The Middle Class, Macro, and TinkerBell

The middle class has become one if not the major concept for the coming US election. Both parties attempt to capture it. VP Biden almost cried as he described in his debate his oneness with the middle class. His opponent Ryan was cooler as he claimed his party knows the right ways to help the middle class. It is clear that both sides need more middle class voters to win the coming election.

While middle class comes up in many different campaign and policy issues it most often comes up in the context of the budget – whether controlling entitlement spending or extending the Bush tax cuts – the focus always comes back to the impacts on the middle class. The Democrats want to continue these entitlements and possibly expand them while mostly paying for it with higher taxes on the rich. Let’s call this the direct approach to helping middle class at the expense of the rich.  The Republicans think the middle class is better served in a low tax rate environment, with stronger control over debt, and resulting higher economic growth. Let’s call that the indirect effect because it believes that hurting the rich eventually ends up hurting the middle class.

While the above position descriptions are brief I hope they reasonably and fairly connect the topic of middle class with typical macro policies. If the above already inflames you then I am in big trouble.

The above is meant to reveal or present a strong connection between what I would call the fiscal policy debate and the status of the middle class. Admittedly I am getting old and forgetful but my recollection of my economic education is that there is no strong and clear theory that relates macroeconomic policy and the middle class. In fact, take out any successful macro text book – freshman level or advanced graduate – and I doubt you will find a chapter or a section on macro policy and the middle class. In fact, you might not even be able to find a paragraph.

A little personal history may help put further light on this. I may have more credit hours in economics than any human being or reptile alive. I took a lot of econ as an undergrad at Georgia Tech. After Tech I was lucky enough to draw the short straw that sent me into the US Air Force for four years. While stationed in Arizona I took all the courses to receive an MA in Econ from the University of Arizona. Go Wildcats. Upon release from the USAF I went back to GA Tech and completed an MS program in Economics. Even more courses! Go Yellow Jackets. That’s when I decided to get a PhD at the University of North Carolina – and took courses for another three years. While at UNC I participated in a non-credit activity called the Macro Workshop. That workshop met once a week – even in the summers – for three years. Go Tarheels.

Your response might be – Larry – you are a very slow learner. And I would find it very hard to disagree with you and we can make that the topic of my next blog. But the point is in ALL THOSE COURSES I never ran into a course or a chapter or a topic called “Macro Policy and the Middle Class.”

This is important because it shows that all the so-called political and economic experts (you know who you are Paul Krugman) are just making this stuff up. Both sides of the aisle are making this stuff up as if it were a fairy tale. Take any macro model you want from any macro course you desire. It can be Keynesian, Monetarist or Gangnamian. Look at IS-LM curves, AD curves, AS curves or whatever – there is no middle class curve. Look at independent, dependent, or mutually dependent variables – there are no variables for middle class. There are equations for such things as output, employment, interest rates, consumer spending, business spending, etc – but there is NOTHING representing the middle class.

Larry you are screaming! Okay I took a big breath. That feels much better. Thanks. If I had taken Marxian Macro or if I perhaps had paid a little more attention to some specialized literatures in economics I might have found some theories and models about class and distribution of income. And you know what – I am not saying that distribution of income is not an important subject. It is important. It is very important.  And we should focus on it in a very direct and objective way.  But that is very different from two parties acting as if they had some great insights into how to improve the lot of the middle class via entitlement spending and tax rate changes. They know squat and they are using us in their frequent misleading and thoughtless conjectures about how their policies will impact the middle class.

This reminds us of what macro does. Most of what macro does is to help us better understand changes in key macro indicators like economic growth, inflation, interest rates and exchange rates. It does it in models that represent behaviors of consumers, workers, owners, foreigners, and the government. It mostly filters or tracks their behaviors by examining markets for consumer goods services, new housing, business structures and equipment, stocks, bonds, labor, and foreign exchange. That is macro and let’s admit – that’s a lot. 

Macro does not tell us about energy and food. It does not explain why companies move from north to the south. It does not tell us what causes poverty and why people give to charity. It does not discriminate the wages or the dividends or other sources of income for the middle class or the rich.

What politicians are doing is starting with bonafide macro and then adding fairy tales. Their passionate speeches make it sound like it all fits together and sound like a good story but they have nothing real to back it up. It is hot air. It is like when your doctor tells you how to improve your golf swing. He knows some anatomy but if he isn’t a golf coach I am not sure he has that much to offer.

The upshot about all this is that, again, these politicians create false debates to get us riled up and to distract us from their deficiencies. I wish we could get rid of the whole lot. We have real poverty issues in this country that need resolving. We need to improve education and job opportunities and economic growth.  We need stronger financial institutions. We need regulatory transparency. We need a smaller national debt. We need a lot. But instead of getting the tiniest amount of real analysis or policy we get Tinkerbell stories that have no basis in reality. Now where is that JD when I really need it?