is not the center of Creation. Darwin showed us that humans are part of
the animal kingdom. Freud told us we are not even masters of our own house.
of light is not a constant. It has been slowed under certain conditions. Surely there must be something that
is hard and fast. Ah, interest rates cannot go below zero. Errr, well, that has
been proven to be wrong. In fact, according to the Financial Times, as of mid-August, there were around $13.4 trillion of bonds (mostly government but some corporate debt too) with yields below zero.
can count on is that central banks will take the side of employers in wage
contests with employees. Wage growth was understood as inflationary, and inflation was recognized as the chief threat to financial
and economic stability. This too
has changed.
wisdom holds that insufficient aggregate demand is deterring investment, which is understood to be a major factor restraining productivity growth. Further, it is recognized that
restrained wage growth is depressing aggregate demand. Of course, in
countries with high unemployment, this
should be expected. However, unemployment levels in the US, Japan,
Germany and the UK are in the area that economists generally identify as full employment and wage growth is subdued.
The Federal
Reserve, the Bank of Japan, the Bundesbank (yes!), and the ECB have either
advocated or indicated it would welcome stronger wage growth. This push seems to be most
strongly expressed in Japan where deflationary forces are still evident. If the government and central bank’s encouraging higher wage
settlements is not sufficiently bewildering, consider press reports quoting the
IMF’s mission chief in Japan calling on the government to take stronger
measures to boost wages.
How is this to be achieved? Moral suasion, tax breaks, and at
last resort, penalties can be assigned. Kozo Yamamoto,
an Abe adviser who recently joined the cabinet, suggests that maybe all the
ministries should have a wage target
policy.
the reforms associated with the third arrow of Abenomics was independent
directors on corporate boards. This has
been a fairly successful campaign, in
part because the government has created ETFs which the BOJ is buying of
companies that adopt such best practices.
Japan had
adopted a “comply or explain” approach that can be used to induce
higher wages. Either
companies would have to voluntarily adhere
to such guidelines or publicly explain why not. Economists and/or policymakers appear to know how much wage growth is desired. Some have proposed 3% pay
increase in Japan.
Two former members of the Bank of England’s Monetary Policy Committee, and now
professors in the US and working at the Peterson Institute for
International Economics, Posen and Blanchflower, advocate a corporatist
solution of coordination between unions, firms,
and the central bank. Praet
at the European Central Bank argues that average wage increases should be in
line with the ECB’s inflation target.
things governments are doing too. Germany recently introduced a
minimum wage. In Japan, Abe intends on raising the minimum wage from
JPY798 to JPY1000 by 2020. In the US, many local governments and
states have increased minimum wages well above the Federal minimum wage of
$7.25. Posen and Blanchflower argue that the Federal Reserve should add
wage inflation as an additional intermediate target of monetary policy.
Central bankers and many governments have been encouraging higher wages. Is this proof that left-wing
socialists have taken over? Hardly. In fact, the conservatism of officials and commentators likely means these efforts will not succeed. Labor unions in Germany,
especially, in the public sector and chemical industry have secured above
inflation levels of wage increases, but this has not changed things. Germany continues to export 40% of what it produces,
government has been encouraging Japanese businesses to share some of their record
high profits with workers to little avail.
advocating higher wages are not yet willing to do everything that is
takes to ensure success because they still appear
to be confined by ideological shackles. Few are contemplating strengthening precisely thoseh institutions whose raison d’etre is boosting wages, namely trade
unions. During the Great Depression in the US, FDR did help strengthen unions and facilitate mobilization.
Despite the platitudes about the development of a new playbook after the
Great Financial Crisis, few are ready to embrace the FDR’s 70-year old policies.
third of a century, organized labor has been
gutted. The liberation of the capital markets ushered in by Reagan and Thatcher, was predicated on the defeat of the US and UK
labor movements. This was the
answer to the stagflation of the early-1970s and the falling rate of profit:
Break the back of organized labor, introduce greater flexibility, and allow
capital grab a greater share of
productivity gain.
unprecedented share of the national income. Aggregate demand was made effective
through the extension of credit, and we know how that story ends. Capital
took such a great share of national income
that it is choking on it. It does not know what to do with it.
Corporations in the US, Europe, Japan, and China are sitting with
unprecedented levels of cash on their balance sheets. They have plowed
money back to buy their own shares,
increase shareholder dividends, finance large mergers and acquisitions, which
typically are unwound in carve out and spin-offs, with a loss of good will, in
the next cycle.
advocating higher wages want it as yet another concession from the state. Businesses pay unlivable wages, so
the state offers transfer payments, which are the fastest growing component of
household income in the US even before the Great Financial Crisis.
Approximately 52 mln Americans (more than one in five) receive means tested government assistance.
In comparison, in 2004, the figure was closer to 42 mln. Making employees pay for their wage
increases via tax incentives for businesses shows the conservative nature of
the official push for higher wages.
their essay for the Peterson Institute,
arguing for the Fed to adopt wage growth as an intermediate target, Posen and
Blanchflower acknowledge that higher wages may not fuel an increase in
inflation. It is possible, they concede, that wages can rise without
inflation if labor’s share of national income rises. They also recognize
that labor’s share of US national income is historically low. Posen and
Blanchflower suggest it is easier and more transparent for the Fed to judge
whether an increase in labor’s share of income is out of line with historic
norms and its causes, rather than focus on the elusive concept of NAIRU
(non-accelerating inflation rate of unemployment).
claim may be true, what Posen and Blanchflower, in effect are proposing, is
that just as the class struggle intensifies over the distribution of the social
product (national income), the central bank, which is insulated from the vagaries of representative government, can be a stronger referee. Ultimately,
what Posen and Blanchflower are interested in is not a society with less income
and wealth disparity, or boosting aggregate demand. They are interested
in boosting inflation.
Posen and Blanchflower
show that below the seemingly radical idea of boosting
wages lies a conservative effort to ease the intensifying struggle over
distribution by lifting inflation. If everyone’s share of the pie
appears bigger then the fight over its distribution can be de-politicized.
The targeting of nominal GDP (NGDP), which appears to
be gaining traction, and we may hear more about it from Jackson Hole next week, is more of the
same.
The aim is to boost prices as if this can make up for the historically extreme
disparity of wealth and income that limits the growth of aggregate demand, and
serves as the breeding ground of populist political movements, which often appeal
our baser instincts. Many of the advocates of higher wages want to achieve this without strengthening labor or helping it secure a large share of national income.
Perhaps we do have something certain after all. They can’t have their cake and eat it too.