I recently listened to a talk on "Inequality and Institutions" in America at the New America Foundation. (Sadly Brookings and Center for American Progress only seem to have videos that don't work on my 2 year old iPod mini.) The talk was given in June of 2007 by Levy and Temin, a pair of MIT economists about a paper they were working on showing that the decoupling of productivity and wage growth was linked to the breakdown of the New Deal "Treaty of Detroit." In short, institutions such as unions matter in terms of economic distribution.
One anecdote particularly stuck with me, though unfortunately I don't know who to attribute it to as the speaker only identified himself as being, "one of the oldest people in the room." Anyway, this story is definitely out of a different world.
President Kennedy wanted to stimulate the economy but was worried about inflation. He had quite a bit of political capital with the head of the Steelworkers. Their contract was up and Kennedy was able to convince them to make significant wage concessions.
Shortly after, U.S. Steel raised prices by $6 per ton and was soon joined by other major steel manufacturers. In response, Kennedy called a press conference. He called the price rise a betrayal of the national interest and basically he said that he would use all tools at his disposal to punish the companies.
Can you imagine a president doing that today? Never! Any attempt to arbitrate a social contract would be an interference in the free market. Perhaps with work such as the study above and Krugman's recent book the country is slowly returning to the awareness that politics and institutions do change economic outcomes.
I've been wondering. Why is it that a politician that ignores the economists is labeled a populist while economists who ignore politics get tenure and win the Bank of Sweden prize in Honor of Alfred Nobel?
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