.”

      Also pay attention to the graph of household income distribution, looks like a children’s slide, not a normal curve, individual income distribution is similar I believe, previously linked in comments at least from November 2013:
      http://en.wikipedia.org/wiki/File:Distribution_of_Annual_Household_Income_in_the_United_States.png

      If you know where the similar graph is for personal income, please provide the link, but the data is also here, among other places:
      http://en.wikipedia.org/wiki/Personal_income_in_the_United_States#Income_distribution

      Finally, average income for every full time employed worker (120 million) in America is $70,000. I don’t advocate everyone getting paid the same amount, but you see the potential for modest range $50,000 to $100,000. It’s also just coincidental number of workers equals number of households, I’m not confusing the two.


  7. Smith says:

    Why tie fighting currency manipulation (good) to TPP (bad)?
    Same as tying true immigration reform (good) to current bill that vastly expands labor pool lacking freedom and basic labor rights (bad)?
    Same as tying closing corporate tax loopholes (good) to repatriation holiday and lower rates (bad)?

    It is the Republican game to trade illusionary concessions for real and permanent changes that damage the economy and favor the rich (80% of Bush tax cuts). Don’t play that game.


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