There's a dirty little secret about Alan Greenspan - he's a neo-Keynesian. Perhaps one who is ardently partisan of the Republican Party and willing to kneepad for war, repression, religious fundamentalism, darwin denial and human rights abuses - but economically, the Federal Reserve has ignored monetarism for quite a long time. Instead, the Fed minutes are filled with worries about higher wages leading to demand pull inflation, and occasionally with resources leading to cost push inflation.
There's something that's less of a secret about the fed: the Federal Reserve hates you.
[Oh yes, my Katrina CD just got a kind mention from composer critic Steve Hicken.]
Uncle Alan has given lots of breaks to George Bush, allowed inflation to run hot under an easy monetary policy, undertaken inflationary risks to raise rates slowly and avert even a modest slow down. He has shilled for a budget policy which is a monument to innumeracy.
But the people who aren't going to catch an even break from Greenspan are workers. Because if you read the Fed statements over the years, a pattern crops up. As far as they are concerned, a tight labor market is the cause of inflation. That is, when people are feeling good, the Fed feels bad. That's why they love this expansion - recovery for the rich, recession for the rest of us. No labor pressures mean that GDP can expand, without people's real wages going up.
But yesterday's interest rate hike takes the cake - it blazes a new trail in work bashing by the right wing. You see, they are openly fretting about the labor market getting tight - when real wages have been falling. Now it isn't just that real wages have to be basically flat, or growing only slightly, the Fed is concerned that real wages won't keep falling.
This is why a great many of the proposals put forward from the left won't work. Because even if they managed to increase the prosperity of everyone who works for their money, which is much more than merely most of us - the Fed would just tighten interest rates and make those gains go away. It's real wages that the fed targets. This is why Bush's approval stayed higher than it should - he allowed an economic disaster so large, that the Fed had to fight that, rather than fighting real wages. But as soon as the crisis was past - the Fed was back on the job, keeping real wages down.
Now, if this were The Screwtape Letters I would say that Greenspan and company do this for fun. But it isn't and I don't think that Alan Greenspan takes a malicious joy in falling real wages in the United States. According to his statements yesterday he likes worker prosperity - at a safe distance. China's about far enough away.
Instead here is the reality, the limit to material prosperity is a series of bottleneck resources. That is, what's really ultimately scarce. Gold bugs may long for the good old days, but gold isn't ultimately scarce. In fact, if it were just for the industrial uses for gold, it wouldn't be worth digging out of the ground right now in most cases. Oil is at the top of the list, as is Natural Gas, which is oil in drag. Energy has become the key bottleneck because with the improvements in technology, making more with less, almost anything that is in short supply can be replaced by using energy to do it. Even people? Even people.
So this means that the Fed policy is to make sure that American consumption is in line with our ability to pay for what we buy. What we make though, isn't material goods, because those would eat up resources to, but promises. We sell stock and securities and assets and use them to buy oil. Basically, Greenspan's job has been to maintain asset inflation - because we sell that - and push down resource inflation - because we buy that. He's regarded as a genius because he's managed to do that longer than almost anyone dreamed possible. This is the "American Thermidor" vicious circle - the more energy we import, the more assets we have to sell, which means the more pressure there is on wages, which means we cut taxes, which means we don't invest in getting out of the cycle, and have to buy more oil...
However, there is a problem, a big one. Ultimately the assets we sell are one of two things - a claim on future profits, or a claim on things we own. Future profits have one of two sources - either they are the profits we make abroad, or they are the profits we make here in the US. Mostly they are US profits. However, both the income we get from foreign investments relative to what we pay out is dropping, and the real wages in the US are dropping. One can't sell more and more of the profits from wages, when wages are falling.
This is a long term financial pressure. You aren't going to wake up tomorrow and see a currency crash or market crash. Instead, what this forms is a long term headwind, a drag on the economy that will be paid for every day, week, month and quarter. It's a tax, because the government's policy is putting in place. Every year carrying the privileged on our backs gets heavier, every year the ability to do it - as the baby boom ages - gets a little less. Eventually the privileged hope that things will collapse down to the normalcy of the 19th century when people worked until they were dead and left behind debts for the next generation.
But whether that restoration of the "iron law of wages" is every possible, it means something simple. The US has less and less freedom of action. More and more of our economy is keeping Saudi Princes, who own large chunks of Fox News, Citibank and every other major corporation, happy. More and more our economy looks like what a Saudi royal wants, and what they want are things that are as profitable as oil wells. This distorts the economy, because the only thing that is profitable as rent, is other rent - or the hopes for other rents.
This is why I am very negative about drives for protectionism and protections for workers rights. There is nothing that you can pass that an interest rate increase can't take away. Protectionism of various kinds will help some people - and everyone will pay for it. Even some of the people who were protected.
The key to this situation is breaking the hold that scarcity has on the economy, this can only be done by the US assuming world leadership on the issues that create that bottleneck. And since our economy is number one on the list - we consume roughly 25% of the world's oil and gas for 6% of the population, and much of that isn't productive, but is, instead, part of our own never ending race to get ahead of the Jones' in the real estate wars.
The huge hole in the US economy is how much we spend running around. It is consuming much of our private investment, crowding out investment in what should, by rights, be the "wide and wireless boom" - that is, transitioning consumer electronics to wide screen and high definition formats, and creating an invisible net over the country where people are never out of touch.
There isn't anything we can do for this economic cycle - there is going to be a short period where people fill their big new houses with big new televisions, but that isn't going to create employment here. On the contrary, since we don't make the consumer electronics we are buying, it will lead to a situation similar to the early 1990's, when massive tax increases to pay for a financial bail out finally force an end to borrow and squander spending from the government, at the same time that inflation forces more interest rate rises from the Fed. America will spend a long time in the economic wilderness, not in recession, per se, but in an long bottom and a weak recovery. By the end of this - it will be 6 years after the recession starts more or less that a real recovery will be able to occur, Americans will have spent 15 years in the Bushconomy, and have nothing to show for it, but McMansions and rusting inflation wagons.
And a great deal of debt.
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So here is the deal, as long as we are addicted to oil, the Fed is going to make sure that we don't overdose on it, but they aren't going to break our addiction. That means that whenever real wages start rising, they will choke off the economy. We can only have prosperity at the cost of being impecuniary ourselves. Only people working in protected sectors of the economy, or at the very top, will see real wage increases. This will be paid for by other people getting, as Daniel Gross puts it "crammed down".
The solution to this problem is going to include a change of leadership at the Fed, but only as part of taking the bull by the horns and restructuring the economy so we are no longer hooked into the "American Thermidor" cycle. The cycle can go on for a while longer - at the cost of global warming and depleting oil reserves. After that we have to start investing huge amounts in new infrastructure to get lousy grades of oil, coal, and tarry goo into our gas tanks. This will cost more and more, and mean there is less and less for everything else in the economy. It will take place gradually, knocking a fraction of a percent off of growth and real GDP per year - but after two generations, that adds up to a huge amount. Long term bad decisions aren't always visible, but after two generations, one can see the nations that invested in the future, and the ones that stuck themselves in the past.
Since our current life style is predicated on the rest of the world believing we are going to create the future, if they decide we aren't they will leave. But they aren't going to do that until the are absolutely forced to by their own economies. When the Chinese can't shoot job rioters, they will float the Yuan and buy lots of oil to grow their internal economy - but not until then. When Europe is faced with slashing its own internal safety net to shreds, they will dump dollars and bolster the Euro - but not until then. But both of those days will arrive without changes to policy.
Remember, when you fall out of an airplane, the fall isn't so bad, it's that short sharp stop at the end.