Adjustment Is a Political Project

At the core of the impasse in Washington is the challenge rising wages pose to the institutions that govern the American economy. That is why the president’s declaration that the Federal Reserve will stabilize prices has potentially grievous consequences.

The Fed’s explicit strategy is to prevent workers’ wages from catching up with higher prices and to increase the number of unemployed people, which weakens workers as a class. Though there have recently been hints of an “off-ramp” for interest rates, we currently remain on this path.

Will the plan work?

Over the summer of 2022, households spent down the savings they accumulated from the earlier period of the pandemic from enhanced unemployment benefits, household stimulus payments, and the accompanying rise in wages. As these savings have fallen with both the burst of household spending and rising prices, the outlook for future demand has faltered.

Adjusted for rising prices, fixed investment peaked in Q1 2022 and fell for each of the next two quarters. Most of this decline in real investment has been in construction, both residential and nonresidential, though there was a slight positive offset in investments in transportation equipment in Q3 2022 — a possible sign that the rise in auto prices is unlikely to end.

This contraction in investment, curiously, has coincided with record-high profits, which for nonfinancial corporations have risen to a seventy-two-year high of over 16 percent of gross value added.

In June, the consumer price index stabilized at a new level about 14 percent higher than before the pandemic. It has remained near this level for the past three months, while the producer price indexes for commodities and for manufacturing have both fallen — meaning retailers are not passing lower costs to consumers in the form of lower final prices. While commodity processors such as slaughterhouses and lumber mills have been lowering prices, wholesalers and retailers have not, and so consumer prices remain high.

This is unsurprising: one of the most challenging observations for economists to interpret since the Great Depression has been the downward inflexibility of consumer prices in periods of recession. As the economist Paul Sweezy wrote in 1939, rigid prices can be explained by conditions of oligopoly — domination of a market by a small number of sellers. More recently, Sam Peltzman of the University of Chicago described the same phenomenon as a general principle of the US economy: “Prices rise faster than they fall.”

If prices are unlikely to fall in the short term, and if real wages are below their pre-pandemic level, then there are three broadly distinct options for how the United States can stop prices from rising further.

Option 1: Wait and See

Adjusting to the higher price level has a built-in solution: wait until spending falls off.

The balance of power in the economy today is favorable to this wait-and-see approach. Unlike the last inflationary era, from the 1950s to the 1970s, few workers today participate in collective bargaining, and so are unable to keep up with prices. In past periods of rising prices, workers could demand higher wages through their unions to prevent adjustments that fell exclusively on working-class households.

Demand took longer to fall off as wages kept up with prices: the famed wage-price spiral, which sustained the pressure for price increases, should properly be understood as a problem of political economy — a struggle over real purchasing power between profits, wages, and savings.

The wage bump of 2021, by contrast, was won primarily through individual bargaining. About one in ten employed workers are represented by unions today, compared to one in three during the Korean War. Thus, the recent wage gains during the coronavirus pandemic have predominately represented individual workers emboldened by emergency conditions to demand changes to their terms of employment.

But as prices rise above wages today, there has been no indication of another round of wage increases. While wages continue to rise, workers have no method to set large regional or sectoral patterns — that is, to organize their wage demands to try and keep up with the new price level. In fact, employers are demonstrating a resolute opposition to recognizing unions, and even more so to engaging in bargaining.

Many well-meaning friends of the administration have seen a silver lining in the fact that the balance of class power has tilted so much toward owners. Because wages are lagging behind prices, many argue today, there should be less concern about inflation and less urgency to induce a recession. “The optimistic case is that this [labor market] churn will fall without a downturn,” writes Matthew Klein, “leading to a benign slowdown in both (nominal) worker pay and underlying inflation.”

Others take labor’s weakness to mean we can raise the level of government spending and prevent a recession. As the historian Adam Tooze writes, “The absence of class conflict and the dampness of wage-price spirals ought to free technocratic policy-making.”

Yet liberal writers who take solace in labor’s weakness should consider the politics of their proposition. How long will workers tolerate falling real wages, politically speaking? How long will real wages have to fall before technocratic policymakers once again risk the threat of enlarged government spending and the organized constituencies it makes possible? For those constituencies will inevitably challenge the power and independence of existing centers of decision.

Option 2: Bring on the Recession?

Historically, the solution of waiting for inflation to burn itself off has been politically problematic in a country governed by biannual elections. It is more a symptom of deadlock than a program of action.

It took nearly thirty months for the inflation that followed World War II to burn itself off before the recession of 1949. Control of Congress switched twice in two years. During the Vietnam War, taxes and interest rates were increased in both 1966 and 1968, but prices did not slow until the summer of 1970. The entirety of Jimmy Carter’s term was spent urging large corporations and labor unions to hold price and wage increases to 6 percent — a level so high as to embolden those urging recession.

For this reason, big owners and their political representatives are lining up against those calling for moderation to argue that the unemployment rate must rise to ensure prices do not increase further.

There is good precedent for this prescription of a painful and socially destructive recession. During the first three interest rate tightening cycles of the postwar period (1955–1960, 1965–1970, and 1973–74), for example, planned recessions failed to stabilize prices. The perverse lesson many have taken from this experience is that a planned recession must be long and deep to ensure it snuffs out price increases, as the Volcker shock and Ronald Reagan recession of 1979–1983. In committing to continued interest rate increases, this is the path the Federal Reserve has been signaling it will take for most of 2022.

In March 2022, when the Federal Reserve Board (FRB) first embarked on raising interest rates, Chair Jerome Powell justified the move by saying wages “are running at levels that are well above what would be consistent with our 2 percent inflation goal over time.” In May, he said the country needed to “get wages down.” In July, Powell explained, “We actually think we need a period of growth below potential in order to create some slack.” The governors of the board of the Federal Reserve, he continued, “expect . . . some softening in labor market conditions” and thought such softening “probably necessary . . . to get inflation back down on a path to 2 percent.” On November 2, the FRB again raised interest rates, though it signaled the possibility that, if wages stabilize, it may reduce the pace of tightening in the future.

Mark Zandi, chief economist for the financial securities rating firm Moody’s, and widely quoted by American national media producers, exemplifies this apparent consensus: “We need the slowdown in job growth and job creation pretty quickly to take the steam out of wage growth and quell inflationary pressure.”

The Federal Reserve’s most recent quarterly forecasts, released in September, show the board members raising their median unemployment rate assumptions for 2023 from 3.9 percent to 4.4 percent, with some members aiming as high as 5 percent. As David Rubenstein of the Carlyle Group recently told CNBC, the unemployment rate “will probably have to go to about 5 or 6 percent before inflation can get down to 2 percent.”

So, while liberal commentators like Tooze hold that sluggish wage growth means interest rate hikes are unnecessary, the Fed and its hawkish supporters see even modest wage increases as calling for a drastic increase in unemployment.

Option 3: Organize for Planning

Historically, it has been workers’ refusal to bear the burden of adjustment to inflation that has compelled discussion of legislative solutions. When wages keep up with rising prices, something else has to give. It was the failure of high interest rates and austerity to arrest inflation during the 1970s that brought discussion of “incomes policies” into the commanding heights of the US economy, when bargains had to be struck with the representatives of organized labor over the terms of adjustment to rising prices.

Then as now, alternative strategies depend on Congress and the White House. That is why controlling inflation in a way that does not fall unfairly on workers must be an organizing project on a grand, national scale. Any program that can supply the public with low-cost necessities — energy, food, housing, and health services — in a period of expanding employment and rising wages will require a higher degree of public planning in each of these industries.

Investment decisions in the amount and location of new capacity, in operating rates of that capacity, and in the profit and prices of the products produced by that capacity must be exposed to greater public scrutiny and released from the secrecy and blackmail of private controls. Such scrutiny will require new boards and commissions, and an overhaul of existing institutions like the Federal Trade Commission.

All of this will require not only authorizing laws empowering new investigations, regulations, and enforcement — it will require money. Under our constitutional system, these are powers reserved for Congress.

There is evidence that officials within the Federal Reserve understand this challenge. Lael Brainard of the Federal Reserve Board of Governors in a September speech said,

Overall retail margins — the difference between the price retailers charge for a good and the price retailers paid for that good — have risen significantly more than the average hourly wage that retailers pay workers to stock shelves and serve customers over the past year, suggesting that there may also be scope for reductions in retail margins.

She continued this analysis in October, remarking that “there is ample room for margin recompression to help reduce goods inflation.” As no other than the Financial Times opines, “policy has more routes to lower inflation if the cause is about profits.”

Likewise, there are offices in Congress attuned to the monumental project at hand.

In May, for example, the House of Representatives passed the Consumer Fuel Price Gouging Prevention Act in a 217 to 207 vote. Sponsored by West Virginia representative Kim Schrier and cosponsored by Katie Porter of California, the bill would have authorized the president to proclaim a “fuel emergency” to prevent companies selling consumer fuels at “unconscionably excessive” prices. Enforcement of the act would have relied on the Federal Trade Commission.

In August, Representative Jamaal Bowman introduced his own Emergency Price Stabilization Act, proposing to establish an investigative subcommittee to examine costs and prices throughout the economy and authorizing the White House to issue targeted orders on selected prices and investments necessary for economic stabilization.

As for expanding capacity, officials within the Biden administration understand the importance of raising the level of investment by providing government financing. The Inflation Reduction Act, for example, includes authority for roughly $350 billion in loans and loan guarantees for clean electricity generation. For comparison, in 2020, American utility companies spent a total $40 billion to install twenty-five thousand megawatts of wind and solar electric generating capacity in the United States. (The Los Angeles Department of Water and Power, the nation’s largest electric utility, generates about eight thousand megawatts to serve four million people today.)

Accelerating the growth of this power-generating capacity is critical to weaning the American economy off fuels with volatile prices subject to political conditions abroad. As Jigar Shah, the director of the Loan Programs Office at the Department of Energy, recently explained to Bloomberg, “We need to get back to a period of energy abundance. . . . Planning — it matters, right? And we need to plan.”

Changing the Balance of Power

Yet sustaining such a long-term investment and construction program, or legislating the regulation necessary to keep costs from rising, points in a different direction than the Federal Reserve’s program to slow down growth and raise unemployment to 4.4 percent in 2023. In fact, as interest rates rise, such investments in capital equipment will only grow more expensive.

Despite the glimmers of constructive thinking inside Congress, the White House, and the Fed about how to stabilize prices without raising unemployment, the current Democratic leadership in the House and the Senate have shown no serious interest in moving the legislation necessary to change the institutions that produced our inflationary recovery.

And why should the current regime consider alternatives when the current path of adjustment is so favorable to owners and employers? That is why the Federal Reserve has retained the initiative in governing the US economy, even during the current midterm elections, when the public is ostensibly empowered to set the national agenda. The American working class is not sufficiently organized to force a reframing of the problem or to change the calculation of risk to large owners and their representatives by refusing to bear the burden of adjustment.

The midterm campaign has seen the party offer discordant messaging about its priorities. Active efforts to stake out space for legislative solutions have hardly appeared on the public radar, dominated as it is by a small handful of national news companies set on framing the election in terms of the trustworthiness and morality of public school teachers, of homelessness as a problem of crime rather than of access to affordable housing, and, above all, of inflation — a national economic problem for which the Democrats are said to have no solution. President Biden’s Johnny-come-lately embrace of taxing corporate profits arrived long after the terms of the midterm election had been set.

If American workers are to not only keep real wages rising but stay employed in the 2020s, they must organize themselves to exercise influence over the immediate decisions shaping the looming economic restructuring of the US economy. Building the power for workers and working-class households to access the halls of power of the old industrial economy took a generation of defeat and another of patient organizing. But the picket lines of one moment lay the groundwork for the elections of another: what is important is that when the emergency comes, workers are prepared and organized to defend themselves from the predations of owners and their elected officials.

It may be too late to make gains in 2022, but for workers to defend themselves and their local insurgencies from greater repression in 2024, they better start planning today. Because as of early November 2022, it’s not clear that anyone has tied local fights against falling real wages to any organizing project of national scope. It would be up to the Left to articulate the need for such a nationwide project — and to start building it.