3.

The Great Debate,

and a New Conservative Strategy

As of the end of 1999, wealthy conservatives could hardly believe their good fortune. It seemed too good to last. For the previous 20 years:

§         The U.S. economy had been growing,

§         Worker productivity had been going up,

§         Corporate profits had been going up,

§         The stock market had been skyrocketing,

§         Unemployment had been going down, and

§         To everyone’s feigned surprise—workers’ wages had been steadily losing pace with inflation.

Conservatives had told the public that, under these conditions, this last development was never supposed to happen. Thus, the great debate: Is this good fortune for investors too good to last without workers’ incomes starting to rise?

Despite the recent consensus that there is less need now to raise the prime to control wages, it’s instructive to review the debate as it has progressed over the years: Should the Fed raise the prime interest rate in order to slow the economy, drive unemployment up and, thus, stomp out even the remote possibility that workers’ may begin sharing in the prosperity of our country? Or are there other ways to destroy workers’ incomes without having to rely on manipulating the prime?

In the next few pages, note how our cold-blooded Wall Street barbarians have been debating the economic fate of working Americans in the era of ClintoReaganonomics. In the view of today’s financial conservatives:

§         Workers are in a category that is no different from machinery or raw materials, therefore,

§         They are an expense to be minimized—or totally eliminated if possible.

§         The growing income gap between rich investors and executives—and middle- and low-income workers—is irrelevant.

§         Conservatives also consider it irrelevant that:

§         Workers are human beings who are citizens of this country, with this country’s standard of living, and this country’s cost of living,

§         Workers have families to support,

§         Workers have medical bills, house payments and school ex-penses to pay, and

§         Workers built the very corporations that are now abandoning or victimizing them.

  

All that counts to America’s financial elite are corporate profits and their own incomes. Therefore, the only consideration in this debate has been: What is the best way to keep working Americans’ incomes from going up, and still continue the growing income and wealth disparity between the top 20% of Americans and everyone else?

The Wall Street Journal gave us a brief introduction to the debate when it reported that “Business and Academia Clash Over a Concept: ‘Natural’ Jobless Rate”:

Are too many Americans at work these days for the econ-omy’s own good? Absolutely says Martin Feldstein…. “We are…into the danger zone.” “Nonsense,” retorts Dana Mead…. “Economists who talk that way…don’t understand how American companies have tied wage increases to productivity gains, shifted work overseas and learned to produce more with fewer people.”¹ 

Realize what these two modern conservatives are debating here. The “natural” jobless rate occurs when unemployment is high enough to keep wages of working Americans from going up, but not so high that corporations can’t make huge profits. Feldstein claimed that unemployment was getting into the danger zone (too low), and maybe the Fed should raise interest rates. Raising interest rates would slow down the economy, jobs would be scarcer, and wages would stagnate.

Mead disagreed: Because of our nation’s conservative economic policies, corporations have better ways to put pressure on wages to keep them down—and still allow corporate profits to grow.

Business Week described Alan Greenspan’s now-discredited 1995 view of the debate, under the head, “Can the Economy Stand a Million More Jobs?”:

Despite growing comfort at the Fed with the current jobless rate, Greenspan remains the biggest skeptic. Fed watchers say that he still doubts the economy can handle unemployment lower than 6% without triggering wage pressures.

   Greenspan hinted as much in an Oct. 19 speech, noting that while the downsizing trend has left employees docile, at some point “workers will perceive that it no longer makes sense to trade off wage progress for incremental gains in expected job security.”²

Obviously, in Greenspan’s view the economic welfare of working Americans takes a distant second place to high corporate profits. He isn’t concerned about outrageous incomes of the wealthy; he is concerned only about microscopic wage increases of working Americans. He even took comfort in the fact that downsizing had kept workers docile. But he worried that their attitudes may change if they figure out that just having a job isn’t enough, if their wages don’t go up.

In 1997, after two more years of stagnant wages and soaring corporate profits, The Wall Street Journal described how Greenspan had changed his opinion. Under the head, “In Setting Fed’s Policy, Chairman Bets Heavily on His Own Judgment,” it explained that

Despite a rebound in economic growth, wages and prices remain, so far, amazingly placid.… Mr. Greenspan [now] has a different mantra: Workers’ fear of losing their jobs restrains them from seeking the pay raises that usually crop up when employers have trouble finding people to hire. Even if the economy didn’t slow down as he expected, he told a Fed colleague last summer, he saw little danger of a sudden upturn in wages and prices.    

    “Because workers are more worried about their own job security and their marketability if forced to change jobs, they are apparently accepting smaller increases in their compensation at any given level of labor-market tightness,” Mr. Greenspan told Congress at the time.³

   

As all the major financial publications were pointing out, Republicans and conservative Democrats had created a new world economy. Workers’ fear of losing their jobs prevented them from seeking pay raises, so, even if the economy didn’t slow down, there was little danger of wages going up. Thus, Greenspan’s “different mantra.”

Barron’s Op-ed Heavyweights

Now read what two economic heavyweights had to say in Barron’s about the great debate. Under the headline, “Forget NAIRU” (Non-Accelerating Inflation Rate of Unemployment), Gene Epstein explained why the old “Goldilocks” theory of traditional conservatives is now invalid:

Joblessness can fall without boosting inflation.… The idea of the NAIRU is based on the theory that there’s a “Goldilocks” rate of unemployment—not too hot, not too cold—at which inflation will stabilize.

   The theory was sparked by concern that a low jobless rate can cause such an acute mismatch of geography and skills that wages start to rise, touching off an acceleration rise in prices.…

   [Joseph Stiglitz, chairman of the Council of Economic Advisors]…implicitly gave advice to his colleague, Fed Chairman Alan Greenspan: Try easing interest rates and bringing unemployment down. Don’t worry, because if inflation starts to jump, you can always retrace your steps and see it decline again.⁴

The reason Stiglitz was so euphoric is that highly skilled “Baby Boomers” were entering the labor force. They were more adaptable to new and different jobs, and were more willing to go to where the jobs were, thus increasing competition for high-skilled jobs. He also noted that the labor market was more competitive and less unionized, which forced unions to reduce their demands.

Translation: In the past, conservatives manipulated the prime to keep the economy hot enough to maximize profits, but not so hot that wages would go up (the Goldilocks strategy). But, by using other methods and because of other factors, they’ve been able to force unions to reduce their demands, thus removing a traditional upward pressure on the wages of everyone, even non-union workers.

And—here’s the best part—if workers should accidentally start making higher wages, the Fed can always “retrace its steps and reverse its course” (by raising the prime, and, hence, increasing the unemployment rate).

Offering a contrary opinion, Charles Lieberman defended the more traditional way of keeping wages down by raising the prime. In a Barron’s headline, he asked “Is Inflation Dead?” and warned that “In fact, it may be right around the corner”:

               

The service sector now accounts for 80% of total non- agricultural payroll employment in the United States, and these jobs are exposed to little international competition. If there’s a shortage of truck drivers who travel between Boston and New York, the availability of unemployed truck drivers between Rome and Milan, or Tokyo and Yokahama, or Santos and Sao Paulo, is totally irrelevant….

   Low value-added manufacturing like that of clothing, toys and shoes long ago mainly moved to low-wage countries. There is nearly an unlimited supply of such products and they can be imported at low prices. But importing them doesn’t relieve any manufacturing capacity problems here because the U.S. no longer makes many of these items.⁵

Lieberman went on to disagree with his optimistic colleagues who felt the prime rate didn’t need to be raised because foreign labor has become a satisfactory substitute: The U.S. can’t count on “low value-added manufacturing” imports to continue to lower wages, because we gave away those industries long ago! They’re history and no longer relevant.

Lieberman also wrote that “much of our labor force is in the service sector and not subject to international competition.” He was clearly wrong on that point. Three years after his op-ed piece—and as recently as May, 1999—service sector employees were still suffering from a severe case of creeping wages. As Business Week put it in its “All This and Low Wage Pressures, Too”:

Productivity is up, unemployment down, and the Fed can bide its time….

   Given the solid growth in service jobs, it is remarkable that service companies are not bidding up wages faster. The explanation may be that, the low unemployment rate notwithstanding, the demand for labor across the entire economy may be easing and the supply is rising.

   How so? First of all, the loss of 407,000 factory jobs during the past year creates a fresh supply of workers for the service sector.⁶

The working Americans who lost the jobs that went overseas are now quite willing to fill any demand for service jobs, as well as any “shortage of truck drivers who travel between Boston and New York,” who, incidentally, have seen their hourly income drop from $16 to $9 an hour.

The Great Debate Continues

No matter how much wages stagnate—and due to the chronic insecurity of greedy and materialistic conservatives—the great debate will likely continue ad infinitum. As recently as December, 1999, The Wall Street Journal proclaimed that “Even-Lower Jobless Rate May Not Ignite Inflation,” and cited a Department of Labor study which suggested that

The national unemployment rate—already at 4.1%, a 29- year low—might safely sink even further without dragging the economy into an inflationary spiral….

A few economists have abandoned the idea of a safe floor for unemployment altogether. Many others have retained the idea of a safe floor and simply lowered it.⁷

 So, again, the great debate among modern economists has nothing to do with the welfare of American workers. It’s still about the best way to make investors richer by keeping wages from going up. All that seems to change in this controversy is that the “safe floor” for an acceptable level of unemployment keeps ratcheting lower.

To get a better understanding of why lower unemployment in a growing economy doesn’t cause wages to rise higher than inflation, or even as high as inflation, consider another wrinkle in the conservative con: The stealth Catch-22 and why economic growth no longer counts.