I need another look at Steve Waldman's interesting layout of our economic problem:
"Prior to the 1980s, the marginal unit of CPI was purchased from wages... Prior to the 1980s, central bankers routinely had to choose between inflation or recession."
Then came the “Great Moderation”. The signal fact of the Great Moderation was that the marginal unit of CPI was purchased from asset-related wealth and consumer credit rather than from wages.
So in this view, the policy-change was a change from intermittent wage-suppression to continuous wage-suppression. It's a tidy thought, but that doesn't make it right.
I do not accept Waldman's tidy analysis. The Federal Reserve does not manage wages. It does not control wages. It
The premise of Waldman's opening remarks -- wage suppression by central banks -- is wrong. The Federal Reserve fights inflation by restricting the quantity of money and has done so continuously since the end of the Second World War:
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| Graph #1 |
Continuously, except for two little bumps in the 1980s and one in the 1990s, which I have discussed elsewhere. I always wondered about those bumps on this graph, but never saw the connection until now. Nice. Off-topic, but nice.
The quantity of money was suppressed for the full post-war period. Eventually, that open-ended, bullheaded policy began to have an effect. Wages declined a little then, during the recent half of the post-war period:
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| Graph #2 |
As Waldman has it, the plan was wage suppression. As I have it, the plan was to fight inflation, but they did a bad job of it. After they pushed money down to fifteen cents, they tried to fix things with Reaganomics, and that's when wages started coming down a bit. Two different stories altogether.
Let's say the plan during the Great Moderation has been continuous wage suppression, as Waldman claims. Call it a change from money-suppression to wage-suppression.
Now, what is Waldman's solution? It is a return to money-suppression! Waldman proposes to use "helicopter drop" money, and to vary the quantity dropped as needed, to combat inflation. Money-suppression, it is.
Well, that's certainly better than accumulating more debt.
So, I've got to object a bit. You are misreading me.
ReplyDeleteI've never claimed that the Fed engaged in "continuous wage suppression". I have claimed that there was a regime change in the economy, not that the Fed caused or arranged that regime change.
I have also claimed that the Fed observed that regime change, viewed it as helpful, and understood it as being related to a decline in the wage intensity and increase in the credit intensity of GDP. "Great moderation" monetary policy was a response to a change in the economy, and its purpose to maintain what, from the perspective of a central banker, was a benign new regime. The Fed became focused on limiting growth in wage intensity (or unit labor cost), and was supportive of growth via credit expansion.
This need not and never did amount to "continuous wage suppression". On the contrary, there were lots of forces in the economy contributing to wage suppression. It did amount, as you correctly point out, to intermittent wage suppression, when those other forces proved insufficient and unit labor costs threatened to significantly expand.
That Fed interventions to suppress wages were intermittent understates their importance a bit, because the Fed's allergy to increasing labor share (unit labor cost growth) was widely telegraphed, and other actors in the economy bargained under the expectation that interventions whose effect would be to increase labor share would be frustrated by contractionary policy and potential recession. But, perhaps in part due to this expectation but also due to other trends (globalization, deunionization, and tech), the Fed in practice only sporadically had any need to pull back on push back against wage pressures.
The Fed's mandate is to provide price stability and maintain full employment. During the great moderation, they discovered they could achieve that mandate by encouraging credit provision and discouraging wage growth relative to GDP. Generous credit ensured sufficient demand, and also reduced political and union pressure for higher wages. Contained wages reduced pressure on prices and contributed to full employment in the context of credit driven demand. The Fed's publicly stated policy was to cap labor share, but that rarely, or shall we say intermittently, required direct action in response to wage pressure.
Thanks again for taking such a careful look at my stuff. I'm sure I must have expressed myself poorly. But your characterization of my views do not reflect my views (which I think are not so different from yours).
(p.s. i've commented on your previous post. i hope you've seen that.)
"I've never claimed that the Fed engaged in 'continuous wage suppression'. "
ReplyDeleteWell, good! Maybe I did misread you. I don't like the concept, because I don't see a direct connection between the Federal Reserve and the level of wages. But you certainly did claim that economic policy as a whole engaged in continuous wage suppression. Not much of a difference to the outcome, really.
In paragraph 2 of your post, you wrote: "In order to suppress the price level, central bankers had to reduce the supply of wages... Prior to the 1980s, central bankers routinely had to choose between inflation or recession."
I reduce those remarks to the concept of intermittent wage suppression.
In paragraph 4 of your post, you wrote: "Central bankers and economists found [the Great Moderation] pleasant at the time, but sustaining that comfort required that cash wage growth be suppressed, that credit be expanded regardless of overall loan quality, that asset prices be frequently manipulated, as means to a macroeconomic end."
I reduce these remarks to the observation that continuous wage suppression was part of the Great Moderation.
I put my two simplifications together and find that your observation -- which I think is very clever -- is that the change embodied in the Great Moderation was a change from intermittent wage suppression to continuous wage suppression. Whether the policies were implemented solely by the Fed, or by U.S. economic policy as a whole, is among the least of my concerns.
Anyway, I don't disagree with the observation that wages fell (relative to GDP) during the Great Moderation. I disagree with your assessment of the period before the Moderation when, as you write: "central bankers had to reduce the supply of wages." So I will say again that the Federal Reserve does not control wages.
What's important, however, is not what the Fed doesn't do, but what it does. You missed the good parts of my post.
Part three tomorrow. Hopefully you will like that one better.
Interesting discussion! As far as wage suppression goes, the regime outlined in the comments above is neither new nor particularly remarkable. The insight about the regime change is useful, and it aligns pretty much with the adoption of pure fiat currencies.
ReplyDeleteWe need to be careful though to encompass the whole picture. During the period in question the world gini index has declined by about 8 points I think.
Given the extremely lopsided worldwide distribution of wealth (in per capita terms) of the post-war starting point, this represents quite a remarkable transfer, and it implies that the wage suppression activities of both the pre and post moderation phases have actually only transferred wage pressure overseas. If we take a worldwide view then, it implies a victory for labour over capital.
Given this leakage, I suggest that any policy designed either to increase wages or suppress them further needs to take the leak into account. For example, any capital transfers to citizens could very well end up overseas as well, unless specific consideration is directed at preventing that.
We're getting closer. (I hope I wasn't snippy!)
ReplyDelete"But you certainly did claim that economic policy as a whole engaged in continuous wage suppression. Not much of a difference to the outcome, really."
That depends on what you attribute to policy and what you attribute to happenstance, which is hard to untangle. I think the proximate causes of most wage suppression was globalization, technology, and the undoing of labor power. Policy played a role in all of those. Globalization, automation, and deunionization depend in part on policy choices. But, technological and institutional change as well increased international competition can happen for reason we wouldn't attribute to policy as well. It's a blurry line.
The claim I do make, that perhaps you object to, as that in the service of managing the price level, central banks pre-great-moderation induced recessions, and in doing so indirectly suppressed wage growth. I also claim that during the great moderation, the US Fed made it very plain that unit labor cost expansion (or equivalently, labor share expansion) would not be tolerated. Still, whether or not you want to attribute the objective decline of wage share to policy or to economic history is ultimately a judgment call. I do think it's fair to say that economic history would have been different under alternative policy regimes, e.g. if the Fed had a mandate to suppress (arguably) unsustainable credit expansion as well as provide full employment and price stability. I think "great moderation" monetary policy represented a self-reinforcing confluence of economic history and the Fed's mandate. Under the its mandate, the Fed behaved very naturally, and found the period very comfortable. But I dislike the period and the policy because the most natural way to achieve its mandate given the conditions it found had visibly poor consequences unrelated to the mandate (at least over a short-to-medium time horizon). Whether I am accusing the Fed (or perhaps the mandate-making Congress) of a sin of omission or comission is a judgement call. (I certainly am accusing it though. You reasonably got that sense.)
"So I will say again that the Federal Reserve does not control wages."
I certainly agree with you that the Fed doesn't control wages. Actually, that is at the core of my story. Prior to the great moderation, I claim that central banks needed to control wages to control the price level, but they could not directly do so. So, they had to resort to causing periodic recessions. The wonderful (to central bankers) fact of the great moderation is that they no longer needed to control wages, they could manage the price level and general employment conditions by modulating credit and asset-price related spending.
But central bankers did understand that this was only true if wages remained suppressed (relative to credit growth), and they did what they could to persuade the world that one way or another, they'd not tolerate labor share expansion. Perhaps these were threats they'd not have been able to see through had they been more severely tested, since they don't control wages. Perhaps if they'd been severely tested, they'd have generated recessions old style. We don't know (although at the time, some people were pretty explicit that willingness to push the economy into a recession if necessary was the sine qua non of central bank credibility). But I think the whole economic policy apparatus understood that the Fed stood firmly against rising unit labor costs, and if it couldn't control wages it could create recessions. The effect of that knowledge on broad policy and outcomes is certainly debatable.
Anyway, thank you again for your thought and analysis.
Liminal — The international dimensions are very tricky. For example, while world Ginis has decreased, within country Ginis have increased in the countries largely responsible for that global decrease! Do we view labor markets as national or global? There have certainly been moments, e.g. in China, where labor bargaining power has increased, but what has happened to overall labor share of output? I don't know, but to the degree that labor markets are primarily national, it's hard to reason from a decline in global Gini to an increase in labor share anywhere. China's GDP may have grown much, much faster than wages, while wages have multiplied. That might simultaneously reduce global Gini and global labor share.
ReplyDeleteAgain, I'm not saying that's what happened. Only that trying to "think globally" about this stuff is hard. It is easier to think nationally (and abstract the rest of the world in terms of injections and leakages, as you hint). But of course it would be better to have a global account, as well as national stories.
"It is easier to think nationally (and abstract the rest of the world in terms of injections and leakages, as you hint). But of course it would be better to have a global account, as well as national stories."
ReplyDeleteSure. But in terms of putting forward a solution, one needs to take leakage into account, because otherwise its not credible from a real world policy perspective.
So I really think you need to bite the bullet on this one.
The same applies to Art's work, which is entirely based on US data.
Steve,
ReplyDeleteYou say the Fed became focused on on limiting growth in wage intensity (or unit of labor cost), and was supportive of growth via credit expansion. Couldn't one reasonably argue that this support of growth thru credit expansion could have been the catalyst for the great moderation? I mean, if a greater portion of the "growth" is achieved by means of credit vs. savings, it is inevitable that a some point the credit "bubble" is gonna pop.
Furthermore, I don't think you can ignore the effects of the transfer of unit labor costs from US workers to the developing economies. (Specifically Chindia.) And what effect does the trade imbalance between the US and China have on the continuation of the growth thru "credit" problem; if any? Most analysis has been focusing on the excess growth thru credit problem and doesn't seem to give much attention to the trade imbalance that has only been exacerbated by deliberate policy choices. (Policy matters.)