Why Economic Growth Won’t Save the Poor

Federal ReserveI want to talk about productivity and inflation. This is partly just to nail down the issue for me. But also, I think I talk about this stuff in a way that assumes a knowledge that many people don’t have. Most people think of inflation as “printing money.” By this way of thinking, the economy is worth a certain amount and if there is more cash, then it is worth less. This isn’t true because money is a medium of exchange, not a reflection of the value of the economy — at least not directly.

Let’s consider an example. Imagine a world in which all workers and capitalists are paid according to their value. In this case, we assume we have no inflation. Now if one set of workers gets a raise, it will make the cost of whatever they are making go up. This is inflation. But if productivity went up at the same rate, this would not be inflationary. The workers would be paid, say, 3% more, but they would be producing 3% more stuff.

We don’t have such an economy. In our economy, largely because of governmental policy, capitalists get far more money than they deserve and workers less. Workers find themselves in a monopsony. If they can form unions or otherwise push back against this, it is possible that they will get more money by taking away some of the undeserved profits of the capitalists. In this case, workers can get a raise without causing inflation.

But at this point, the Fed should error on the side of creating jobs and not worry about inflation.

So we end up with inflation just in the case where workers get pay increases that, in an economic sense, they don’t deserve. (Obviously, this is not just about workers. If the price of oil goes up, it will cause inflation, for example.) The point I want to get across here is that inflation is not something we need to worry about in the modern American economy. For the last 40 years, workers have seen their wages stagnate even as productivity has continued to go up.

Given my simplistic story of inflation here, we should have seen deflation. But, of course, we haven’t. And that is because overall “wages” (wages and profits) have gone up at the rate of productivity. It is just that with tax laws and anti-union policies, the vast majority of the fruits of that productivity gain has gone to the capitalists. This has resulted in a huge increase in inequality.

Federal Reserve Building

And this brings us to the Federal Reserve. They are the ones who “print money.” And they are the ones who are hyper-concerned about inflation. Their biggest concern is that wages are going to start rising and this will cause inflation. That’s a valid concern. But it is only a concern because the capitalists will insist upon keeping their undeserved profits. There would be no inflation if increased worker wages came at the expense of overly generous business profits. But obviously, this is not something that the Fed has power over.

But at this point, the Fed should error on the side of creating jobs and not worry about inflation. Jobs help workers and inflation hurts the rich. But what the Fed means when it talks about raising interest rates to stop inflation is that it is going to put millions of people out of work and put even more pressure to keep wages low on those who have a job.

So we have an economy where workers are in a double bind. They aren’t making as much as their productivity would indicate. But when the economy gets good enough that their wages start rising, the Fed increases rates to stop it. This is why we can’t depend upon the Republicans’ big answer to save the poor: “Growth!” All the gains of growth go to the top. And that is something we have to fix in our regular political system.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

4 thoughts on “Why Economic Growth Won’t Save the Poor

  1. This past weekend I attended a bunch of parties-that part was weird-what was not weird was talking to a right wing friend of mine about unions. He repeated the same story I have heard time and time again, that some friend of his ran a shop with a union in it and anytime he had to discipline a person he had to deal with the union. Oh and when he was in a work place that had union employees, the union members were lazy.

    I responded with the very obvious and easily proven fact that owners will screw workers any chance they get so workers should get the chance to either join together like the owners do with things like the US Chamber of Commerce to get positive benefits for themselves or you could have the law do it. And since he hates the government growing, I said he should probably favor the unions.

    It is an argument you will never win with the right wing because they always think “owner=good” “union=bad.” I did get him to agree to reduce military spending in favor of using the money to go mine asteroids though.

    • It’s because conservatives are authoritarian by default. Employer is above worker and so therefore right. Try to get your friend to read Conservatives Without Conscious — written by a conservative icon. It often helps conservatives to learn about their authoritarian tendencies.

    • He repeated the same story I have heard time and time again, that some friend of his ran a shop with a union in it and anytime he had to discipline a person he had to deal with the union. Oh and when he was in a work place that had union employees, the union members were lazy.

      I also constantly hear these just-so stories from former employees of unionized workplaces. Former union members seem common as hemeroids. In a workfarce that is only 9% union, for there to be so many former union members, it would seem that the unionized workplaces have the highest turnover. It would be interesting if someone did a study to find out whether union workplaces tend to have higher turnover than non-union ones.

      • Both of the two right wingers I know who claim membership in union shops lived in California for a time. And they have a 16.3 union membership rate per the BLS so it is plausible.

        According to this: http://nextgenerationmanufacturing.typepad.com/my-blog/2011/05/stat-of-the-week-labor-unions-and-employee-turnover.html

        The story is different for U.S. plants, where the correlation between unions and turnover all but disappears. But if anything, the data lean slightly toward lower turnover in facilities with significant union representation. The average turnover is 10% for shops with more than a quarter of workers in unions; it’s 12% where fewer than a quarter of workers are in unions.

        But apparently the last real study was in 1984 and that did show a clear advantage to unionization as turnover rates were much lower and productivity higher.

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