The encouraging jobs reports from the Bureau of Labor Statistics (BLS) over the past few months has given the Fed the predictable jitters about inflation. This is unfortunate because unemployment worries still exist while inflation concerns, even according to the views of some ranking Fed officials, do not! October's jobs report noted an additional 214,000 non-farm payroll jobs added to the US economy while that of September showed that over 248,000 such jobs were added that month. Currently, the official unemployment rate is down to 5.8%. Considering that official unemployment peaked at just over ten percent only a few years ago this is very good news though it seemed to proved political inconsequential in the off year election this November.
One reason could be that so little has changed for America's economically embattled middle class. According to one evaluation by the Chicago Political Economy Group;
Based on unrealistically low federal guidelines, 45.3 million Americans survived in poverty last year. Based on this figure, the poverty rate was listed at 14.5 percent, with poverty-level income set at $11,888 for a one-person household, and $23,834 as the poverty threshold for a family of four. In 2013, 19.9 million people lived in families with an income below half of their poverty threshold. The poverty rate for children was nearly 20 percent, i.e. more than 14 million children in the country live in poverty. Median household income in 2013 was $51,939, essentially unchanged from the 2012 figure of $51,759. But real median household income was eight percent lower in 2013 than it was in 2007 and 8.7 percent lower than the 1999 peak of $56,895. Since that year, incomes in the 50th and 10th percentiles have declined 8.7 percent and 14.3 percent respectively, while there was not a decline, as we might have expected, in income at the 90th percentile.
This is the picture that is politically relevant and not simple job numbers or even the fact that more than the eight and a half million jobs lost in the Bush depression have been replaced. The "recovery" has seen a rapid increase in profits but not in wages or the inflation adjusted level of average incomes which are below the historic peak of the late 1990s. The inflation adjusted level of the current minimum wage is still below its peak in the early 1970s before double digit inflation began to set into the economy. But this has more to do with the anemic growth of wages than with prices changes; core inflation remains below the Fed's two percent annual growth target. This is not the fault of the Obama Administration which has consistently pushed for an increase in the Federal minimum wage to $9/hour where it would at least match the inflation adjusted peak from the early 1970s. Resistance from big business and their GOP allies is the main reason the efforts of Obama and his progressive allies have not succeeded in their recent efforts.
Even under Janet Yellen, an inflation "dove" by the standards of past Federal Reserve leadership, the Fed seems unduly preoccupied with inflation. James Bullard of the St. Louis Federal Reserve, who only recently advised that the Fed should continue its quantitative easing policy to avoid the inflation rate falling below the Fed's target, now looks forward to a modest short term interest rate increase to head off possible inflation pressures. Fearing that lower oil prices, strong jobs data and a lift in consumer spending, Bullard sees a modest increase in short term interest rates in the first quarter of 2015 as justified. Reuters has recently quoted Bullard, who doesn't have a vote on the Fed's Open Market Committee, as saying, "While a low inflation rate may suggest a somewhat lower-than-normal policy rate, that effect is not large enough to justify remaining at the zero lower bound..." The Fed has always been the ally of big banks and big business not only in fighting inflation but in using recessionary conditions to keep wages in check. So far they have been successful. But a fierce political struggle could be shaping up with roughly one third of US households, or what has been officially referred to as "the working poor" (those households at or below 200% of the federal poverty line according to an analysis by social policy researcher Shawn Fremstad of 2010 US Census Bureau data), demanding wages be increased to a living wage all across the country!
Economist Dean Baker has recently critiqued impending Fed efforts to cut real wages by raising interest rates in order to raise unemployment by slowing GDP growth. It is clear that the Fed not only prioritizes inflation control over employment growth but also sees its mandate as controlling wage growth on behalf of capital. Baker asserts;
There are many powerful people who want to keep...wage gains from happening. Immediately after the jobs report was released, James Bullard, the president of the St. Louis Federal Reserve Bank, was on television insisting that the Fed had to start raising interest rates. Bullard complained that the Fed was behind schedule and needed to slow the economy to prevent inflation. There should be no ambiguity about what Bullard was saying...Bullard wants to see the economy slow because he doesn’t want to see more workers get jobs. This is because when more workers get jobs, it will increase their bargaining power and they will be in a position to demand higher wages. This is exactly the inflation that worries Bullard. If workers are getting higher wages then we will see more inflation than in a situation where wages are stagnant. Bullard wants the Fed to slow the economy so that wages remain stagnant...Unfortunately, he is a member of the Fed’s 19 person Open Market Committee that decides interest rate policy. Several of the other district bank presidents who sit on this committee have expressed similar views.
This is not just another rant about how one of the Fed's key roles in the economy is to hold down wages and middle class incomes to raise business profits and protect the financial assets of banks and the rich; I believe that our historic experience in this country, particularly the protracted Volcker recession of the early 1980s which deindustrialized the US economy to a great extent, is sufficient proof of this claim. It was well known that the Volcker recession was aimed as much at weakening the bargaining power of unions-which were blamed for much of the inflation of the 1970s-as anything else. In fact, according to one source,
Fed Chairman Paul Volcker actually saw his mission as one which would permanently weaken unions;
Fed Chair Volcker apparently regarded the outcome of union negotiations as especially significant from a macro viewpoint. To Volcker, the foiled Professional Air Traffic Controllers Organization (PATCO) strike – in which President Reagan fired and replaced the strikers - was a blow to inflation. He saw a direct impact on subsequent wage setting and inflationary expectations. According to Volcker, “The significance (of PATCO) was that someone finally took on an aggressive, well-organized union and said no.” Volcker regarded the PATCO outcome as having “a psychological effect on the strength of the union bargaining position on other issues – whatever the issues were.” (Neikirk 1987, p. 110) In short, Volcker viewed affecting union wage determination through monetary restraint as important for the Fed’s disinflation campaign. One commentator characterized the Fed chair’s view as founded on the idea that “inflation would not be securely defeated...until all those workers and their unions agreed to accept less. If they were not impressed by words, perhaps the liquidation of several million more jobs would convince them.” (Grieder 1987, quote on p. 431; discussion on pp. 429-431) Others at the Fed apparently had similar wage-push ideas. (Grieder 1987, p. 454
The Volcker recession brought
union density down from about one quarter of the US workforce to just over 15% in the late 1980s when Greenspan became the new Fed Chair. Total US workforce union density hovers around 12% currently. Ever since the end of the Volcker recession, average real incomes in the US have been in decline over time. The shift of income from labor to capital was as much the work of the Fed as the capital/labor relationship itself since the Fed is an obvious ally of capital in the ongoing US class war.
I do however, believe that in a time of much crackpot thinking, significantly pushed by Ron Paul and his followers, that the Fed somehow promotes inflation on behalf of banks (a crazy idea if ever there was one!), one must speak the truth especially when the issue starkly presents itself.
Saying that banks benefit from inflation is like saying that the environment benefits from massive carbon emissions. In both cases the latter is highly toxic to the former. Inflation cheapens debt and destroys the value of the one thing banks have; money and financial assets with fixed interest rates denominated in dollars. This is the reason that banks fight inflation so tenaciously; their asset values are inflated away as prices rise in response to growing effective demand for goods and services. This is why there has always been a political fight over inflation vs. unemployment. Historically, workers have always lost out to the financial sector and big business in general, not because of inflation but because of the exact opposite; the fight against inflation lowers wages by creating recessions and unemployment.
According to the BLS, average monthly job growth between the end of the third quarter of 2013 and the start of the fourth quarter of 2014 was about 222,000 which is unprecedented since the late 1990s when the Clinton Administration presided over the creation of millions of jobs per year not seen since the 1960s. The NYT reported that over 10.3 million private sector jobs were created for fifty five months straight since the first quarter of 2010 when the job market began to recover in earnest. This has doubtless caused financial markets and big business worries not only about inflation but rising real wages and thus, diminished corporate profits. But according to more recent NYT report;
"...the report also found that wages were rising only slightly faster than the rate of inflation, fueling the debate over just how strong the labor market really is. Over the last 12 months, wages are up just 2 percent, which helps explain much of the disconnect between increasingly cheery assessments from many economists and the public’s continuing discontent. “We are adding jobs, but it is still a wageless recovery,” Elise Gould, an economist with the left-leaning Economic Policy Institute, said, adding that average hourly earnings rose only 0.1 percent in October after no gain in September. “The economy may be growing, but not enough for workers to feel the effects in their paychecks.”
It is very clear that big business is seriously in doubt regarding just how long GDP, consumer spending and employment growth can continue without a concomitant rise in real wages. And this is probably the reason that the Fed is considering applying the breaks, as it did suddenly in 1999 and 2000 under Allen Greenspan, with higher short term interest rates. Greenspan's rate hikes at the time brought down average real wages (in the midst of an unprecedented ten year economic expansion) for the first time in 14 years, according to economist
John Miller. The rise in overall economic growth usually threatens profits with the upward pressure on real wages that usually follow these economic trends. It is for this reason that Fed policy tends more toward recession than inflation; in addition to controlling prices, it also protects profit margins from real wage gains.
Thus, the Fed is usually overcautious about inflation. Unemployment is a small price to pay to keep price levels to an annual average of under two percent. But the economy and the majority of households pay the price. Janet Yellen's recent Jackson Hole speech was quite sanguine about the "labor market recovery" noting the dramatic drop in official unemployment rates and the unprecedented high levels of average monthly private sector job creation over the past year as compared to previous periods of this recovery. But Yellen also noted that the continued slack in the labor market is hard to interpret and that real wage growth may remain low despite increases in employment. This is because of what Yellen calls "pent up wage deflation" which refers to the fact that wages actually bottomed out during the height of the recession and couldn't be further reduced to reflect former high unemployment conditions giving employers the ability to currently keep nominal wages stuck where they are even as the economy recovers. This secular trend in real wage decline is actually harming the recovery more than is actual unemployment.
Yet Yellen anticipates the distinct possibility that real wages could eventually rise and create cost push inflation by raising unit labor costs which have been low for years. True, current federal open market committee (FOMC) expectations are that little will change in the very near future. But as Yellen makes clear, any sudden rise in real wages will be met by swift counter action by the Fed, probably in the form of abandoning its zero bound interest rate policy. Some of Yellen's concluding remarks bear this out;
"...if progress in the labor market continues to be more rapid than anticipated by the [Federal Open Market] Committee or if inflation moves up more rapidly than anticipated, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target could come sooner than the Committee currently expects and could be more rapid thereafter."
As in the late 1990s, sudden rapid real wage increases resulting from sharp upward trends in GDP and income growth will be met with interest rate hikes to "cool the economy down." The Fed's historic bias favors the inflation control part of the "dual mandate" over full employment.
The Fed's use of monetary policies such as the recent purchases of US Treasury debt to hold down interest rates has not stimulated GDP growth very much. As Keynes famously remarked, such monetary focus in a time of low effective demand amounts to "pushing on a string" which is to say highly ineffective. It is clear that the far right domination of the US Congress will prevent another round of fiscal stimulus. However, this is just what is needed. The long term collapse of US purchasing power is the real issue. Economist Jeff Madrick explains;
For a few decades now, American economic policy has focused on keeping inflation low, assuming that the natural rate of unemployment is fairly high. In general, that has led to stagnating wages. Family income today is at 1990s levels. Adjusted for inflation, hourly wages are at levels they last reached in the 1960s. The wage share has been falling...It is time to talk about the importance of high wages to sustainable growth in America and Europe -- indeed, in most countries around the world...I'd also argue that the U.S. had a low wage policy to fight inflation, which had become public enemy number one in the minds of even the most sophisticated economists since the 1970s. These economists persistently over-estimated the so-called natural rate of unemployment, which gave the Federal Reserve justification to keep rates up to suppress inflation. In practical fact, the Fed under Alan Greenspan was mostly appeasing bond markets...But at the center of the issue are low wage shares and inequality. And one reason the world's policymakers, technocrats, and economists don't think about it clearly enough is that they focus too much on "supply" as the principal source of economic growth...They focus far too little on "demand" as a source of economic growth. So here is the brief version of this case. To simplify, aggregate demand must be strong enough to utilize the full productive capacity of a nation in order to optimize growth and keep unemployment down. Demand is largely consumption, which in turn is mostly a product of salaries and wages. In other words, wages must be high enough to support demand for goods and services.
Thus, in the words of economist Lance Taylor, we need wages led growth instead of "profit-led" growth. Researchers have decried the global trend in the declining wage share in the overall economies of the advanced capitalist countries. They convincingly argue that such a decline has created a long run demand constraint on economic growth. In other words, it has created secular stagnation in the global economy. What is clear is that the higher profit share has
not led to more rapid job creating investment and growth thus debunking the main thrust of supply side economics. One interesting policy paper published by economists with the
Political Economy Research Institute reviews some of the recent research on the effects of profit/wage share shifts over the past three decades and the effect on macro-economic growth rates. Here are some of the findings;
Onaran and Galanis (2012) is the only study in the literature which estimates the effects of simultaneous changes in the profit share in several countries, thus not just an isolated change in one single country. Based on estimations of country specific behavioral equations for the components of private aggregate demand for the 16 developed and developing members of the G20, they simulate the effects of a simultaneous pro-capital redistribution of income, i.e. a 1%-point increase in the profit share. Their results show that a simultaneous decline in the wage share in these 16 countries leads to a decline in global growth. Furthermore, Canada, Argentina, Mexico, and India, who are profit-led countries in isolation, also contract when they decrease their wage-share along with their trading partners, thereby being exposed to the effects of decreasing import prices on net exports in a simultaneous race to the bottom scenario. When these countries implement a similar wage competition strategy, the expansionary effects of a pro-capital redistribution of income are reversed as relative competitiveness effects are reduced and world GDP decreases. According to Onaran and Galanis (2012), the contraction in private excess demand in the originally wage-led countries (Euro area, UK, US, Japan, Turkey, and Korea) is much deeper in the case of a global race to the bottom than what would have been in the case of a nationally isolated pro-capital redistribution process. The Euro area, the UK, and Japan contract by 0.18-0.25 per cent and the US contracts by 0.92per cent as a result of a simultaneous 1%-point decline in the wage share; in the developing world, the two wage-led economies of Turkey and Korea contract at very high rates - by 0.72 and 0.86 per cent respectively (Onaran and Galanis, 2012). Australia, South Africa, and China are the only three countries that can continue to grow in the context of a simultaneous global decline in the wage share. Even in these countries, however, growth rates are reduced in comparison to a generalized regime of expansion. Overall, Onaran and Galanis (2012) find that a 1%-point simultaneous decline in the wage share in G20 leads to a decline in the global GDP by 0.36%-points. Finally they simulate the effects of an alternative scenario of a simultaneous wage-led recovery in the G20 as opposed to a race to the bottom: if all wage-led countries (Euro area, UK, US, Japan, Turkey, and Korea) return to their previous peak wage-share levels (e.g. as in the late 1970s), and moreover if all originally profit-led countries (Canada, Australia, South Africa, China, Argentina, Mexico, and India) increase their wage-share by 1-3 per cent -points, all countries could grow and the global GDP would increase by 3.05 per cent.
It is fairly clear that the neo-liberal supply side policies of the last three decades have slowed the overall growth of the world economy and that of the largest capitalist economies significantly. It is also clear that the race to the bottom in the
"beggar thy neighbor" competitive wage reductions only slow global economic growth by worsening demand constraints. One country's wage levels is another country's export market and lower wages only shrink demand and lower investment regardless of the rapid profit growth this helps create. Wage suppression has not succeeded in raising growth. Export markets eventually decline as a consequence of global wage compression.
One of the problems caused by the ongoing excessive preoccupation with inflation was that countries like Germany suppressed wages in order to restore their export competitiveness in manufactured goods and regain their trade surpluses lost during the 1990s. Germany recycled its trade surpluses through the bond markets of its Eurozone trade partners much like China does with the US. The eventual consequence of such debt driven growth was the Eurozone debt crisis of recent years! Contrary to popular perception, the crisis didn't start with government deficits but from trade imbalances caused by the "beggar thy neighbor" practice of competitive wage reductions primarily by surplus countries like Germany. Inflation control thus caused an even worse long term crisis that could have been avoided by a more balanced wage growth led economic policy for the Eurozone.
Further indulgence of supply side economics seems futile. In essence, boosting consumption through real wage increases will stimulate growth. Three decades of redistribution of income from wages to profits have led us to the secular stagnation we experience currently. Empirical data abounds but according to Business Insider's analysis of recent Fed data, in 2012, US corporate profits as a share of GDP approached a record 11% while the wage and salary share of GDP slide to a mere 44%, the lowest its ever been in the post-WWII period! The slow growth we experience is most likely due to growing income inequality and the resulting constraints placed on effective demand.
Those in the Fed that still fear inflation is just around the corner should consider a WSJ report of late which pointed out that;
The dollar, as measured by the Fed’s broad dollar index, is up 6.7% in value compared to the world’s other currencies. Meantime, the price of gold, which some investors believe should rise when inflation fears pick up, has fallen from $1730.60 per ounce to $1229.20, a 29% decline.
Some economists, like Paul Krugman, have famously advocated that the Fed actually spur some modest inflation as a solution to the current stagnation. Recalling FDR's successful early reflation of the US economy after taking office, Krugman believes that a modest increase in core price levels will act as a signal to increase production by countering deflation and a spur to consumer spending by cheapening debt while discouraging saving. One Time article from two and a half years ago quotes Krugman as saying, "Higher expected inflation would aid an economy up against the zero lower bound...because it would help persuade investors and businesses alike that sitting on cash is a bad idea.” Though then Fed Chairman Ben Bernanke condemned such ideas as "reckless" it is also a fact that he once suggested the very same cure for the protracted Japanese stagnation/deflation problem.
One reason that inflation is so low and will remain so into the foreseeable future is that demand for goods and services, the only real determinant of price levels, has remained low due not only to declining real incomes but to continued household debt overhang from the financial crash. Fed pronouncements that it will raise the short term interest rates (despite the rising strength of the dollar and falling gold prices) if unemployment falls very far below 6% (what many economists see as the "non inflation accelerating rate of unemployment) or if core inflation goes above the modest 2% target rate is absurd and will only cut off the very modest income growth experienced by the growing numbers of working poor in America. It will also reverse the fragile economic recovery. But of course, the Fed's real mandate has always been interpreted by its leadership and its member banks to be the protection of Wall Street over Main Street.