I have often argued that neoclassical macroeconomics is obsessed with class—and biased against the working-class—even when class is not explicitly represented in the models. That’s because, as I explained here,
neoclassical economists blame workers and their downwardly rigid wages for creating and maintaining high levels of unemployment. If the labor market is flexible, a fall in the price of labor is presumed to eliminate involuntary unemployment. If it’s not, then other means are necessary, such as austerity policies that raise unemployment, thus creating pressure to decrease nominal (and, with them, real) wages with the promise of eventually restoring full employment.
As it turns out, Mark Thoma also understands that macroeconomic policy has class implications.
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. . .
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.
And, of course, one of those possible changes is for the working-class to abolish class entirely.