The administration’s problem is not a question of economics, but a matter of values and priorities.
In the first Great Depression, President Roosevelt created an alphabet soup of institutions – the Works Progress Administration (WPA), the Tennessee Valley Authority (TVA) and the Civilian Conservation Corps (CCC) – to directly relieve the unemployment problem, a crisis the private sector was unable and unwilling to solve.
In the current crisis, banks were handed bottomless bowls of alphabet soup – the Troubled Asset Relief Program (TARP), the Public-Private Investment Program (PPIP) and the Term Asset-Backed Securities Loan Facility (TALF) – while politicians dithered over extending inadequate unemployment benefits.
Proponents of labor-market flexibility argue that it’s easier for the private sector to create jobs when the transactional costs associated with hiring and firing are reduced. Perhaps fortunately, legal protections for American workers cannot get any lower: US labor laws make it the easiest place in the word to fire or replace employees, according to the OECD.
Another consequence of labor-market flexibility has been the shift from full-time jobs to temporary positions. In 2010, 26 percent of all news jobs were temporary – compared with less than 11 percent in the early 1990′s recovery and just 7.1 percent in the early 2000′s.
The American model of high productivity and low pay has friends in high places. Former Obama adviser and General Motors (GM) car czar Steven Rattner argues that America’s unemployment crisis is a sign of strength:
Perversely, the nagging high jobless rate reflects two of the most promising attributes of the American economy: its flexibility and its productivity. Eliminating jobs – with all the wrenching human costs – raises productivity and, thereby, competitiveness.
Unusually, US productivity grew right through the recession; normally, companies can’t reduce costs fast enough to keep productivity from falling.
That kind of efficiency is perhaps our most precious economic asset. However tempting it may be, we need to resist tinkering with the labor market. Policy proposals aimed too directly at raising employment may well collaterally end up dragging on productivity.
Rattner comes dangerously close to articulating a full-unemployment policy. He suggests unemployed workers don’t merit the same massive government intervention that served GM and the banks so well. When Wall Street was on the ropes, both administrations sensibly argued, “doing nothing is not an option.” For the long-term unemployed, doing nothing appears to be Washington’s preferred policy.
The unemployment crisis has been a godsend for America’s superrich, who own the vast majority of financial assets – stocks, bonds, currency and commodities.
Persistent unemployment and weak unions have changed the American workforce into a buyers’ market – job seekers and workers are now “price takers” rather than “price makers.” Obama’s recovery shares with Reagan’s early years the distinction of being the only two post-war expansions where wage concessions have been the rule rather than the exception. The year 2009 marked the slowest wage growth on record, followed by the second slowest in 2010.<2>
America’s labor market depression propels asset price appreciation. In the last two years, US corporate profits and share prices rose at the fastest pace in history – and the fastest in the G-7. Considering the source of profits, the soaring stock market appears less a beacon of prosperity than a reliable proxy for America’s new misery index. Mark Whitehouse of The Wall Street Journal describes Obama’s hamster wheel recovery:
From mid-2009 through the end of 2010, output per hour at U.S. nonfarm businesses rose 5.2% as companies found ways to squeeze more from their existing workers. But the lion’s share of that gain went to shareholders in the form of record profits, rather than to workers in the form of raises. Hourly wages, adjusted for inflation, rose only 0.3%, according to the Labor Department. In other words, companies shared only 6% of productivity gains with their workers. That compares to 58% since records began in 1947.
Workers’ wages and salaries represent roughly two-thirds of production costs and drive inflation. High inflation is a bondholders’ worst enemy because bonds are fixed-income securities. For example, if a bond yields a fixed five percent and inflation is running at four percent, the bond’s real return is reduced to one percent. High unemployment constrains labor costs and, thus, also functions as an anchor on inflation and inflation expectations – protecting bondholders’ real return and principal. Thanks to the absence of real wage growth and inflation over the last two years, bond funds have attracted record inflows and investors have profited immensely.
The Federal Reserve has played the leading role in sustaining the recovery, but monetary policies work indirectly and disproportionately favor the wealthy. Low interest rates have helped banks recapitalize, allowed businesses and households to refinance debt and provided Wall Street with a tsunami of liquidity – but its impact on employment and wage growth has been negligible.
http://www.nakedcapitalism.com/2011/05/mark-provost-why-the-rich-love-unemployment.html
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