The Democratic Party has made income inequality" a signature issue for the 2014 (and presumably 2016) election cycle. Democrats
en masse shout
Jaccuse!" at Republicans. There is a very different story to tell.
Income inequality" is a crude and twisted heuristic for stagnant median family income. Income inequality" does not really resonate with voters as
noted by the
Washington Posts own Catherine Rampell with a mountain of evidence showing that Americans dont begrudge the wealthy their wealth just are frustrated at the lack of widespread economic opportunity.
So lets get down to cases. Stagnant median family income is not the GOPs fault. Its the Fed who done it.
The Atlantic Media Companys
Quartz recently claimed that the Fed has been intentionally keeping a lid on wages. This has potentially major political implications. Among other things this view would allow the Republicans to push the discourse back toward the real problem wage stagnation. It can serve to refocus the Congress on the real solution restoring real rule-based integrity to monetary policy as a way to get America moving again.
A culpable Fed gives irony to the fact that it is the Democrats that protect the Fed as if it were the Holy of Holies of the
Temple. What if as asserted in
Quartz the Fed
by policy and not the GOP is the source of wage stagnation? This opens an opportunity for the GOP to parry the political narrative of income inequality" and feature the real issue on the mind of the voters and forthrightly to address its core cause poor monetary policy.
This has been slow to happen because Federal Reserve has exalted prestige. The elite media has a propensity to canonize the Chair of the Fed. Media adulation has obscured the prime source of the stagnation besetting American wage earners for the past 43 years.
Paul Volckers life was exalted (with some real justification) for instance by
New York Times prize-winning journalist Joseph B. Treaster as
The Making of a Financial Legend. Downhill from there…
Chairman Greenspan was featured on the cover of
Time Magazines February 15 1999
issue as the most prominent member of The Committee To Save The World." One of the greatest investigative journalists of our era Bob Woodward wrote a deeply in-the-tank hagiography of Alan Greenspan entitled
Maestro. In retrospect the halo the media bestowed was
faux.
The
Atlantic Monthly in its February 12 2012
issue featured Fed Chairman Ben Bernanke on its cover as
The Hero. (Hedging its bets The
Atlantic ran a duplicate inside cover referencing him as
The Villain.) Author Roger Lowenstein wrote: Ben Bernanke saved the economyand has navigated masterfully through the most trying of times." The adulation for Chairman Bernanke in retrospect seems overdone. Even President Obama at the end of Bernankes final term gave him a not-so-subtle push out the door as reported by
CNN: Hes already stayed a lot longer than he wanted or he was supposed to…."
Its Janet Yellens turn for media canonization. This is premature.
Madame Yellens institutional loyalty and obvious decency command this columnists respect. Her intentions present as profoundly good. That said the road to a well-known notorious destination is said to be paved with good intentions. Moreover canonization demands that a miracle be proven. None yet is in evidence.
The canonization of Madame Yellen began in earnest with an August 24 article in
Politico by Michael Hirsch
The Mystery Woman Who Runs Our Economy. The process was taken up to the next level the very next day in an article by Matt Phillips in
Quartz Janet Yellens Fed is more revolutionary than Ben Bernankes ever was.
Hirsch tees it up in
Politico nicely:
As has been written Yellen is clearly passionate about the employment problem. It was no accident that the theme of this years Jackson Hole meeting was labor market dynamics" and the AFL-CIOs chief economist Bill Spriggs was invited while Wall Street economists were not.
…
Yellen is also very cagey about whether thats happening or not: Shes playing her own private game of chicken with inflation indicating that she wants to see more wage growth for workers (another thing thats hard to track ahead of time) before she raises rates. Beneath the careful analysis and the caveat-freighted sentences the bottom line seems to be: Were making this up as we go along."
Phillips in
Quartz observes that
it has been Fed policy to suppress wages for two generations. Phillips:
From her position as the worlds single most powerful economic voice the chair of the US Federal Reserve Janet Yellen is forcing the financial markets to rethink assumptions that have dominated economic thinking for nearly 40 years. Essentially Yellen is arguing that fast-rising wages viewed for decades as an inflationary red flag and a reason to hike rates should instead be welcomed at least for now.
…
It might sound surprising to most people who work for a living but for decades the most powerful people in economics have seen strong real wage growththat is growth above and beyond the rate of inflationas a big problem.
Phillips then gets to the point providing what passes for economic wisdom among the enablers of the Feds growth-sapping (including wage-enervating) interventions.
Since the end of the Great Inflation the Fedand most of the worlds important central bankshave gone out of their way to avoid a replay of the wage-price spiral. Theyve done this by tapping on the economic brakesraising interest rates to make borrowing more expensive and discourage companies from hiringas wages started to show strong growth.
Phillips provides this exaltation of Janet Yellen:
If shes right and American paychecks can improve without setting off an inflationary spiral it could upend the clubby world of monetary policy reshape financial markets and have profound implications for everything ….
Higher real wages without exacerbating inflation indeed would be something to cheer. That demonstrably is possible. The devil is in the details.
Theres persuasive even compelling evidence that the international monetary system is better governed by and working people benefit from a smart rule rather than the discretion of career civil servants however elite. An important Bank of England paper in 2011
Financial Stability Paper No. 13 contrasts the poor performance since 1971 of the freelancing Fed with the precursor Bretton Woods and with classical gold standard rules. This paper materially advances the proposition of exploring a move towards an explicit rules-based framework."
A rule-based system would represent a profound transformation of how the Fed currently does its business. House Financial Services Committee Chairman Jeb Hensarling (R-Tx) said in a recent hearing that The overwhelming weight of evidence is that monetary policy is at its best in maintaining stable prices and maximum employment when it follows a clear predictable monetary policy rule."
Madame Yellen
stated that It would be a grave mistake for the Fed to commit to conduct monetary policy according to a mathematical rule." Contrast Madame Yellens protest with a recent
speech by Paul Volcker in which he forthrightly stated: By now I think we can agree that the absence of an official rules-based cooperatively managed monetary system has not been a great success. In fact international financial crises seem at least as frequent and more destructive in impeding economic stability and growth. … Not a pretty picture."
Madame Yellens ability to achieve her (postulated) goal of rising real wages in a non-inflationary environment likely depends on who is right here Yellen or Volcker. It is a key issue of the day. The threshold issue currently is framed as between a clear predictable monetary policy rule" and the discretion of the Federal Open Market Committee. The available rules are not limited to mathematical ones but to achieve real wage growth and equitable prosperity the evidence fully supports the proposition that a rule is imperative.
Returning America to consistently higher real wage growth is a Holy Grail for this columnist. Equitable prosperity very much including the end of wage stagnation is a driving objective for most advocates of a rule-based system very much including advocates of the golden rule."
Getting real wages growing is a laudable and virtuous proposition. Premature canonization however is a flattering injustice to Madame Yellen … and to the Fed itself. The Federal Reserve is lost in a wilderness uncharted territory" partly perhaps mainly of its own (well-intended) concoction.
The road to the declaration of sainthood requires according to this writers Catholic friends documentation of miracles. If this writer may be permitted to play the role of
advocatus diaboli for a moment … no
American Economic Miracle akin to the Ludwig Erhards German Economic Miracle" the
Wirtschaftswunder driven by currency reform yet appears in evidence.
Expertise which Chair Yellen certainly possesses in abundance can lead to hubris … and hubris in disaster as it did in 2008. Good technique is necessary but not sufficient.
As this writer elsewhere has
noted
Journalist Edwin Hartrich tells the following story about Erhard …. In July 1948 after Erhard on his own initiative abolished rationing of food and ended all price controls Clay confronted him:
Clay: Herr Erhard my advisers tell me what you have done is a terrible mistake. What do you say to that?"
Erhard: Herr General pay no attention to them! My advisers tell me the same thing."
Erhard famously proved right his experts wrong.
Madame Yellen by dint of her decency and intellect may yet prove capable of restoring the Great Moderation … and the real wage growth with low inflation that went with that. Yet at best Great Moderation 2.0 would be as was its predecessor a temporary rather than sustainable solution. Making it up as you go along" is a proposition fraught with peril.
At worst if Madam Yellen has as observers such as
Forbes.coms
John Tamny detect a proclivity for cheapening the dollar as a path to real wage growth she easily could throw working people out of the frying pan and into the fires of inflation. Moreover the Feds proclivities toward central planning may be one of the most atavistic relics of a bygone era. Central planning by its very nature even if well meant always suppresses prosperity. As the sardonic statement from the Soviet Union went So long as the bosses continue to pretend to pay us we will pretend to work."
Some who should know better ignorantly and passionately still are stuck in William Jennings Bryans rhetorically stirring but intellectually vacuous 1896 declaration
You shall not press down upon the
brow of
labor this crown of thorns you shall not crucify mankind upon a cross of gold." This is a plank that won Bryan his partys nomination and cost him the presidency… three times. The electorate knows that cheapening the money is the
problem not the solution.
The Fed not the gold standard pressed down the crown of thorns upon labors brow. The GOP rather than playing rope-a-dope on income inequality" would do well to dig down to find the monetary rule with which to restore a climate of equitable prosperity and real wage growth. Results not intentions are what counts.
There is abundant evidence that the right rule-based system would not be a grave mistake" but a smart exit ramp back to growth of real wages. Anything the Fed does that departs from a dollar price rule is anti-equitable-prosperity. Anything else hurts all labor and capital. The Congress under the leadership of Chairmen Garrett (R-NJ) and Hensarling (R-Tx) whose committee has in front of it the
Federal Reserve Accountability and Transparency Act and Joint Economic Committee Chairman Kevin Bradys (R-Tx)
Centennial Monetary Commission at long last is bestirring itself. Now is the right time to amp up the crucial debate over monetary policy … by enacting both of these pieces of legislation.
