Time to End the War on Wages

For the past two decades or so, the federal government and the Federal Reserve have waged a relentless war on wages.  This war was a “shadow” war, a subset of the war on inflation that began with the Reagan administration in response to the soaring inflation of the ’70s.  But never mind that most of that inflation was caused by soaring oil prices.  It was assaulted on all fronts, and that included wages. 

Paul Volcker and the Federal Reserve attacked with interest rates.  But the real weapons of mass destruction were in the hands of the federal government.  The first was trade policy.  We threw open our doors and welcomed any and all foreign competition, regardless of whether or not they reciprocated, and the impact on wages was devastating.  As we were blinded by the flash of low prices, the blast wave leveled factories across the whole country.  Then came the biological weapon – immigration policy.  The labor market was flooded with immigrant workers, legal and illegal, white collar and blue-collar.  The aftermath of this war is that blue-collar wages are now lower than their peak in 1977 and median family income is now lower than it was in 1969.  Family net worth is lower than it was in 1976 and family indebtedness has soared to record levels as Americans have struggled in vain to hold onto their standard of living. 

Sunday, while being interviewed by Tom Brokaw on “Meet the Press,” President-Elect Obama remarked that all sides in the auto industry must come together and make concessions, including further wage and benefit concessions by the UAW.  With wages of $28 per hour, assembly-related workers are already paid below the national mean income and, with wages at $14 per hour, non-assembly-related UAW workers’ pay is already well below the median income.  Is cutting their wages further and cutting tens of thousands of jobs to help the Big Three survive in some form his idea of helping the middle class?  Will he claim moral victory if a few of us manage to hold onto low-paying jobs, saying that at least those jobs weren’t lost too?

High wages aren’t the problem.  Wage inflation that exceeded the overall rate of inflation is what gave Americans the highest standard of living in the world.  Since wages only represent two thirds of the cost of products, rising wages driven by a strong demand for labor actually improve purchasing power.  Cutting wages cuts prices at a slower rate and purchasing power is lost.  Inflation-fighting focus needs to be on the other factors, things like raw material shortages, product shortages, rising taxes and so on.  Want to help the middle class?  Start focusing on driving a demand for labor.  Your stimulus plan will be a nice kick-start, but we need permanent jobs – the ones our misguided trade policy gave away.  We need policies that will increase market share of the domestic automakers, not cut their capacity to match declining market share.  We need policies that will drive the domestic automakers to hire more workers, not cut their jobs and cut their pay. 

Ultimately what we need are immigration policies that stop feeding an over-supply of labor and trade policies that hold foreign nations accountable for upholding their end of the bargain.  They can either buy as much as we buy from them or we can take action to cut imports.  One way or the other, balance must be restored.  It’s their choice, but it’s our responsibility to make sure that one or the other happens.

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2 Responses to Time to End the War on Wages

  1. Clyde Bollinger says:

    Pete,
    I’ll acknowledge my bias up front. I want what i want when I want it. That goes for lots of things such as fresh produce in the dead of winter, for instance, along with a lot of other things, but most if not all are not necessary. It is my suspicion that I and the USA could survive with very few imports should it become necessary. Chromium come to mind as a necessary import. Several spices and Australian wine round out the list. The point being that we have the resources to enable us to thumb our noses at the rest of the world and just do our own thing. No doubt while researching for Five Short Blasts, you gathered the data to support this conclusion.

    With this premise, it seems that our leaders should take a hard look at what makes the system fail and take steps to effect a course correction – thus avoiding the collision -Five Short Blasts should have been adequate notice. Some how there needs to be a larger readership.

    Penalizing American workers by curtailing wages is not the answer. Generations of retirees who have a good faith expectation of benefits – even if they may be excessive by some standards – should not be penalized either. The most obvious equalizer that I can think of is for the, what is it they are called?, transplants, to be required to place an amount equal to the big 3’s legacy cost in escrow for each car they make. The money collected rather than tax payer funds could then be used to de-couple the legitimate beneficiaries of the expected benefits from the domestic producers over a 5-10 year period. No new hire would have any expectation of post active employment benefits going forward. In time, all car makers would be playing on a level field. Most of the same rational could be applied to other industries as well. I’m not convinced that even the car company retirees think their benefits are sustainable even with healthy companies.

    • Pete Murphy says:

      Clyde, regarding natural resources (things you mention, like produce and chromium), I have no problem with free trade in such things. It’s free trade in manufactured goods with overpopulated nations that is the real problem. Nevertheless, any trade deficit is a problem. So, if we eliminated the deficit in manufactured goods and were left with only a deficit in some natural resource, then some action needs to be taken to reduce that deficit too. Either our own exports are undervalued, or our per capita consumption of those exports should be reduced (perhaps by recycling or using them more efficiently) or, if that’s not possible, it may be a clear indication that we are, in fact, overpopulated. In that case, the total consumption of those materials would be reduced by reducing the population.

      Your idea of taxing foreign makers with plants in the U.S., in order to level the playing field with the Big Three, is an interesting idea. You’re right that, whether pensions are provided by employers or the government, the contribution toward those pensions needs to be equal.

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