Much talk has been made of what the Chairman Powell and US Fed officials say they learned from the inflation spiral of the 1970s. Keep employees’ wages from rising too fast, since they are that part of the inflation equation the Fed can control.
That is, by raising interest rates the Fed hopes to pressure employers to restrain hiring practices and wage hikes by making it more expensive to do so.
But the problem is Fed economists know that many other factors affect inflation—e.g., corporations inhibit competition with monopolistic practices, supply-chains are not always dependable providers, and geopolitical events like wars and pandemics create major scarcities, as has happened since 2020.
The above St. Louis Fed (FRED) graph dating from 1950 shows how successful the Fed’s main monetary policy has been of suppressing wages to keep inflation moderate.
Wages and salaries rose on average 5-10 percent annually until 1980, when Paul Volcker began his reign as Federal Reserve Chairman. Employees’ incomes then began the long descent to averaging less than 5 percent since.
Inflation was tamed, the inflation battle was won, but at what cost? Did it make most Americans better off? No. There were a series of recessions culminating in the Great Recession of 2017-19 in which they lost a greater share of total wealth generated by their employers.
The picture is startling per this popular graph.
Income disparities are now so pronounced that America’s richest 1 percent of households (orange line in graph) averaged more than 84 times as much income as the bottom 20 percent in 2019, according to the Congressional Budget Office. Americans in the top 0.01 percent (brown line) tower stunningly higher. With average household income of $43 million, they bring in 1,807 times more income than the bottom 20 percent.
Of course, globalization and the lowering of trade barriers that moved higher paying wages overseas have been the orthodox explanations for why workers lost such a share of the wealth pie. But also lost in the discussions was the Fed’s monetary hand of quickly raising interest rates when inflation heated up and dropping them when a recession resulted.
That has been the Fed’s pattern since the Volcker era. Keep inflation down at all costs, even if it harms employment. Yet we know since the pandemic that a war and COVID-19 scarcities have been most responsible for the sudden inflation spike.
The post-pandemic era has therefore created new opportunities with the need to rebuild the US economy since the pandemic. Trillions are being spent in a ‘new’ New Deal era of governments coming to the rescue as they did in the 1930s.
The result is a fully employed American economy with rising wages and salaries for years to come—unless the Fed attempts once again to tamp down this activity with its outdated policy goals.
It could right the imbalance that has always benefited employers in the name of price stability since the 1980s by allowing its mandate of maximum employment to continue by restraining further rate hikes.
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
No comments:
Post a Comment