Wednesday, August 30, 2006

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."


jeff poppenhagen said...


You bring up a most intriguing concept with this piece. I would argue that inflation concentrates the spoils in the hands of those who stand closest to the inflation. That is, those who get to create the credit get to decide where it goes and, thus, get to decide where the inflation occurs. Obviously, knowing where the inflation is going to occur is quite an advantage in wealth building. Since inflation is not a wealth building policy for society as a whole, inflation is really then wealth distribution policy (Austrians here would argue that it is wealth destructive for society). Inflation is a "trickle-down" policy. Those who stand closest to credit creation see wealth transfered to them from those farther away (fixed income retirees being at the back of the inflation train).

I think you may be on to a very important point with this piece. I wonder then if Bernanke is OPENLY acknowledging that inflation will be the policy because our debt structure now requires it and, that for this policy to remain in place, other policy makers had better make sure that other wealth distribution methods are enacted. Maybe we will look back on this speech as quite a tipping point for financial markets and society.

Dude said...


I think I've been a little loose with my metaphors. When I refer to the "trickle down economy" I'm referring to the shift from Keynesian demand side emphasis to the supply side emphasis since Reagan. Before the monetary restrictions, such as limits on loan rates, or Glass Steagall, were removed, those closest to inflation tended to be the consumers, now it is the financial (and other favored "suppliers") sector. The consumer has to wait for the trickle.

I agree inflation is wealth distribution, but from whom to whom depends on the rules of the system. Under Greenspan, as you know, corporate profits shifted heavily towards the financial sector (call it affirmative action for finance which had to suffer under the slavery of FDR), while welfare transfer payments were cut dramatically.

I think Bernanke is acknowledging exactly what you note: Inflation is required and the common man better get his share or the next version of FDR will change the system again.

I see (thanks RJ) that even Bill Gross is warning of the need for more "equitable distribution." So the battle will continue.

It seems to me that the problem arises because nobody wants to play on a level field. First the financial guys tilt it their way then the welfare staters tip it their way and then the cycle begins anew. In the end we are likely to find that our freedom to tilt the playing field at all will diminish over time.