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By E. J. Dionne Jr.
Friday, November 17, 2006

Democrats might usefully take a break from their inane round of back-stabbing and score-settling to focus, for a few moments, on why voters gave them their congressional majorities. A lot of Americans are hurting in the pocketbook, and if Democrats don't use the next two years to help them, the party will squander the trust it has temporarily earned.

To prepare for next year, the Democrats (and those Republicans who want to revive their party) should read a truly remarkable speech that Janet Yellen, the president and chief executive of the Federal Reserve Bank of San Francisco, gave the day before voters went to the polls.

In plain language backed by sophisticated analysis, Yellen makes clear that voters who feel severe economic pressures are not deluded, despite the economy's strong performance in keeping down unemployment and inflation.

The reason: new forms of inequality that don't fit into our conventional understanding of how the economy works. She argues that "much of the gain from excellent macroeconomic performance has gone to just a small segment of the population -- those already in the upper part of the distribution."

Yellen tells unfashionable truths. She does not claim, as many conservatives and free traders do, that globalization and the decline in union membership are innocent in the inequality saga. "Globalization and skill-biased technological change may have been working in combination to particularly depress the wage gains of those in the middle of the U.S. wage distribution," she says.

Note the word middle. That's where the biggest negative impact of globalization is being felt. At the top, Yellen says, globalization has been helpful to "highly able workers performing non-routine work requiring problem-solving skills." In the middle, "technology and globalization had the opposite effect -- substituting for workers performing routine or repetitive tasks and depressing their wages."

By the time we reached this decade, "many low-wage jobs that could be eliminated by technology had already vanished." That means the remaining jobs "involve manual and service work that cannot easily be automated."

As a result, "wages in the middle not only rose far more slowly than those at the top, they also rose more slowly than those at the bottom of the distribution."

Yes, there is a middle-class squeeze.

People at the bottom of the economy need help, which could come from an increase in the minimum wage, guaranteed health insurance, expanded wage subsidies through the earned-income tax credit and unionization.

But for the left-out middle, which rebelled in large numbers last week, the answers are more complicated, though no less urgent.

Job training and education are always touted as the answer. Yellen is all for them. But they are no cure-all, because Yellen notices something else that many others have ignored: Even the better educated are now being hit by globalization and technological change.


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