April 18, 2016

WINNING THE WAR ON WAGES:

The forgotten recession that irrevocably damaged the American economy (Jeff Spross, April 18, 2016, The Week)

The story of how Volcker fulfilled his mission is complicated. But it boiled down to a massive hike in interest rates: The Fed's primary target for those rates reached an astronomical 19 percent in 1981.

It seemed to work, as CPI fell below 4 percent in 1983. And the standard tellings of this incident tend to emphasize the courage of Volcker and the policymakers and elected officials who stuck by him -- their willingness to do what was necessary in spite of its massive political unpopularity.

But there's a different version of the story you could tell. Volcker's policies were unpopular for a very good reason. They sparked two recessions: A brief one in early 1980 (arguably costing Carter re-election) and then a massive one from late 1981 to late 1982.

The basic problem, as economist Dean Baker explained to The Week, is there's no way to tame inflation that doesn't involve inflicting damage on the economy. But using interest rate hikes to spark recessions is a methodology that loads the bulk of the pain onto everyday workers, and people who are marginalized in our society. The national unemployment rate (the blue line below) briefly reached 10.8 percent -- higher than it got even in the Great Recession -- and it didn't get back to 5 percent until 1989. Which was bad enough. But the unemployment rate for lower class workers is always much higher than for upper class ones. Ditto racial minorities: The unemployment rate for African-Americans (the red line below) topped 20 percent by 1983.

"People lost their jobs and never got them back," Baker said. "People lost their houses, lost their families."

The Volcker recession also roughly coincides with a remarkable inflection point in the American economy. Before the mid-1970s, labor markets were often tight and full employment was common. After the Volcker recession, full employment -- when there are more jobs available than workers, so employers have to bargain up wages and work conditions -- basically disappeared. Union membership had already fallen 5 percentage points from roughly 1960 to 1980. But after the Volcker recession, its decline accelerated, falling another 10 percentage points from 1980 to roughly 1995.

Inflation is always and only a function of wage hikes.

Posted by at April 18, 2016 7:22 PM

  

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