by Michael Roberts
Every August, the great and august among central bankers and
strategists of the world economy meet as guests of the Kansas City
Federal Reserve for an economic symposium at Jackson Hole, Wyoming, a
ski resort under the Teton mountains. After the planes, helicopters and
limos have transported them all to the luxurious lodge, the participants
make and hear presentations and speeches on the economic issues of the
day.
This year, the theme was ‘labour market dynamics’, in other words,
the strategists of capital (mainly US capital) were considering whether
labour markets in the major economies were sufficiently ‘flexible’ to
reduce the high levels of unemployment engendered by the Great Recession
and to look for the causes and solutions to the very slow recovery of
employment. (http://www.kc.frb.org/publications/research/escp/escp-2014.cfm).
In one paper, mainstream economists, Steven Davis and John
Haltiwanger, of the University of Chicago and University of Maryland,
reckoned that “the US economy became less dynamic and responsive in recent decades.”
And the reason was too much government regulation. They calculated that
the fraction of workers required to hold a government-issued licence to
do their jobs rose from less than 5% in the 1950s to 29% in 2008.
Adding workers who require government certification, or who are in the
process of becoming licensed or certified, brings the share of workers
in jobs that require a government-issued licence or certification to 38%
as of 2008, they say. So the slow recovery from high unemployment is
the fault of government regulation and not the market economy.
In contrast, Giuseppe Bertola, economics professor at EDHEC Business
School, reckoned that it was more government action, not less, that was
needed to get unemployment down. Bertola argued that some job protection
and unemployment assistance may offer a positive ‘trade-off’ not only
for the individuals receiving them but also for the economy as a whole.
What was needed was not more ‘flexibility’, but more ‘rigidity’! “Rigidities
can be beneficial in imperfect economies, where the flexibility that
employers like is the other face of the precariousness that workers
fear,” he wrote. Bertola cited the German model of work-sharing
through reduced hours, made possible by strong cooperation between
labour unions and large corporations, as having allowed unemployment to
remain lower in Germany than in the United States during the crisis–and
to come down consistently since.
Bertola’s line is not welcomed by the mainstream in analysing the
causes of high unemployment. Indeed, in another paper for Jackson Hole,
Jae Song, an economist at the Social Security Administration and Till
von Wachter, a professor at the University of California, Los Angeles
argue that the problem of long-term unemployment does not really exist. “In contrast to the behavior of long-term unemployment, long-term non-employment behaved similar in the Great Recession”
to previous recessions, they say. So the level of permanent
unemployment is no worse than before and there is no need to wait to
tighten monetary policy. The economy is not permanently damaged and
indeed is ready to go.
To sum up, the mainstream economists at Jackson Hole generally found
that the US unemployment situation was not too bad and any unemployment
left was due to too much government regulation and lack of flexibility.
So there would be no problem if the Federal Reserve ended its
quantitative easing measures and started hiking interest rates. The US
economy would cope and ‘return to normal’ without any serious
repercussions.
Janet Yellen is not so sure. Both Janet Yellen, the first woman head
of the Federal Reserve and Mario Draghi, the first Italian head of the
European Central bank, made speeches on the state of the economy, the
pace of ‘recovery’ (or otherwise) and what they as central bankers would
do about it with monetary measures. The US Federal Reserve board
members are split on whether the US labour market has recovered
sufficiently for the Fed to start raising interest rates and ‘return to
normal’. For the hawks (still in a minority), the rapid decline in the
unemployment rate shows that ‘slack’ in the economy is disappearing so
the Fed should ‘tighten’ monetary policy soon. For the doves (led by
Yellen), the low rate of wage growth suggests there’s plenty of slack
and tightening should wait.
In her Jackson Hole speech, however, Yellen seemed to less sure about the slow pace of ‘recovery’ (http://www.federalreserve.gov/newsevents/speech/yellen20140822a.pdf). She dithered. As one commentator noted, she used “1 coulds, 20 buts, 11 woulds, 7 mights and a magnificent 56 ifs.”
The doves argue that the huge drop in the labour participation rate,
which measures how many of those of working age actually have a job,
showed that there many people who wanted a job, but had just given up
looking and so were not counted among the unemployed but should be. And
many of those working are in part-time or temporary jobs (see my posts
on this, http://thenextrecession.wordpress.com/2014/01/13/americas-lost-generation-and-pikettys-rise-in-capitals-share/). In other words, the labour market was still slack.
But Yellen presented a new argument for the hawks. She cited a paper
by the San Francisco Fed that argued during the Great Recession wages
were not cut by most firms, but now that recovery is under way,
employers are holding back on pay rises. This was a form of “pent-up wage deflation.”
At some point, as the labour market ‘tightens’, this will end and wages
would then rise quite rapidly. So maybe the Fed should pre-empt the
impact on inflation by raising interest rates sooner than originally
planned.
But this assumes that rising wages from the end of ‘pent-up wage
deflation’ would cause higher inflation. It depends on how the value of
the national product is shared between the owners of capital in profit
and labour in wages. Way back in 1865, Marx dealt with this issue in a
debate inside the International Workingmen’s Association eventually
published in a pamphlet entitled, Value, Price and Profit. Marx argued that wages can rise without any effect on prices if profits fall. Indeed, that would be the usual result. (http://www.marxists.org/archive/marx/works/1865/value-price-profit/ch01.htm#c0)
In mainstream economic terms, we can pose it this way. There has been
a huge divergence between productivity growth and wage growth since the
1980s in the US and elsewhere. Profit shares as part of value added
have rocketed to record highs. Indeed, it is estimated that wages in
real terms could rise 10% to restore the gap with current productivity
growth, a measure of the non-inflationary leg room from a rise in wages
now.
Of course, such a wage rise would hit profits and that is the real
problem for capitalism, not inflation. If companies cannot raise prices
to compensate because of weak demand for their goods and services and
strong competition nationally and internationally (prices are rising
just 1% a year in international traded goods), then profit share will
fall and the mass of profits will also probably fall, triggering a new
slump in investment. After all, despite the massive rise in profit
share, US corporate profits are now starting to drop. A 10% wage rise
would be a last straw.
In the Great Depression of the 1930s, wages recovered sharply but
inflation of prices did not. What the rise in wages did do was
contribute to a fall in profitability (as Marx posed in Value, Price and Profit),
engendering a new slump in 1937. And the Fed helped to tip the economy
into a slump by hiking interest rates to stem ‘inflation’. See my post http://thenextrecession.wordpress.com/2014/08/01/the-risk-of-another-1937/.
Even the Federal Reserve finds little connection between wage rises
and inflation (see a new paper by some Chicago Fed economists (http://www.clevelandfed.org/research/commentary/2014/2014-14.cfm):
“We do find that wages are sensitive to economic activity and the level
of slack in the economy, but our forecasting results suggest that the
ability of wages to help predict future inflation is limited. Thus,
wages appear to be useful in assessing the current state of labor
markets, but not necessarily sufficient for thinking about where the
economy and inflation are going.”
Yellen is not sure what would happen. If the Fed were to tighten too
soon, it could abort the recovery and send the economy back into a new
slump. On the other hand, if inflation starts rising then interest rates
will have to be hiked even if the price is a new recession. But Yellen
does not know which.
The problem for the ECB appears to be different. The Eurozone economy
shows no sign of ‘recovery’ whatsoever and the risk is more that it
will slip into an outright deflationary depression, something that the
southern Eurozone states of Greece, Portugal, Italy and Spain are
already experiencing. The average inflation rate for the whole area is
already near zero and the Eurozone is beginning to look like Japan in
its stagnation of the 1990s that Abenomics is trying to end (see my
post, http://thenextrecession.wordpress.com/2014/07/30/abenomics-raises-profitability-and-misery/).
In his speech, Mario Draghi talked about taking action to provide
more credit for the banks and companies and keep interest rates near
zero for much longer – the opposite of Yellen’s musings (http://www.ecb.europa.eu/press/key/date/2014/html/sp140822.en.html).
He hinted at new measures similar to that of the Fed, namely
quantitative easing, i.e. buying up government bonds through the
printing of more euros. “The risks of doing too little outweigh the risks of doing too much,” he said.
So the prospect for 2015 (the seventh year since the Great Recession
began) is of the Fed tightening credit and raising interest rates and of
the ECB doing the opposite. The risks are aborting the relative US
economic recovery and/or the collapse of the Eurozone into outright
depression (see my post, http://thenextrecession.wordpress.com/2014/08/14/the-myth-of-the-return-to-normal/).
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