Home > Main > Monetary policy and Human misery

Monetary policy and Human misery

September 6, 2011

Labor Share of income Plummets in the last Decade

Brad Delong tells good stories.  Here he tells a story about monetary policy and about how monetary policy is supposed to work.

Back before 1990 a typical recession involved the Federal Reserve fighting inflation by imposing a liquidity squeeze on the economy–raising interest rates, making a whole bunch of business models unprofitable, and so inducing businesses then fire their workers But after the excess supply in the labor market registered, wage increases stopped, and inflation expectations fell, the Federal Reserve would simply reverse course and return asset prices to their previous levels. Thus if you were a business it was easy to figure out what you should do after the macroeconomic storm had passed. Since asset prices and interest rates were back at their previous level, what you had been doing three years earlier before the recession would still be profitable. So all you had to do is reproduce your division of labor as it had been three years before.”

The bold’s mine. Monetary policy works by inducing misery on random people and businesses.  Note that his article is a long ode to fiscal policy.

Update: Here is the share of income for Labor from that well known communist columnist, David Frum.  Thx Beowulf!

Also if you need more grapics – go here check out how wonderful modern monetary policy (post Volker) is for workers wages.


[Update 11-2-2011: Welcome Zerohedgers! Feel free to walk around and find out how money works!  The red meat can be found here, but I write lots of offensive posts about why monetary policy sucks. Thanks el Veijo!  I used to know someone named oldman before he passed, and he was…worthy.  ]

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  1. beowulf
    September 6, 2011 at 7:18 am

    The trendline of labor’s share of income (versus capital’s share) since Tsy-Fed Accord of 1951 uncapped interest rates tells the tale.

    Until 1980, the cycle to cycle trend was pretty consistent– economic booms increase wage demands, recessions beat them down again, which are followed by booms which increase wage demands, etc etc. After 1980, the trendline has slid down (with a only a brief reversal in Clinton’s 2nd term) until now it looks like the bottom fell out. As David Frum puts it:
    “Workers’ share of U.S, national income is collapsing.
    Two questions for the Republican presidential candidates:
    1) Is this a problem?
    2) If yes, what can be done about it?”

    • TC
      September 6, 2011 at 9:16 am

      Also, check out that NYT chart – I am sure you already did, but it’s truly dramatic.

      I just wish I had more time to write on this. I’ll hae more time by the end of the year.

      • beowulf
        September 7, 2011 at 12:19 am

        Just figured out what NYT chart you meant, which made my labor productivity/compensation chart linked afterwards redundant, sorry about that. I can’t disagree with Bob Reich’s diagnosis or proposed solutions, if he ran for president I’d vote for him. He did screw up one minor fact that actually makes his point about the importance of public spending.
        “More generally, it stood by as big American companies became global companies with no more loyalty to the United States than a GPS satellite…”

        OK, this shouldn’t bug me but it does. Suffice it to say, the US Air Force couldn’t have a worse marketing team if it borrowed them from North Korea. if GPS were built by Intel, there would be commercials, billboards and perhaps a college bowl game to remind the public of every lost sailor plucked from the sea or idiot hiker saved from bears thanks to GPS (google “saved by GPS”).

        But, as it happens, the GPS system is funded by American taxpayers and is operated by a military unit in Colorado called Air Force Space Command (what a cool name we have, let’s not tell anybody!) as a single payer, one size fits all, government-run, socialized navigation system offered as a public good, free at point of service, to the entire world. This exemplar of socialism (good luck trying to compete with free, suckers) is available to everyone by order of President Reagan to prevent a repeat of the 1983 Soviet shootdown of an off-course South Korean airliner. Speaking of Koreans, if those North Koreans ad men suddenly turned on us, Space Command could shut off GPS (completely or partially) with the flip of a switch.

        Thanks for letting me vent. :o)

  2. TC
    September 6, 2011 at 9:14 am

    Frum must have relatives who are really suffering. This guy is becoming a progressive in thinking if not in proposed solutions.

    It’s horrible out there, and I expect the backlash is building. I don’t think it will be riots, but the next 30 years will be very different than the last 30 years.

    • September 6, 2011 at 11:12 pm

      This sounds like a great question until you realize you have no follow up & they all respond stating the US needs to deregulate & cut taxes in order to unleash the magic of the marketplace or whatever. Then Ron Paul chimes in about gold and all the audience can think about is how they’re paying more for a gallon of gas & go wild. The democrats need to learn to communicate in these sorts of simple ideas if they hope to win without the Republicans shooting themselves in the foot.

  3. Clonal Antibody
    September 6, 2011 at 10:16 am

    I had linked a set of graph’s that you might find on topic – I had posted them in a comment on Art Shipman’s blog – two that you might find of interest are

    Average Hourly earnings (nominal and CPI adjusted)

    Total Household Consumer Debt/Total Accrued Wages and Salaries)
    CPI adjusted Household consumer debt per person in the civilian labor force

    We Should also assume that the number of full time working members per household went up from about 1.1 in 1963 to over 1.5 in 2008

    See Civilian labor force per capita

  4. beowulf
    September 6, 2011 at 11:16 am

    Thanks Clonal. Looking at the first chart, average hourly earnings (adjusted for inflation) have been stagnant at $16 an hour for over 30 years. That’s crazy, (as Ravi Batra points out) this has created a terrible wage-productivity gap, “the gap between the real wage and labor productivity. The real wage is the purchasing power of the average salary. If productivity rises fast and the real wage rises slowly, then a wage-productivity gap develops and grows… Productivity is the main source of supply, whereas wages are the main source of demand. If this wage-productivity gap keeps rising over time, supply will rise faster than demand and then we face the problem of overproduction.”

    Australia, by way of comparison, just raised its minimum wage 3.4% to US$16.54 (A$15.51) an hour. If that’s the floor, I’ll go out on a limb and say the average is above that. Minimum wage laws are like hummingbird wings, in theory they shouldn’t fly but in practice they work just fine.
    “Australia’s workforce is pushing close to full capacity with an unemployment rate of just 4.9%.”

    • TC
      September 6, 2011 at 11:44 am

      “Productivity is the main source of supply, whereas wages are the main source of demand. If this wage-productivity gap keeps rising over time, supply will rise faster than demand and then we face the problem of overproduction.”

      Slap your head obvious, yet has to said be in comments at the Traders Crucible.

      I have so many WTF moments here in the comments section. There are so few links between the real world and economics it terrifies me. Why is this stuff being said on little blogs and not on national news every day?

      • beowulf
        September 6, 2011 at 2:14 pm

        Its because political campaigns are funded out of capital income, not wage income.

        “The following chart shows labor productivity and real hourly compensation [wages and benefits] since 1950. Two things strike me particularly about this graph. The first is how closely the two series track each other between 1950 and 1980. During those 30 years labor productivity in the nonfarm business sector of the US economy rose by 92%; real hourly compensation paid to workers rose by a nearly identical 87%… The second striking feature of this picture is, of course, how much the two series have diverged since the early 1980s. Output per hour of work in 2010 was 87% higher than in 1980, while real hourly compensation was only 38% higher.”

        Leaving aside that most of that 38% growth since 1980 is the cost of employer-paid health insurance (Obama screwed the pooch by keeping healthcare costs on businesses and individuals instead of enrolling everyone in Medicare); if wages the past 30 years had tracked productivity at the same rate as for the prior 30 years, average wages would now be 50% high. The difference between an average wage of $16/hr versus $24/hr is $16,000 per worker per year.

    • Clonal Antibody
      September 6, 2011 at 1:01 pm

      Hence my other graphs. The difference has been partially made up by increasing the cpi adjusted debt burden. Thus one has to take out the debt servicing charges from the incomes. To me the debt curves are the really scary part of the picture!

    • Clonal Antibody
      September 6, 2011 at 1:05 pm

      I should have said increased debt and a shift from primarily single income households to households with more than one income stream.

    • Clonal Antibody
      September 6, 2011 at 7:20 pm


      From the hourly real income, we must subtract the debt service payments – in other words, the taxation imposed by the financial industry.

      Hourly Tax imposed by the financial industry on hourly wage

      Both the real hourly wage graph presented earlier and the above one are in 2006 dollars

  5. Clonal Antibody
    September 8, 2011 at 11:14 pm

    Check out EconProph’s new article – The Mean and the Median Tell Two Different Stories

    n the U.S. over the last 34 years, the median household income has only grown at less than 0.5% per year despite increases in education. So real GDP per person grows at 1.9% per year, but real median income only grows less than 0.5% per year. At 0.5%, it will take 150 years for income to double. End of the American dream of doing a lot better than your parents. What accounts for the difference? It’s the upper 1% of the income distribution, the rich folks, millionaires and billionaires, that have skimmed off the 65% of all of the GDP gains for 34 years.

  6. beowulf
    October 21, 2011 at 5:08 pm

    TC, you should chart the lag between your posts and Peter Orszag’s columns.

    Over the past two decades — and especially since about 2000 — the share of national income that flows into wages and other kinds of worker compensation has been plummeting in various countries. Labor share normally bounces around over the business cycle, but given how long the decline has lasted, it can’t be dismissed as cyclical. And this partly explains the kind of anger and frustration that is fueling the Occupy Wall Street movement worldwide.

    You did leave him hanging by not offering solutions above. :o)
    No wonder the frustrated Wall Street protesters lack any specific proposals for change: We are effectively missing $500 billion a year in wages, and no one has a credible set of ideas that would bring it back.

    • TC
      October 21, 2011 at 8:31 pm

      Peter D saw him ripping off a Traders Crucible post -Word for Word – in an NYC coffee shop! The good citizen Peter D was so shocked he forgot to take a photo with his his cell camera so we have no photographic proof of this crime…but it’s just a matter of time before his obvious plagiarism is noticed and he spends the rest of his life as a pariah and I ascend to my rightful place at the right hand of the father.

      • Peter D
        October 21, 2011 at 8:59 pm

        that’s all true and I will know better next time!

      • beowulf
        October 21, 2011 at 9:39 pm

        Oh, I’m not saying Peter Orszag is plagiarizing you,
        the truth is far more grim…
        I’m saying Peter Orszag is your soulmate.

        • TC
          October 22, 2011 at 12:16 pm

          ok. deep breaths…. wha!?!?

    • TC
      October 21, 2011 at 8:33 pm

      Still – why aren’t more people talking about the obvious weaknesses of monetary policy? Even if it works as advertized, there are huge reasons to use fiscal over monetary policy.

      • Peter D
        October 21, 2011 at 9:15 pm

        TC, have you seen my latest comment on Sumner’s blog? Basically, monetary policy like NGDP targeting can only work thru the fiscal channel, i.e., increase of private sector’s NFAs. Once people understand this, the whole debate reduces to what types of fiscal stimulus are the most effective, not to whose doing those (Fed or the Treasury).
        Now the whole expectation thing is a bit of a different story. i don’t deny that expectations may work in theory but I claim that they absolutely fail in practice. There are people that might be susceptible to influence by inflation expectations, but those are mostly the wrong people – savvy investors orrich savers, not the consumers whom we need to be spending now. What happens is that the consumers even if they vaguely expect inflation (and please don’t tell me that they do because the Fed “credibly” promised so – they do because the stupid media types like Peter Schiff promised so!) these consumers merely hunker down and save even more. They are like deer caught in headlights, but it is only natural – when you uncertain about your income or have no good income to begin with, the last thing in the world you’re going to be doing if you expected inflation is to go and buy stuff! (Winterspeak had a good couple of posts on this.) You either save even more or you shift into gold, real estate or forex – nothing that help aggregate demand! Krugmans and Rowes of the world have to understand that consumption cannot be brought forward.
        And the rich guys who expect inflation do the same – they just bid up other assets prices and this does zilch for AD. this whole transmission mechanism is one large fiction.
        and the same os true with interest rates. Low interest rates do nothing to nring consumtion forward.
        Just about the only thing that would induce people to buy more is more real income.

        • Peter D
          October 21, 2011 at 9:17 pm

          …and typing on iPad suks…

        • TC
          October 21, 2011 at 9:43 pm

          I hadn’t seen it and even when I commented the last time hadn’t really looked at the posts. I feel a bit bad now I was a smart ass to Scott. He is really a honest broker in his own way. He and Nick Rowe are both honest, upright people and I sometimes want to kick myself for being an ass.

          then, your comment.

          That’s exactly right! Buying assets only works because they (the fed) over pay for the assets. It’s the fiscal transfer that matters, not the monetary policy….that’s how it works even within monetary theory

          Scott admits it, and it’s 100% obvious once pointed out. It’s only calling it monetary policy that confuses people like me. just go back to the balance sheet and put it into columns, and there you have it. Monetary policy = fiscal policy through another channel. the channel might be easier to withdraw. it might be hidden under layers of bank balance sheets. But the reason monetary policy is a fiscal transfer to financial entities – who then (presumably) lend out these funds with leverage.

          The crazy thing about MMT is that when you start thinking this way, it starts to self-reinforce and also make things more clear. But this – monetary policy is simply a different, politically acceptable and bank approved form of fiscal – its awesome and “has the benefit of being true” 🙂

          On different topic: I do have a problem with this: “Low interest rates do nothing to nring consumtion forward.”

          This can’t be true in aggregate, right? It’s impossible. If we can produce it…

          Nice one 🙂

      • beowulf
        October 21, 2011 at 10:13 pm

        Its easy to be for fiscal austerity if you think monetary policy is what can push the economy out of a ditch.
        To accept that fiscal policy is the tool that can do that would conflicts with their austerity policies and create cognitive dissonance and admit they and everyone else has been wrong. Not unrelated to this, Stephen Colbert wasn’t kidding when he called David Frum “The Balls” of the Republican party…
        “For years, I’ve shared the Marketplace airwaves with former Secretary of Labor Robert Reich. We recorded commentaries, point counter-point, alternate weeks on business and economic issues. The intent was for Bob to represent the left, and for me to represent the right.
        Over the past three years, this format has put me into some awkward positions. So long as the topic is “green jobs” or NLRB regulations or immigration, my thinking aligns reasonably congruently with the current conservative consensus.

        But on the issues that today most passionately divide Americans – healthcare reform, monetary policy, social spending to aid the unemployed, and – soon – the American response to the euro crisis, I have to recognize that my views are not very representative of the conservative mainstream.
        When speaking wholly and declaredly for myself, I can shrug off (admittedly – with some regret) the distance I have drifted from old comrades. When I’m called on to do point-counterpoint, I can’t deny that there is something false about the situation… If I can’t or won’t do that job, then I should make way for somebody who can and will.
        Accordingly, I have resigned my role on the Marketplace program…”


  7. Peter D
    October 21, 2011 at 11:14 pm

    TC :
    On different topic: I do have a problem with this: “Low interest rates do nothing to nring consumtion forward.”
    This can’t be true in aggregate, right? It’s impossible. If we can produce it…

    OK, what I mean is this. Temporal consumption preferences are very, very inelastic. You cannot scare people to bring consumption forward (with inflation expectations) and you cannot induce them to bring consumption forward (with low interest rates.) What are they gonna buy to protect themselves from inflation? Cars that they won’t have money to buy gas for? Food that will rot? Electronics that they think they cannot afford now and that will become obsolete in 2 years? Just about the only thing you can do with your money if you believe it will buy less in the future is to try and buy some assets – real estate, gold, forex, antiques, whatever. Not the consumption items that can primarily affect AD. The only thing that can really change consumption preferences is rising income. Yes, there will be some rising income effects from all the financial speculation that people will engage in with inflation expectations, but these are all secondary and muted.
    Same with low IR. People don’t say: interest rate too low – I go buy and iPad; and they don’t say: interest rates are high, let’s not buy that iPad and buy a bond instead. If you know anybody who changes consumption habits based on interest rates, I’d like to know. And we know that short term interest rate is where the Fed wants it – and it wants it low because it thinks that economy sucks; and long term interest rate is where people think economy will be in the future. So, if those interest rates are low, this means that economy sucks now and people also think it will suck in the future. And people who think economy will suck in the future and income will suck in the future are not going to go and buy stuff today. They are going to either hunker down or speculate. And whatever income effects the speculation might produce – those will not be enough to offset the general pessimism and low income that produced deficient demand in the first place. So, low interest rates not only hardly ever induce consumption, they are in fact the signal that consumption will suck for the near future!

    • October 22, 2011 at 1:56 am

      Peter D :
      If you know anybody who changes consumption habits based on interest rates, I’d like to know.

      Err, that would be me then. But I know I’m odd 🙂

      • TC
        October 22, 2011 at 12:14 pm

        TRAITOR! I DENOUNCE YOU! lol 😉

        But, how specifically? if you don’t mind my asking. I am a bit flummoxed as to what someone would actually do, how they decide, and what interest rates you watch.

      • Peter D
        October 22, 2011 at 12:17 pm

        No! You are supposedly the model human being according to most of economics profession! I am ready to admit being wrong, but tell me, what do you buy when you see interest rate too low? How do you bring your consumption forward? Do you do the same when you expect inflation?

        • October 22, 2011 at 1:29 pm

          Once interest rates are too low there’s no point keeping the FU Fund in the bank and you can’t ‘stooze’ effectively. Plus in the UK low interest rates are generally means increases in the cost of living. So at that point I tend to do a kit refresh – where those things need refreshing of course – or get services in (decorators, etc) – it ain’t going to be cheaper tomorrow to buy them and they’re usually glad of the work.

          I’m a man that likes a bargain. 🙂

    • Peter D
      October 27, 2011 at 9:02 pm

      This is a nice summary from Warren, that touches on the role of IR:

      the reason the govt can deficit spend in the first place without causing ‘inflation’ via excess demand is because the economy has a net savings desire for whatever reason.
      so govt doesn’t deficit spend first, and then, quick, offer some rate to keep those funds from causing inflation.the govt buys things when it deficit spends, and that they are offered for sale is the evidence that the economy wants the net financial assets.
      yes, the term structure of rates figures into that savings decision, but looking at the interest income channels and econometric evidence I suspect that higher rates reduce savings desires, and vice versa.

      (at: http://feedproxy.google.com/~r/CommentsForTheCenterOfTheUniverse/~3/flBYi5eUPJI/)

      • beowulf
        October 29, 2011 at 10:53 am

        “the reason the govt can deficit spend in the first place without causing ‘inflation’ via excess demand is because the economy has a net savings desire for whatever reason.”

        Peter, check out this paper…”Three Balances and Twin-Deficits: G0dley versus Ruggles and Ruggles”
        I couldn’t begin to summarize it other than to just say… 4.7% of US GDP plus trade deficit. :o)

        • TC
          October 29, 2011 at 11:59 am

          Wow. Just wow. Greatest Paper ever.

          I am nearly in tears right now.

          Did anything happen in 1996-1997 that might have changed this Private Balance relationship? I don’t know, maybe a government surplus combined with China who locks their trade surplus and stable oil deficits? Just a completely uninformed guess. I have no idea what I am talking about.

        • beowulf
          October 30, 2011 at 5:33 pm

          Yeah, pretty good stuff. Shaikh’s presso slides and audio at the link.

          1996-1997 is when combination of Clinton tax hikes and Gingrich budget cuts made budget deficit smaller than trade deficit, at which point private sector savings started draining away until economy imploded with dotcom bubble popping. Same thing happened a decade later (in 2007 the budget deficit was $163B and the trade deficit was $709B).

  8. Peter D
    October 21, 2011 at 11:24 pm

    TC :
    I hadn’t seen it and even when I commented the last time hadn’t really looked at the posts. I feel a bit bad now I was a smart ass to Scott. He is really a honest broker in his own way. He and Nick Rowe are both honest, upright people and I sometimes want to kick myself for being an ass.

    I haven’t seen you being nasty to any of them. In fact, you’re always very deferential. I just saw Rowe trying to convince some Austrians that Fed credibly targeting NGDP might work:

    Bob: to target NGDP, the Fed doesn’t print money. It *threatens* to print (unlimited amounts of) money, conditional on NGDP being below target. If the threat is credible, and NGDP rise to target, the actual size of the Fed would almost certainly shrink. A fully credible threat like this would not need be carried out.

    So, the idea theoretically is OK – it is like open mouth operations: the Fed doesn’t need to buy bonds to defend the target rate, it is enough that the market knows it can do so. But this is just crazy that Rowes and Sumners and Krugmans think that you can scare people into bringing consumption forward. People don’t behave like that (by the way, where is praxeology when you need it? my guess it is useless to answer questions like that – you need actual sociological studies, not some inapplicable “logic”.)

  9. Peter D
    October 24, 2011 at 10:32 pm

    “Stooze”? “Kit refresh”? What are those in Engl… I mean, American? I guess you mean you buy new stuff instead of the old one? Like what?
    So, I guess at least some people with income – like Neil – might decide against having the money in the bank and also not chase some assets, but rather spend it on the more “fleeting” stuff. I wonder how many people like that are there, especially in a balance sheet recession.
    Neil, would you do the same if you expected high inflation?

    • October 25, 2011 at 2:09 am

      The two tend to be linked in the UK given the way our economy works. You buy stuff today if inflation is high, unless the interest rate happens to be high and you can make money from the system (http://www.stoozing.com/easy-stoozing-guide.php).

      It’s less about having income and more about having a buffer. My work is ephemeral – like an actor. Therefore I follow Bogart’s advice and maintain an FU Fund.

      Most of MMT is buffer based. It tries to buffer employment, commodities,etc. Perhaps I find it intuitive because of the way I have always operated.

      As I said I’m odd. I came out of university in profit.

  1. November 2, 2011 at 12:13 pm
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