Here’s an interesting piece by my pal Lane Kenworthy on lots of stuff I go on about in these parts. Many good insights but a few parts in which I see things differently, one of which is very important to our respective views of the way out of the inequality/wage-stagnation cul-de-sac.
His theory of the case is that some of the traditional policy solutions promoted by progressives are out of sync with structural changes throughout advanced economies. The trends pushing against manufacturing employment and unions, for example, have been ongoing for years across the globe and are unlikely to change much. But he shouldn’t include full employment in that bin.
First, a word about manufacturing policy. Our persistent trade imbalances have accelerated the loss of jobs in the tradable-goods sector and this is very much a policy variable (dollar policy, currency management) that we should not abandon. Also, our competitors, from China to Germany, often have aggressive manufacturing policies that seek new markets with the government sector backstopping private investments under the theory that the private market will underinvest where returns are uncertain. That government function has a long track record here as well, from railroads to fracking to the internet, laser, GPS, etc. Most recently, we’ve had some success with public/private investments in advanced batteries.
I doubt Lane would disagree with any of the above. Neither do I think those policies would reverse the trends he documents. Germany, for example, is much more invested in promoting manufacturing than we are and they run consistent trade surpluses. But their manufacturing share of employment is falling much like our own, though from higher levels.
Still, this isn’t just about jobs. I’m bullish on manufacturing policy, but not so much on job growth in the sector (though slowing the rate of decline is certainly possible). But it’s also about productivity, innovation, R&D, and unwinding the trade deficit (thus boosting growth), all of which are big deals and all of which could be left on the table if we ignore the sector based simply on the declining employment share.
Second, and this is a bigger deal, I just disagree with the idea the full employment is out of reach:
Full employment can help push wages up even in an otherwise inhospitable market and institutional context. Indeed, in the United States, an unemployment rate around 4 per cent was the key to the past generation’s one brief period of nontrivial wage growth – the late 1990s. But monetary authorities aren’t likely to cooperate, particularly given that monetary accommodation is widely thought to have contributed to the housing bubble and bust that precipitated the 2008 economic crash.
Not only do I think that’s wrong but if it’s right, it undermines one of Lane’s key solutions.
The monetary authorities will pursue full employment but the question is how will they define it? If they set it too high (i.e., if they assume a NAIRU that’s too high), we’ll fail to create the wage pressure Lane cites above. But remember, the Federal Reserve is not a “structural trend” like the shifting of manufacturing output from advanced to emergent economies. They are a policy making body and are not immutable nor impervious to change. For Keynes’ sake, it was Greenspan of all people who presided over—in fact, accommodated—the full employment period of the latter 1990s. And post-crash, Bernanke and Yellen have been, in word and deed, acting quite differently than Lane’s post-crash supposition above. So Lane might be right but I wouldn’t make that assumption and progressives should fight back hard on this one.
Moreover, Lane better hope he’s wrong about this. That’s because he proposes what I think amounts to a pretty hefty wage subsidy to offset the absence of full employment, collective bargaining, and factory jobs. But in slack labor markets, we should expect the subsidy to be absorbed largely by employers who can lower the pre-subsidy wage offer such that the transfer becomes one from taxpayers to producers, not workers. In other words, full employment is complementary to a functioning wage subsidy program of the type Lane envisions. (And yes, there’s the question of how realistic is that vision, but I’m happy to have thinkers like Lane get outside the box of our tightly cramped political economy of the moment.)
I’ve often stressed that progressives cannot give up on the “primary distribution”—market outcomes—and hope to fix everything with redistribution. Not only is that an incredibly hard lift, but as market outcomes continuously deteriorate from the perspective of the middle class and the poor, we’ll have to continuously ratchet up the redistributive function. Good luck with that.
What say you, Kenworthy?