Why Have Policymakers Abandoned the Working Class?

Why Have Policymakers Abandoned the Working Class?

The risks associated with a negative economic shock can vary widely depending on the wealth of a household. Wealthy households can, of course, absorb a shock much easier than poorer households. Thus, it’s important to think about how economic downturns impact various groups within the economy, and how policy can be used to offset the problems experienced by the most vulnerable among us.

When thinking about the effects of an increase in the Fed’s target interest rate, for example, it’s important to consider the impacts across income groups. I was very pleased to hear monetary policymakers talk about the asymmetric risks associated with increasing the interest rate too soon and slowing the recovery of employment and output, versus raising rates too late and risking inflation.

Related: New Data Shows Income Still Stagnant After Recession

It is much easier for the Fed to get an inflationary problem under control than it is to overcome the problems associated with slowing the economy with a premature interest rate increase. As Charles Evans, president of the Chicago Fed said recently, “We should be exceptionally patient in adjusting the stance of U.S. monetary policy — even to the point of allowing a modest overshooting of our inflation target to appropriately balance the risks to our policy objectives.”

But there is more to it than this. Which mistake is more costly – raising rates too soon versus too late – is not just a technical question about which of the two mistakes is easiest for policymakers to reverse. We also need to ask who will be hurt the most if the Fed makes a policy error on one side or the other. If the Fed raises rates too soon, it is working class households who will be hurt the most by the slower recovery of employment. If it raises rates too late allowing a period of elevated inflation, it is largely those who lend money, i.e. the wealthy, who will feel the impact. Thus, one mistake mostly affects working class households who are very vulnerable to negative shocks, while the other hurts those most able to withstand economic problems.

I don’t mean to pick on monetary policymakers. I have no doubt that monetary policymakers think about how the Fed’s policies will impact different income groups even if this is not explicit in their discussion of policy options. I also have no doubt that fiscal policymakers think about how their policies impact various income groups. For example, the whole idea behind “trickle-down” economics is that tax cuts motivate those at the top of the income distribution to undertake new economic initiatives that benefit working class households.

Related: Yellen Says Many U.S. Families on the Edge of Disaster

Somehow, by helping those least in need of help – the wealthy – we will end up helping those who need it the most. It hasn’t worked in practice -- not much trickled down after all, but that hasn’t stopped conservatives from making these claims. Conservatives also think about the impact of fiscal policy on lower income groups and use this as a reason to block or scale back programs such as unemployment compensation or food stamps.

The assertion in this case is that social insurance programs cause lower income workers to stop seeking employment and instead live off of the money they receive from the government even though there is very little evidence to support this reason for blocking these programs.

In the past, those on the political left held a different view, that these programs provide critical help to those who are least able to weather an economic storm. Democrats still say they believe this, but judging from their actions during the Great Recession it is hard not to conclude that they too have forgotten about working class households.

Related: Many Long-Term Unemployed Still Reeling from Recession

Why do we hear so much about the need to raise interest rates now rather than later, or get the deficit under control immediately despite the risks to households who are most vulnerable to an economic downturn? Those who are most in need – those least able to withstand a spell of unemployment or other negative economic events – have the least power in our political system.

With the decline in unions and other institutions that used to give workers a voice in the political process along with rising inequality that gives even more power to those at the top, the problem is getting worse. No wonder policy has been tilted so much in favor of those at the top. Fiscal policy in particular has been far too responsive to the interests of those with political power rather than those in greatest need.

If we are going to be a fair and just society, a society that protects those among us who are the most vulnerable to economic shocks, this needs to change. The necessary change won’t come easily, the entrenched political and economic interests will be difficult to dislodge.

But the current trend of rising inequality in both the economic and political arenas along with the rising economic risks faced by working class households due to globalization, technological change, and a political system that increasingly neglects their interests is not sustainable. If these trends continue unabated, change will come one way or the other. The only question is how.

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