Workers Shouldn’t Shoulder Disproportionate Burden in Inflation Fight
Happy days must be here again with the chorus of good economic news. Last Wednesday, Federal Reserve Chair Jerome Powell chronicled current conditions and outlined the direction ahead. After flat GDP in 2022, growth is returning with modest expansion expected for the year! On Friday, the jobs report dropped word that the 263,000 jobs created in November exceeded expectations! Wage growth (annualized) equaled the core inflation rate! After 2 ½ years of near chaos, pandemic-induced supply chain bottlenecks are finally easing! Even the price of gasoline is dropping like a rock!
Happy days, however, will not arrive any time soon. Those promising trends are “harshing the mellow” of some macroeconomists and the real power players, portending bleak choices that will yield dreary outcomes. Powell concludes that “nominal wages have been growing at a pace well above what would be consistent with 2 percent inflation over time.” His plan initially sounds vague — “to raise interest rates to a level sufficiently restrictive to return inflation to 2 percent.” During 2022, the Fed raised interest rates from 0.25% to 4%. That run up will continue and may accelerate. The call for an outsized 0.75% rate push at the Fed’s December conclave is growing from the inflation hawks.
As interest rates rise, the likelihood of a bruising recession grows in parallel. But policymakers evidence biases — about underlying facts and a range of inflation treatments. Their preferred approach may eventually control inflation, but only with enormous consequence for workers, the poor, and near poor. Let’s review three facts and consider three categories of policy options.
Fact 1: Workers’ incomes are barely keeping even with the cost of living. Wages are not skyrocketing, nor are they a primary cause of inflation. Raising interest rates to cause a recession to control inflation is choosing sides against workers and their communities. Between September 2019 and 2022, the Consumer Price Index (CPI) rose by 7.5% on an annual average basis. Wages were up too, but not enough to fully offset inflation. (Chart 1) In fact, workers did better against inflation prior to the pandemic. Between 2013-2019, median weekly earnings grew ahead of inflation.
The people bearing the burdens of low-wage work are women and/or Black and Latinx. Black and Latina women would barely make $40,000 a year if they were paid the median usual earnings for 52 weeks per year (an optimistic assumption). That is above poverty, however, it is only about half of the “living wage” in many states and cities for a family with two children and one wage earner. (Chart 2)
Fact 2: Workers don’t thrive in good times and are often battered by a sour economy. Rich households do well in good times and bad. Too many jobs pay at or near poverty. Workers’ families are not the source of the excess demand pushing inflation. They are not prepared to weather inflation and a recession will exacerbate their struggles. The income of the rich is rising faster than the cost of living. The bottom two fifths of the household income distribution achieved at best modest gains before the pandemic, and they lagged badly behind in the past two years. The top fifth enjoyed robust pre-pandemic gains and garnered even larger increases in the past two years.
Fact 3: Corporate profits are driving inflation more than labor costs. Josh Bliven’s analysis shows labor factor costs are a minor contributor to inflation. The biggest culprit, corporate profits, contributes seven times more. (Chart 5)
The midterm elections will almost certainly lead to more pitched battles over the direction of the country, including federal economic policies. Now is the time to set the workers’ agenda before Democrats lose their narrow control of federal policy levers. Boundaries for negotiations with the Republican House for the two years ahead are needed. What should we do beyond moderately raising interest rates in the year ahead?
Rx 1: Adopt fairer taxes. To tackle inflation, let’s adjust taxes, not just interest rates. Tax strategies can ensure that the sacrifices entailed in controlling inflation are more equitably shared. Higher tax rates at the top rungs and a new wealth tax could dampen their spending and investment. Excess corporate profits are adding to inflation, too. In Europe, excess profit taxes have already been proposed. A parallel proposal could draw from The Ending Corporate Greed Act. Tax changes should prompt the top of the economic pyramid to cinch their belts for a change. The working class and poor shouldn’t carry a larger burden in the inflation fight. Added revenues could also reduce the federal deficit. Falling public debt decreases inflation expectations and builds confidence in the US dollar.
Rx 2: Ensure an adequate safety net. We must act on lessons from the pandemic and prior recessions. Let’s help families in or near poverty through the crises. Let’s fix unemployment insurance (UI). We should invest to modernize the states’ capabilities to administer UI. We should also raise minimum benefit levels and again extend payments to gig workers and others who are now ineligible. The larger, refundable child tax credit should also be restored and extended. If you’re committed to families, extend an innovation that slashed poverty among children by 30%. And it’s long past time to hike the federal minimum wage – stalled at a paltry $7.25/hour since 2009!
Rx 3: Expand industrial policy. European countries, China, Japan, and South Korea have long buttressed key sectors. The US debate centers on government aid for manufacturing, technology, and other sectors. We should expand the focus to include essential workers who make work possible for millions of others. The Domestic Workers Bill of Rights, already adopted in 10 states, should be a federal priority. The 2.2 million workers in this category are 91% female, mostly immigrants, and women of color. And what of all that empathy for frontline healthcare workers- 16 million strong? They appreciate the appreciation. But they need better pay, benefits, and working conditions. Enhancing public payment systems for healthcare will be required.
This is the time to battle for an inflation policy agenda that will not exacerbate poverty or class, gender, and racial inequalities. Let’s not again pick “heads you win, tails we lose” options that impoverish working families while favoring corporations and wealthy investors. We must join together and fight inflation but on different terms.
Mark G Popovich is the Director of the Good Companies Good Jobs Initiative at the Aspen Institute Economic Opportunities Program. The views expressed are his own. The author deeply appreciates the informative discussions about these issues with Maureen Conway. An earlier version of these ideas was posted on Working Class Perspectives blog thanks to WCP’s Sherry Linkon and John Russo.