Thursday, September 29, 2016

Larry Summers on the decline of the middle class

Summers at the WaPo - decline of the middle class is causing economic damage. Short quote:

I have just come across an International Monetary Fund working paper on income polarization in the United States that makes an important contribution to the secular stagnation debate. The authors — Ali Alichi, Kory Kantenga and Juan SolĂ© — use standard econometric techniques to estimate the impact of declines in middle class incomes on total consumer spending. They find that polarization has reduced consumer spending by more than 3 percent or about $400 billion annually. If these findings stand up to scrutiny, they deserve to have a policy impact.

This level of reduction in spending is huge. For example, it exceeds by a significant margin the impact in any year of the Obama stimulus program. Alone it would be enough to account for a significant reduction in neutral real interest rates. If consumers were spending 3 percent more, there would be scope to maintain full employment at interest rates much closer to normal. And there would be much less of a problem of monetary policy’s inability to respond to the next recession.

Well, the gig is up. Here I thought a childishly easy Ph.D. thesis would be the quantification of exactly how much right-wing government policy is responsible for secstag: now everyone's writing about it.

Oh well. Maybe I can use this for my undergrad Political Economy essay this winter.

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