Off the Cliff

I have often discussed the attack on labor in this column. The chart today clearly shows the declining share of national income that goes to wages (Money Box):

 

The question that emerges is why? There are a number of explanations proffered, from capital-biased technological change (in other words machines are playing a larger part in production or in popular terms - "the robots are coming, the robots are coming") to monopolization effects (where corporations are simply using increased market power to suppress wages). But while there might be something in both of these explanations, I think the author of the Money Box piece, Matthew Yglesias, is right in pointing out that the "cult of price stability" is the biggest culprit. However, he appears to believe this is based on a preternatural fear of inflation. While this may be partially true, I believe it is more readily explained by the neoliberal ideology that underwrote the change in fed policy.

Inflation can, of course, be detrimental to an economy. If prices are rising faster than wages, then the average consumer is hurt as their purchasing power declines. It also has a deleterious effect on investors, as prices rise the real value of their capital decreases, unless they earn interest greater than the increase in prices each year. As I have mentioned in previous posts, the 70s consensus around declining corporate profits was that labor was the easiest cost to control. But how? One move was to begin a battle against organized labor that continues to the present day. Unions are the biggest impediment to lowering wages and thus Public Enemy #1 to big business and neoliberalism. We even see this battle play out in public education. A second was to move production overseas, where lower labor costs were no longer offset by protectionism or high transportation/communication costs. Finally was a change in monetary policy -- getting the Federal Reserve to focus its attention on inflation rather than full employment. A clear way to suppress wages, as is currently occurring, is by having higher unemployment. This gives employers the upper hand and allows them to underpay employees. 

The net effect of these changes is a world where corporate profits are increasing year over year, Wall Street execs and hedge fund managers are making piles of money without necessarily adding value to the economy or effectively managing risk (their main responsibilities) and the average worker has seen their real wages decline. Where has the money gone? To the new elite class that has built a party (can you guess which one?) that will support their interests at the expense of everyone else. This is exactly what is occurring with the fiscal cliff debate at present -- one party is arguing that defeating an incrementally small increase in the tax rate of the top 2% is worth sending the U.S. economy into recession to combat. Fight on you one percent warriors!