Political Economy of the Zero Bound?

Arnold Kling

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Tyler Cowen offers a theory.

The greater the number of protected service sector jobs in an economy, the more likely those citizens will oppose inflation. Inflation brings the potential to lower real wages, possibly for good.

The wages that are stickiest downward are those in the public sector. The only way to lower the wages of teachers or other government workers is through inflation.

Note that in the last several months, the government sector has been shedding jobs. The alternative, as I have said many times, is to cut pay. But that is unthinkable.

If you are in this protected sector, and particularly if you are employed by a state university, you personally benefit from more government spending. You personally are more likely to be hurt by monetary expansion.

I think this is true of many workers in what Tyler calls the "protected service sector." Thus, the political economy predicts that these folks will be very sympathetic to the argument that there is a "zero bound" at which monetary policy is not the answer, and only fiscal policy can help.

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CATEGORIES: Monetary Policy , Political Economy , Politics and Economics

COMMENTS (3 to date)

Latest Comment

david writes:

Don't public-sector unions frequently negotiate COLA into their agreements, so inflation will not, in fact, reduce even real wages?

Public-sector retrenchment or wage reduction all require confrontation with unionized labour. This happens more easily in some places than others, of course.

Posted April 5, 2012 8:00 AM

Ted Craig writes:

Cutting staff rather than lowering wages is a great political tool. It scares people: Your house will be robbed because there will be fewer cops! Your children will be stupid because there will be fewer teachers! Approve this millage now!

Nobody will vote to raise somebody else's individual pay. They will vote to maintain payroll.

Posted April 5, 2012 9:37 AM

Steve Sailer writes:

That's what my economics professors at Rice U. said in the late 1970s: inflation was pushing the non-economics professors to the right. Inflation was running 5 to 10 percent per years. The college wouldn't cut their pay in nominal terms, but was happy to let their pay go down in real terms by giving them only very small raises, so suddenly the anthropology professors wanted to crack down on inflation.

Posted April 5, 2012 11:29 PM

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