This year, Labor Day came on the heels of the annual Jackson Hole conclave of central bankers.
The meeting exposed a core disagreement among Fed Board members on the future of stimulative policy, with Chairman Yellen expressing continued concern about employment and conservative members once again warning against the inflation boogeyman that increasingly seems to be a figment of their imagination. Yellen announced that the Fed will employ broader measures, focusing attention on incomes and the quality of employment, both of which continuing to be problematic. Her point is that the number of people that are looking to work in some kind of job means less in the current circumstances than whether they are actually earning a reasonable income.
All of this should have caused us to spend our last beach days of the summer reflecting on what has happened to the labor market and its implications for the future.
It is simply inadequate to focus on fixing the structural damage done to labor by the Great Recession. Labor was already fundamentally damaged during the 30 years before 2008, in large part due to the misguided policies of Reagan and his successors, policies that were touted as solving problems that turned out to be the wrong ones. Until income from labor returns as a robust element of the economy, the structural problems will not have been solved.
The most important thing to take away from Central Bank policy and labor markets is what has not been accomplished. The aggressive intervention of the Fed may well have prevented an even more catastrophic downturn, but the striking thing is that the consequences of the massive effort represented by the “QE’s” and other measures have been so meager.
Eventually, the business cycle had to reverse and there had to be some movement in unemployment. But the most important question is whether the labor structure been repaired so that the next cyclical down turn—which is also inevitable (Europe has already returned to recession)—can be withstood without too much harm.
That has not occurred. We have seen a tsunami of corporate profits and a trickle of improvement for the general population. Unless a solution can be found, we risk entering the next recession still trying to solve the labor income problem that created the Great Recession.
Last week, the Economic Policy Institute turned out an excellent description of the troubled labor market. It offers a detailed description of the dynamics of income growth across the echelons of household incomes from the period starting in 1979. It tells a story of declining value of labor and massive increases at high-income levels occurring in stages over more than three decades. These forces were clearly behind the enormous increases in household debt that the banks took advantage so aggressively that they blew up the financial system.
The Fed and the other Central Bankers simply do not have the power to fix the problems that underlie the labor markets. They can pump low-cost financing into the economy, but they cannot (and sometimes will not) be able to dictate what this cheap money is used for. Under the structure that emerged over the last 35 years, this cheap money will overwhelmingly be used to fuel financial activity designed to generate profits for the financial sector and for corporate policies to pump up share prices without investing in the real economy. Investments that improve the labor share of the economy will continue to languish while bankers, corporate management and the super wealthy will flourish.
These problems are structural and a sensible and aggressive economic policy is needed to address them. The policy must change how business is done. The EPI study makes clear that we cannot simply educate workers to solve it. Unfortunately for the vast majority of households, this requires elected officials to act. Conservatives are constitutionally unable to get such a policy right and progressives are apparently unable to muster the will to do so.
The EPI numbers in this report do not address an extraordinarily important feature of our troubled economy, though they have produced some good relevant data in the past: the disproportionate effects of the new labor structure on racial and ethnic groupings that have historically been disadvantaged. As the resources available to the vast majority of the public become scarcer, the groups that will be adversely affected the greatest will be people of color.
Scarcity of resources ups the ante on a perceived zero-sum game for working Americans and induces intolerance.
When one considers the disparate views of whites and African-Americans on the events in Ferguson and its broader implications, one factor in the intensity is likely to be the desperation of a population that is far less secure and optimistic than should be the case in a country that touts itself as the land of opportunity.
Political forces will eventually move politicians to address the structural flaws of labor, but only when they have no other choices. Whether this comes by way of the ballot box, another catastrophic recession or through the efforts of the least advantaged to claim wages that allow them a decent life remains to be seen.