Matt Yglesias's Odd Political Economy

Matt Yglesias often makes intelligent points, but this post might be too cute by a half. He says the goal of monetary policy in the last few years has been "has been to do just enough to stabilize financial asset prices without going far enough to produce catch-up growth in the labor market." This isn't so crazy, but then he goes on to say: "What’s more, from the point of view of capital maybe it’s better not to catch up. As long as growth is positive and unemployment isn’t rising then maintaining a large 8-9% of the labor force out of work could be a useful tool of wage restraint."

How does "capital" benefit from high unemployment? There are some people who are primarily investing in bonds, or who have fixed incomes, and such people may like the idea of zero inflation or even deflation. Maybe lenders like this as well in some cases, though I'm not completely convinced. But generally, holders of financial assets, perhaps especially the wealthy among them, will be owners of stocks, real estate, etc. Why would such people oppose a little inflation? And why would a business owner want 8-9% unemployment, which is presumably coupled with unimpressive sales? I've never heard of someone who preferred a weak economy to a strong economy so that he could "restrain" wages. Basically, both employees and employers are fighting over the same pie (the revenue of their company), but presumably they want that pie to grow. Allowing the size of the pie to shrink or not to grow and then hoping you can consistently out-bargain your employees for a larger share of the pie does not seem like a reasonable or sustainable strategy for employers. Eventually, the employees leave.

Scott Sumner has a good take down of this sort of thinking.