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August 21, 2006

Objectively Anti-Worker

Speaking of inequality (as I was this morning), my boss Bob Kuttner has some good things to say on the subject:

The system is now essentially rigged so that workers' productivity can rise, but workers' incomes can't. A study prepared last month for Democrats on the House Financial Services Committee and released by Representative Barney Frank of Newton showed that since 2002 annual productivity growth has averaged more than 3 percent, while real wage increases have been under half of 1 percent. Corporate profits, meanwhile, have risen from 8.5 percent to 14.4 percent of national income.

Whenever wages show signs of rising with productivity, the Federal Reserve whacks them back down. It shows no such concern about corporate profits being excessive. Until this month, when the Federal Reserve announced a "pause" in rate hikes, our central bank had hiked interest rates 17 times since June 2004, citing fears of inflation, mainly in rising labor costs. But note the sleight of hand. If workers' wages are lagging well behind workers' increased productivity, then rising wages are not a source of inflation.

As the kids say: Word. The Fed's abject terror of wage growth is a rather unhelpful hangover from the stagflation era. But, in the same way that economists kept trying to deal with the problems of yesteryear then, they're missing the relevant economic issues now. This society is in no danger of paying its workers too much, or seeing their salaries increase too rapidly. Quite the opposite, in fact. We're facing down unheralded inequality, and the Federal Reserve can't pull its head out of 1978 for long enough to realize the middle class is evaporating, profits are amassing in a grotesquely disproportionate fashion, and America's workers -- particularly in a labor market this tight -- need a serious raise that isn't cut apart by rate hikes.

August 21, 2006 | Permalink



I'm a confirmed Krugman-ite on inequality issues. I believe it's relatively self-evident that a whole host of governmental policies can structure the economy so that it gets weighted towards the few at the top, or weighted towards a broad middle.

But I'm far less enthusiastic about Fed-bashing on the topic of tight money. The Fed has been raising rates to deal with inflationary threats, and inflation is just as much a threat to the middle as it is to the top.

Money is tight because of the Bush deficits. If we want looser money, we need to install a government that will have fiscal discipline. Blaming the Fed is like blaming the Fire Department for water damage after you've set your house on fire.

Posted by: Petey | Aug 21, 2006 5:38:43 PM

In short, loose money won't help workers if it leads to inflation. Inflation hurts workers.

The Fed is concerned about wage inflation as a component of overall inflation.

If we could have wage inflation without overall inflation, that would be dandy in my book. In fact, we saw such an outcome during the second half on the 90's, when the Fed was headed by the Rand disciple Alan Greenspan, who was no less concerned with wage inflation than Bernanke is.

The difference between the 90's and today is that because of the fiscal discipline of the day, the Fed was able to have an easy money policy without worrying about overall inflation.

The current tight money policy is justified even if you want to see workers get a bigger shared of the economic pie.

Posted by: Petey | Aug 21, 2006 5:46:46 PM

Money is not tight, unless you think real long rates around 2% are "tight".


Sigh. Know the data, kids.

Posted by: wcw | Aug 21, 2006 6:26:45 PM

"Money is not tight, unless you think real long rates around 2% are "tight"

Fed policy is a terrifically intricate subject, and the money spigot is governed by more factors than the single one you cite, wcw.

I think the Fed has indeed been implementing a moderately tight money policy over the past year or so. But, unlike Kuttner, I don't think they have any other viable choice in light of current fiscal policy.

Posted by: Petey | Aug 21, 2006 6:36:44 PM

er, I'm not terribly sure about the sophistication of Kuttner's analysis. I'm no economist, but I'm pretty sure that a reasonable person could disagree that there's any sleight of hand at all. Keeping down wages could also be a mechanism for keeping down spending, given that middle class workers are far more likely to spend their money than those at the top. That workers have been spending well beyond their means in recent years lends a further, albeit amoral, justification for keeping the pressure on their wages, namely, not letting that spending, already totally out of control, get further out of control, pushing up prices and then pushing up labor costs further. Maybe I'm missing something, but labor costs don't have to be the primary source of inflation for an increase in wages to have negative secondary or tertiary effects. In this case, stomping on wages is one surefire way of slowing down the economy. OK, it's totally amoral, but not, as you've written, some sort of shell game on the part of the Fed. But alas, I studied philsophy and German, so these things are over my head. Seems to me Petey has the right solution, keeping the government from blowing its wad all over the wealthy and powerful at everyone else's expense.

Posted by: Marc | Aug 21, 2006 7:16:57 PM

And while it's off-topic of the subject of the Fed and monetary policy, why is no one writing about Malcolm Gladwell's article in this week's New Yorker? It seems like the most important thing anyone will write this week, and it seems directly on Ezra's beat.

Posted by: Petey | Aug 21, 2006 7:56:39 PM

What wcw said. The tax cuts were managed via deficit spending and an extremely loose monetary policy. Easy money enabled the massive public and consumer borrowing that has fed the consumption driven economy. The amount of debt is the story, and the disaster in waiting. China will not pick up the slack forever.

But with the actual major recession we should have had early in the Bush administration, the tax cuts, and perhaps even the war, would not have been possible.

Posted by: bob mcmanus | Aug 21, 2006 8:26:32 PM

Whenever wages show signs of rising with productivity, the Federal Reserve whacks them back down. It shows no such concern about corporate profits being excessive.

Why, it's almost as if there were two groups of people in the economy - those that make a living via work, and those that make a living via interest and profit - and the system was set up to favour the latter over the former.

I wonder why no-one has ever thought of analysing society from this persepective before?

Posted by: Phoenician in a time of Romans | Aug 21, 2006 9:00:40 PM

Petey, that article is totally on topic with what Ezra wrote, thanks for the heads up.

Posted by: jbou | Aug 21, 2006 11:13:22 PM

As far as wage inflation leading into price inflation, it really IS wage COST inflation, which really is wage inflation minus productivity gains.

With slack job growth and substantial labor hour unemployment, its really hard to credit an argument that we are facing demand-pull inflation ... and if we are facing cost-push inflation, Fed interest rate policy is a very clumsy tool, given its impact on undermining further productivity growth.

Posted by: BruceMcF | Aug 21, 2006 11:23:44 PM

Totally on target, thanks

Posted by: dan gillis III | Aug 22, 2006 3:30:14 AM

The Fed's abject terror of wage growth is a rather unhelpful hangover from the stagflation era.

Read: Nixon.

Posted by: Dr. Squid | Aug 22, 2006 3:15:02 PM

ezra: Robert Kuttner is really confused, sorry. Read Kuttner's 10/18/04 "How To Undermine An Ownership Society" in BusinessWeek, its pathetic. Kuttner LIES and says about tax free HSAs, "Third, the most cost-effective approach to health is prevention, but these high-deductible policies don't cover preventative care." Kuttner needs to bone up on Federal law. Our HSA clients have a zero deductible, WITH NO CO-PAY, that pays 100% on preventative services.

I could list all of Kuttner's LIES in just this one story but I don't have the TIME.

I will tell you the rest unless you ban me, ha ha.

ezra don't listen to your PHD buddy Kuttner, he is kinda silly.

Posted by: Ron Greiner | Aug 23, 2006 1:50:16 PM

In short, loose money won't help workers if it leads to inflation. Inflation hurts workers.

Bullshit. Does it hurt workers who live paycheck to paycheck? Not at all. The unskilled temp labor market has less friction than just about any other labor market. It normally clears.

Does it hurt workers with mortgage and credit card debt? Absolutely not - it benefits them greatly. It is, in fact, the only thing that can save a large number of them from foreclosure and bankruptcy.

Petey, if you want to argue that the economy of the United States should be managed to benefit the rentier class, then make that argument honestly.

Don't bullshit us. We know better.

Posted by: felix | Aug 29, 2006 12:53:03 AM

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