I just became aware of an outstanding blog written by the economist Martin Hart-Landsberg. The blog is called REPORTS FROM THE ECONOMIC FRONT and I urge listeners to check it out. It is available here. The entry I am referencing was posted on January 17 and it is entitled: “Once again, the austerity proponents tell it like it isn’t.”
As listeners to my commentaries know, back in 2013, Howard Sherman and I published the first edition of our Macroeconomic text with the subtitle, “Activist vs. Austerity Policies.” The whole thrust of our book was to develop the theoretical understanding behind a full-throated rejection of austerity policies.
[In the second edition, Howard and I were joined by his son, Paul. We presented the anti-austerity arguments in chapter 25.]
One of the problems we anti-austerians have is the attacks on inflation resonate with people. If the price of a pound of chopped meat or a gallon of gasoline rises significantly this is pain felt by every consumer. This makes inflation an easy rationale for policies that in both the long and the short run do much more damage than the “normal” inflation the US has experienced in the 20th century could ever do. I have argued that when policy makers complain about inflation, they are masking a hidden agenda --- keeping workers’ wages low.
Before I get to the specifics of Dr. Hart-Landsberg’s information, I want to trace the historical pattern of policies designed to combat inflation. In a most interesting book published in 2006, economist Dean Baker wrote about the role of the Federal Reserve’s anti-inflationary policies as pursued since the 1960s. The book is entitled The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer, and is available for free as a pdf at https://deanbaker.net/images/stories/documents/cnswebbook.pdf. Chapter two of the book is entitled: “The Workers Are Getting Uppity, Call In the Fed!”
(Remember, the FED is an unelected group of Central Bankers. Though the seven-member Board of Governors of the FED is appointed by the President and confirmed by the Senate, they have 14 years terms. There are five other members of the Federal Open Market Committee that makes short run interest rate decisions and they are not subject to confirmation by the Senate. They are all Presidents of five of the regional Federal Reserve Banks (with one seat reserved for the President of the New York Federal Reserve Bank) and they are chosen by the Boards of Directors of those regional banks. They are, of course, supposed to act in the “public” interest, not in the interest of banks. However, most of them honestly believe that what’s good for bankers is good for the economy. Bottom line – they operate independently of both the President and Congress.)
By the end of the 1960s, with unemployment below what the Council of Economic Advisers had called “full” employment (a measured unemployment rate of 4% of the labor force), profits of American companies were being squeezed. Inflation had risen from 1.6 percent in 1965 to 5.8 percent in 1970. [For inflation rates between 1960 and the present see https://fred.stlouisfed.org/series/FPCPITOTLZGUSA]
This began a series of policy interventions by the FED that support Baker’s characterization. Beginning with the FED induced recession of 1970, the policy was for the FED to hit the economy over the head with rising interest rates and cause a recession in order stop wages from rising. This policy basically was the way the profitability of American businesses was maintained from the 1970s into the mid 1990s. The most dramatic example of this policy of course was the deep recession of 1981-82 (with 10 percent unemployment) which combined with the Reagan Administration’s assault on unions led to almost 15 years of stagnant wages, and ushered in four decades of increasing inequality.
(Most of the analysis of the Reagan Administration’s anti-union bent focuses on his firing of all striking members of the Professional Air Traffic Controllers after they went on strike, but that was just the tip of the iceberg. He appointed pro-management people to the National Labor Relations Board and according to the following article: https://ucommblog.com/section/national-politics/ronald-reagan-union-buster the results were the following: “[T]he board, … settled only half the cases the NLRB did under President Jimmy Carter and found in favor of the employer in 75% of the cases. For comparison, the board under Republican President Richard Nixon only found in favor of the employer in 33% of cases. Most of the cases found in favor of employers were around firing workers who were organizing. The board would often stall cases for an average of three years and even when they decided in favor of the employee they would often only award back wages.”)
By the late 1990s, according to no less a figure than Fed chair Alan Greenspan, American workers had been so traumatized that even when unemployment fell below what many economists believed was the number necessary to keep inflation at bay that very low unemployment did not rekindle inflation. This was because the decade of the 1980s saw unemployment remain at an average of 6.75 percent over almost 8 years of recovery from the 1981-82 recession. As a result of that decade of high unemployment, weekly real wages (that means wages in purchasing power not just the number of dollars on the pay stub) which had peaked in 1979, fell and did not regain that 1979 level until 1999. [For a diagram of real median (median means typical) real weekly wages, see https://fred.stlouisfed.org/series/LES1252881600Q]
The Reagan growth period ended in 1990 in a recession that lasted till 1992. When that recession ended, workers knew better than to push too hard for wage increases. And so, according to a later Fed Chair, Ben Bernanke, we entered a period he called THE GREAT MODERATION.
[See “The Great Moderation,” Remarks by Governor Ben S. Bernanke At the meetings of the Eastern Economic Association, Washington, DC: February 20, 2004 available at https://www.federalreserve.gov/boarddocs/speeches/2004/20040220/ Bernanke made these remarks while he was a FED Board Governor before he was appointed chair.]
In that context, Bernanke and others argued that unemployment no longer had to be regularly increased to keep workers from getting restless and forcing wages up. (Meanwhile, that median real weekly wage did experience some brief years above that level in both the 2000’s and the next decade but it did not permanently break that barrier until 2016.)
As a result of anti-labor policies and high unemployment, since the middle of the 1990s, the Fed has not had to use the recession club to curb inflation. In fact, in recent decades, the FED had seemed to rediscover the fact that the law under which it operates requires it to focus as much on keeping unemployment low as on keeping inflation in check. The experience of the Pandemic has been no exception. The financial crisis of 2008-2009 had so frightened the establishment that the Treasury came up with a massive bailout of the financial sector and the FED cut the interest rate it controls to zero and kept it there till 2015. After that it started to raise that rate until the pandemic hit. They reversed course in 2020 which was clearly the right thing to do as unemployment shot up during that year. [For details see: https://fred.stlouisfed.org/series/FEDFUNDS.]
Dr. Hart-Landsberg does a great service with his most recent blog because he cuts to the heart of the arguments that are being repeated by those who have preached austerity for decades. I have argued in previous posts that last year’s inflation does not herald a long-term problem and that most wages (for people who are working) had more than kept pace with inflation during 2021. The information Hart-Landsberg presented shows that by most measures, the labor market has NOT recovered from the fall off in job opportunities since the pandemic hit.
In my oral commentary, I only had time to highlight one of his data sets, the employment to population ratio. It had reached a peak of 80 percent just before the pandemic hit and after falling to 75% early in 2021, it climbed back to 77% in December. But there are other sets of information that tell the same story. Again, I urge readers to check out this particular blog but once you get to the platform, there are many other examples of his contributions to our understanding. Two other sets of information: Had employment growth continued as it had before the pandemic hit, the economy would currently have FIVE MILLION more jobs that it currently does. The other set is the labor force participation rate. The fall in the unemployment rate below 4 percent which is considered the magic number to aim for masks the fact that many people have dropped out of the labor force. That is measured by the labor force participation rate which is well below the level it had been at when the pandemic hit.
The upshot of Dr. Hart-Landsberg’s analysis is that the labor market has plenty of slack left in it. The inflation surge this past calendar year was not caused by there being too few workers. Now is NOT the time for the FED to go back to the bad old days as described in Dean Baker’s chapter. The FED should NOT raise interest rates and throw more workers out of work.
Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author with Howard and Paul Sherman of the recently published second edition of Principles of Macroeconomics: Activist vs. Austerity Policies
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