The Greenspan Era is over

Further progress in global economic integration should not be taken for granted, however. Geopolitical concerns, including international tensions and the risks of terrorism, already constrain the pace of worldwide economic integration and may do so even more in the future. And, as in the past, the social and political opposition to openness can be strong. Although this opposition has many sources, I have suggested that much of it arises because changes in the patterns of production are likely to threaten the livelihoods of some workers and the profits of some firms, even when these changes lead to greater productivity and output overall. The natural reaction of those so affected is to resist change, for example, by seeking the passage of protectionist measures. The challenge for policymakers is to ensure that the benefits of global economic integration are sufficiently widely shared--for example, by helping displaced workers get the necessary training to take advantage of new opportunities--that a consensus for welfare-enhancing change can be obtained. Building such a consensus may be far from easy, at both the national and the global levels. However, the effort is well worth making, as the potential benefits of increased global economic integration are large indeed.
Ben Bernanke Aug 25, 2006

It is certainly true, as Mallaby notes, that Walmart’s efficient distribution of imported goods has lowered the retail price of many manufactured goods. Auto workers in the Mid-west may not have a job anymore, but the dollars they get from borrowing against their accumulated home equity go further than ever before.

Ok, that remark is a bit over the top. But I think it goes to the issue – if nominal wages were constant and prices were falling, the Walmart economy would be consistent with higher real wages across the board. Workers released from manufacturing would find other jobs – in construction, perhaps, or in the services sector. The composition of the economy would change. I would still worry about taking on external debt to support a boom in investment in non-tradables. But living standards for the median worker would be rising as the changing composition of the economy increased its overall productivity.

That obviously hasn’t happened. At least not recently. Cheap Chinese assembly, global supply chains and efficient big box retailing haven’t been associated with much of a rise in the real purchasing power of the median worker. Indeed Leonhardt and Greenhouse note in New York Times that real compensation (counting benefits as well as wages) fell over the past year.
Brad Setser

The Greenspan era, in my view, is officially over. Ben Bernanke has emerged from the shadow of "welfare state confiscation" hatin' Greenspan to raise the once verboten topic of distribution, and at Jackson Hole, of all places. That is, it seems the new Fed Chair wants to alert the powers that be to the importance of the trickle in the trickle down economy.

Rising political tensions between the haves and have nots may have been obscured by the US media's slavish adherence to the "Terror" frame but like the proverbial tree falling in the forest, lack of awareness of a thing is not the same as the lack of a thing.

Political upheaval in Mexico, which may lead to the creation of a shadow, tax receiving, government has likely raised alarm bells among the powers that be in the US. To the extent the current housing slowdown becomes more of a crash, cheap labor might not be the only thing that crosses the border, political upheaval may follow.

For the financially minded, the rising concern over distribution issues, evident in both Bernanke's recent speech and a number pf papers cited in Mr. Setser's blog post (whose analysis I highly recommend) rather than a sole focus on Rubin's bigger pies, suggests to me that in the event further inflation is the monetary policy choice, as I suspect, then the next round of wage and price increases will be a bit more widespread.

One of the impediments to a virtuous (in the self-sustaining, not positive, sense) inflation cycle in the US of late has been the failure of wages to rise. If social stability is feared, wages may well begin to rise, and the cycle will be completed, just in time for the costs of the adventures in the Middle East to be apportioned.

Sometimes putting off until tomorrow is not wise because then all problems must be dealt with at once. This recalls the line from the spoof film "Airplane"..."look's like I picked the wrong week to stop sniffing glue."