First, let's start with the good news, developments that are both important and a long time coming. Thursday's reports from the Bureau of Labor Statistics showed:
1) For all employees, real hourly wage growth (i.e., growth above the rate of inflation) came in at 1.2% in January, 0.5% of which came from increased wages and 0.7% of which came from a drop in inflation (mostly from a reduction in energy costs).
2) For all private, nonfarm employees, real hourly wages increased 2.4% from January 2014 to January 2015, and--thanks to an increase of 0.6% in the average workweek--real weekly wages increased by 3.0%.
3) Within private, nonfarm employees, for nonsupervisory and production employees (i.e., workers as opposed to management) real weekly wage growth was 3.8% from January 2014 to January 2015.
This increase in weekly real wages is worth applauding, particularly because it is higher for regular workers than for management. I don't usually use bold fonts, but sometimes data can make a person's eyes glaze over. This stuff is too exciting to miss.
Not that many years ago, annual raises of 4 percent or more were common. However, inflation in those years was much higher than it is right now. If inflation increased by 4 percent, and you got a 4 percent raise, then you really got no raise at all. Over the past 12 months, inflation actually decreased by 0.1 percent, which helps workers' purchasing power significantly.
So now to Janet Yellen. She was nominated by Barack Obama, and became the chair of the Federal Reserve just over one year ago. She is not only the first woman chair, she's also the first Democratic nominee to serve as chair since Paul Volcker ascended to the position in 1979. That's because Bill Clinton decided in 1995 to reappoint Alan Greenspan, a conservative Ayn Rand acolyte initially nominated by Ronald Reagan. In January 2001, Greenspan provided crucial cover to George W. Bush's plan to cut taxes (mostly on the rich) by predicting that the projected federal surplus was so substantial that we could both have a big tax cut and still completely (cough) pay down our national debt.
Congress charged the Federal Reserve with a mandate to seek "maximum employment, stable prices, and moderate long-term interest rates." However, Fed chairs have typically focused more on fighting inflation (i.e., keeping prices stable) than on seeking maximum employment. At least until Yellen arrived, that is. To a degree that separates her from previous Fed chairs, Yellen has expressed strong concerns about economic inequality, notably in an October speech:
It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation's history, among them the high value Americans have traditionally placed on equality of opportunity.
In Yellen's testimony before Congress earlier in the week, she addressed this issue as it relates to Fed policy. Perhaps the most important decision the Federal Reserve makes is where to set interest rates. Keeping interest rates low has a stimulative effect, while raising them slows or even halts economic growth. William McChesney Martin, the longest-serving Fed Chair, famously said that the primary job of the Fed was "to take away the punch bowl just as the party gets going," i.e., to make sure that economic growth doesn't get so strong as to set off an inflationary spiral.
The problem comes when Fed chairs see that as their only job, and forget that he or she also must seek maximum employment. Typically, the only time when wages can grow enough to really improve workers' lives is when unemployment is low and the labor market gets tight--giving employees the leverage they lack when they feel lucky just to have any job at all. The Great Recession gave us years when that was the case, although now, finally, things are improving. 2014 was the best year for job growth since 1999. For example, the raises announced recently by Walmart, TJ Maxx, and Marshalls resulted from the tightness of the labor market, as well the organizing work done by employees, not a sudden commitment to a living wage on the part of corporate headquarters.
The stage is now set for decent wage growth going forward, unless the Fed decides to take the punch bowl away and raise interest rates off the historic lows--just above zero percent--at which they've been since December 2008. Yellen has made clear, however, that she is not going to raise rates until and unless labor market conditions continue to improve. At this point, as she testified, "too many Americans remain unemployed or underemployed" and "wage growth is still sluggish."
In response to Yellen's testimony, Republicans expressed what we might call a degree of displeasure. Rep. Mick Mulvaney (R-SC) told her: "You're sticking your nose in places that you have no business to be" by considering issues such as wage growth, long-term unemployment, and income inequality. Rep. Sean Duffy (R-WI)--the guy who complained that he "struggle[d]" on his congressional salary of $174,000 per year--attacked Yellen for talking about income inequality last October and offering a "political backup" (whatever that is) to Democratic candidates who made it an issue on the campaign trail.
Yellen pointed out that she had only been discussing economic trends that are "a problem that everyone in this room should be concerned about," and added, "I am not making political statements. I am discussing a significant problem that faces America .... I didn't offer any policy recommendations whatsoever in that speech." To Republicans, it seems even just talking about data is partisan and political. Imagine what they'd think of actually doing something to counter poverty, wage stagnation, and income inequality. Instead, what they want to do is bring Yellen under their control and stop her from sticking her nose in places they don't think it should be.
On the one hand, government programs have played a major role in alleviating poverty, as Josh Barro at the New York Times explained. Based solely on pre-tax income, the percentage of Americans living in poverty would have jumped by 5 percentage points from 2007 to 2012, i.e., the period following the Great Recession of 2008. Thanks to Medicaid, food stamps, unemployment insurance, and other government programs that automatically aid people earning less than a certain amount--along with measures President Obama and congressional Democrats enacted as specific reactions to the crash, such as the stimulus and extensions of unemployment insurance--the percentage of Americans living in poverty increased by 1 percentage point instead of the aforementioned 5. No small feat.
Additional changes Democrats enacted, including Obamacare--which taxed the rich to provide health insurance premium subsidies to middle- and lower-income Americans and expanded Medicaid--as well income tax hikes on high earners, will further help combat income inequality going forward. Raising the minimum wage is also an important step, albeit one that only some states and localities have taken. But those measures, many of which took effect in 2013 or later, are just now starting to have a real impact. In reality, they can only do so much when it comes to broader income inequality and helping those who are neither rich nor poor. The biggest, most broad-based development that would help both those toward the bottom and those in the middle is rising real wages for American workers. Yellen's approach to setting interest rates reflects her understanding of that fact.
As long as inflation remains low--the Fed considers an annual inflation rate at or below 2 percent to be consistent with price stability--Yellen can keep interest rates low. If she does so, we can start to really reverse the trend of no real wage growth over the past four decades. It is absurd that real hourly wages in late 2014 were at the same level they were in 1979. The high point for average inflation-adjusted wages was actually January 1973.
To get back to that level and--here's a radical notion--maybe even surpass it, we need someone in charge at the Federal Reserve who understands that creating conditions that increase the purchasing power of American workers' paychecks is a part of her mandate. From what she's said and done so far, it appears Janet Yellen is exactly that kind of Fed chair.
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