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Short-Term Economic Performance Does Not Equal Fixing Long-Term Structural Economic Problems

The Federal Reserve stood pat today, determining that they would continue with QE3 despite the relative improvement in economic performance. This clears one hurdle lingering in the minds of some observers: would the Fed have the resolve to stay the course, even if the economy strengthened, which would probably lead to an uptick in inflation? So far, the Fed has passed that test, although it’s way too early to suggest how they will go in the future. Inflation hasn’t yet increased, for one thing, and the economy’s strength is not set in stone.

If the expectations set by QE3 work, it means that the Fed will continue to purchase mortgage bonds even after a robust recovery, to return the US to trend-level economic growth. It’s important to point out, however, that even if this happens, it does little for the structural impediments we have witnessed within the economy for decades. I’m mainly talking about income inequality, and David Leonhardt points this out as well in an article about the Presidential campaign.

But in many ways they have obscured what is arguably the nation’s biggest challenge: breaking out of a decade of income stagnation that has afflicted the middle class and the poor and exacerbated inequality.

Many of the bedrock assumptions of American culture — about work, progress, fairness and optimism — are being shaken as successive generations worry about the prospect of declining living standards. No question, perhaps, is more central to the country’s global standing than whether the economy will perform better on that score in the future than it has in the recent past.

Leonhardt lists a number of potential rationales for wage stagnation and income inequality, including innovations in technology, a loss in the global edge in education, globalization of trade, rising health care costs, the decline of labor unions and tax policy. I think this actually misses many of the causes, particularly things like corporate governance, which creates a go-go CEO compensation culture in the US, and the kind of things Dean Baker talks about in his book The End of Loser Liberalism. And nothing fixes the issue better than full employment, which restores some leverage back to workers and away from management.

But the biggest miss comes from the stranglehold that big money, big lobbying and political influence plays on our politics. That has created an economic framework that only works for those at the top. Politicians designed the policy by proxy, and they generally only get input from those for which this framework works. So they are insulated from the problems this generates. The US economy has withstood more technological innovation and more disruptions from trade in the past. It cannot withstand a system that funnels the gains in productivity to the top by design.

So at one level, I can hope monetary policy, and maybe someday fiscal policy, can bring the economy back to some kind of equilibrium. At the same time, I cannot see an incrementally changed nation’s economic framework bringing benefits to the broad mass of people. Too many changes must take place for that to occur.

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David Dayen

David Dayen