Not the whole story

From a random econoblogger:

One way to think about the political economy of macropolicy is to divide people into two camps, those who are motivated primarily by threats to income and those by threats to wealth.  (I will emphasize threats rather than enhancements for simplicity, and in recognition of the force of loss aversion.)

Threats to income take the form of unemployment, wage loss and the loss of public benefits (the social wage).  The policies attractive to this group are generally Keynesian: looser fiscal and monetary policy, measures to increase wages, and other interventions to prevent the economy from producing below its potential due to insufficient demand.

Threats to wealth take the form of inflation and default.  The policies these people are drawn to are what we usually call orthodox: tight monetary policy, restrictions on new borrowing (particularly by the public sector) and hostility to measures that would reduce the profitability seen as underlying asset and credit markets.  The latter often comes dressed as labor market flexibility.

This is a variant of the theory of a net-savers bloc as the deciding force in U.S. policy (and elsewhere). Put in these terms, it becomes particularly clear that there's something missing from the account. Ok, so there's a large group of the population that depends on ongoing income, above all based on employment but secondarily on state action. Note that these two are not exactly the same, and also that in addition to Keynesian macro-economic stabilization, this group also probably has an interest in greater intervention in the labor market (or greater state provision of services outside the labor market) even in the best of times.

The other group is supposedly concerned about threats to the value of financial assets, especially fixed-income assets like bonds. Yet here again, he sneaks in the slightly different concern about profitability, which in turn motivates an interest in labor market flexibility.

What's missing is a recognition that the balance between profits and labor is a powerful, independent issue. The fact that this maps onto the income/asset value preference distinction so closely--as is implicit in his slightly heterogeneous description of the two--is an accurate reflection of the current political climate, but it doesn't really explain it. As he says later: "Do these perspectives correspond to class interests?  Yes and no. . . . There are high income individuals, for example in upper-level management positions, whose vulnerabilities arise far more from their future employment prospects than their portfolios." Except that insofar as he's baked the profit rate into the "wealth" side means that even executives with relatively little financial wealth (ha) will be strongly inclined toward that side. Yet, remove that stipulation, and it does seem as if in principle corporate management could do either way. Indeed, they did go the other way for 3 decades after WWII.