What are we to make of Senator Elizabeth Warren’s reaction to Fed Chair Powell’s recent remarks on inflation?
“He’s pushing hard to get more people fired because he thinks that is one way to help bring down inflation,” Sen. Elizabeth Warren (D-Mass.) told HuffPost on Wednesday. “But it’s sure painful for the families who lose their jobs.”
But that is not the only way to bring down inflation, because a tight labor market is not even the major cause of current inflation.
Powell had said in his press conference after last Wednesday’s FOMC meeting, “Really there’s an imbalance in the labor market between supply and demand so that part of it, which is the biggest part, is likely to take a substantial period to get down.”
The Fed Governors didn’t like the November unemployment report that 263,000 nonfarm payroll jobs were created, and average hourly wages are still rising 5.1 percent annually. Jobs were created in every job category except retail/trade and transportation/warehousing.
In other words, the Fed Governors have been saying they won’t know if inflation has been conquered without higher unemployment, which means the unemployment rate rising to 5 or 6 percent from its current 3.7 percent.
Why? Because they believe rising wages are a major cause of inflation since wages and salaries make up two-thirds of product costs. But that doesn’t mean they make up two-thirds of the current inflationary surge.
The Fed has made workers’ wages the culprit of high inflation since the wage-price spiral of the 1970s, when an overly accommodative Federal Reserve kept the credit spigot open to combat soaring oil prices. Unions had bargaining power then and it resulted in wages keeping up with inflation.
So top business leaders formed the Business Roundtable and began spending Big Bucks on lobbying and campaign contributions to weaken labor unions and introduce legislation that cut taxes, resulting in ‘trickle-down’ economic policies that lowered taxes for the wealthiest while asserting that some of their wealth would trickle down to workers.
It was the beginning of an economic counter-revolution, instituted to counter the influence of Keynesian, New Deal, economics that had prevailed since the Great Depression.
But we know that not much trickled down, in part because newly enacted laws not only restricted unions’ bargaining power but cut social programs as well.
We also know that prices have been rising even faster than production costs since the pandemic in various studies, including one such I reported by Nobel Laureate Joe Stiglitz that showed corporate profit margins are the highest since 1950, and as a percentage of Gross Domestic Product.
This is while the current 5.1 percent average hourly wage rise of employees doesn’t even match the current annual inflation rate of 7.1 percent. Wages after inflation have been falling 1.9 percent annually since the pandemic, so they now make up a smaller portion of costs.
Wages and household incomes haven’t kept up with inflation since the 1970s. So Big Business did its job of suppressing the incomes of salaried workers during all those years of trickle-down economics.
It was also the beginning of record budget deficits, since Big Business justified the tax cuts by invoking President Reagan’s famous assertion that “deficits don’t matter”.
But deficits matter now because of record spending needed to vanquish COVID and assist the Ukraine in its war with Russia. So this is the wrong time to be penalizing workers and shrinking the American economy into a probable recession.
Harlan Green © 2022
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