Paul Krugman’s column on the new normal that passes for “prosperity” in 21st-century America takes its heart from a speech given by Richard Fisher, the chair of the Dallas Federal Reserve, which Krugman highlighted in a blog post over the weekend:
Much of the speech is taken up with arguing that it’s not the Fed’s job to help the struggling economy, because the big problem there is business uncertainty about future regulation. Urk. Like others, I’ve tried to point out that there is no evidence for this claim: business investment is no lower than you’d expect given the state of the economy, while surveys say that weak sales, not fear of regulation, are holding back business expansion. Oh, and just to make it perfect, Fisher cites Mort Zuckerman to bolster his case.
But what’s really striking here is the way Fisher basically takes the Fed completely off the hook. Hitherto, the Fed has been charged with two goals: full employment (defined more or less as keeping unemployment near the NAIRU), and price stability, defined as roughly 2 percent inflation. But in this speech Fisher essentially takes down one of those goalposts, arguing that there’s nothing the Fed can or should be doing about the weak economy; and he moves the other post, redefining price stability as “keeping inflation extremely low and stable”.
Fisher also says “Neither inflation nor deflation will be tolerated,” and I’m guessing that redefined the proper price stability as… zero growth in prices? That’s well below the stated target of 2% (which is too low at this point, given the economic struggles). Leaving the playing field with regards to full employment is just a shocking lapse in responsibility.
As Krugman concludes, some of these Fed governors will keep moving the goalposts to avoid their own culpability for the situation. They’ll say unemployment is now “structural” because of, I don’t know, technological change. They’ll say deflation is “inevitable” and better than the alternative. And they’ll essentially destroy middle-class America.
The slow economic strangulation of the Freemans and millions of other middle-class Americans started long before the Great Recession, which merely exacerbated the “personal recession” that ordinary Americans had been suffering for years. Dubbed “median wage stagnation” by economists, the annual incomes of the bottom 90 per cent of US families have been essentially flat since 1973 – having risen by only 10 per cent in real terms over the past 37 years. That means most Americans have been treading water for more than a generation. Over the same period the incomes of the top 1 per cent have tripled. In 1973, chief executives were on average paid 26 times the median income. Now the multiple is above 300.
The trend has only been getting stronger. Most economists see the Great Stagnation as a structural problem – meaning it is immune to the business cycle. In the last expansion, which started in January 2002 and ended in December 2007, the median US household income dropped by $2,000 – the first ever instance where most Americans were worse off at the end of a cycle than at the start. Worse is that the long era of stagnating incomes has been accompanied by something profoundly un-American: declining income mobility.
Alexis de Tocqueville, the great French chronicler of early America, was once misquoted as having said: “America is the best country in the world to be poor.” That is no longer the case. Nowadays in America, you have a smaller chance of swapping your lower income bracket for a higher one than in almost any other developed economy – even Britain on some measures. To invert the classic Horatio Alger stories, in today’s America if you are born in rags, you are likelier to stay in rags than in almost any corner of old Europe.
These were policy decisions made by elites on behalf of elites. Their failures for the vast majority of Americans always get redefined as successes for the “producer class,” those who are supposed to trickle down their prosperity to the rest of us. That only happened intermittently in the 1990s because of some concerted policy prescriptions, but even then it wasn’t enough. Policymakers make excuses to the middle class and the poor, and make parties for the rich.