To raise real wages and lower Americans’ cost-of-living, we need to inject more demand into the economy, not less, economist JWMason1 argues
The prices are all right. Photo: Ben Hasty/MediaNews Group/Reading Eagle via Getty Images As America sweats through the dog days of summer, its economy is heating up. Last month, even as the Delta variant exploded, employers added 943,000 jobs to their payrolls. Sixteen months after the COVID recession officially ended, the unemployment rate has now fallen to 5.4 percent; after the 2008 financial crisis, it took seven years for joblessness to fall that low.
Others say that an economy in which millions remain involuntarily unemployed is still quite sick — and that further stimulus is just what the doctor ordered. Among this contingent is J.W. Mason, a professor at John Jay College and economist at the Roosevelt Institute. Mason believes that Manchin’s understanding of macroeconomics is fundamentally confused — as is the entire mainstream debate about inflation.
I think this is one of the fundamental sources of confusion. People have this idea in their head that somehow the overall change in the price level must be driven by a force other than the myriad things that are driving up particular prices. But that isn’t the case.
In your recent essay on the inflation debate, you suggest that the “old-fashioned” view was not always wrong. Or at least, that there have been historical contexts in which excess currency production was indeed the key driver of inflation.If you look at historical hyperinflations, those really are cases where the basic machinery of taxing and spending has just profoundly broken down. The private financial system is profoundly broken down.
It would be like saying, “Rents are rising too quickly in New York City and that’s creating hardship on people. Let’s make subway service worse until we bring the number of people who want to live in New York into line with the number of people who can be accommodated in housing at reasonable rates.” I think anybody would agree that that would be a terrible way of managing a housing problem in a city. But we actually do precisely that when it comes to inflation.
I think there are three questions we should ask about all this. One is: Is it actually the case that labor markets are so tight, they’re generating very large wage increases? And that’s an empirical question. We can debate that. The second question is: Is unemployment unsustainably low, in the sense that we are trying to employ more people than the economy has available? And the answer is absolutely not.
It’s clear then that tight labor markets can enable workers to secure real wage growth; that wages in that context can rise faster than prices. Therefore, if you say that policymakers must never tolerate accelerating wage growth – or allow wages to rise faster than productivity – what you’re really saying is we can’t have an increase in labor’s share of national income. We can’t ever have a situation where the share of the pie going to workers is getting bigger.
In your writing, you emphasize that mainstream economists know that the “Econ 101 textbook” view of things is wrong. They know that there is no tight link between the money supply and inflation, or that economic booms have historically produced real wage gains. And yet, these obsolete paradigms still inform their policy conclusions, and cause them to look past massive logical flaws in their positions. These mainstream economists are generally intelligent people.
Yes, this concept of potential employment is fundamental to a lot of our macroeconomic debates. “How fast can we grow?” in many ways comes down to “How many jobs can we add?” How many people are there potentially available for work? What is full employment? The way we conventionally measure that is to look at how many people were working at some recent high-water mark. You pick a year – let’s say 2005 – look at how many people were working that year, and declare that full employment.
It seems to us that, first of all, if you want to know our economy’s potential employment, you shouldn’t just assume that the decline in employment among younger people is irrevocable. It can’t be all just because they’re playing video games in their parents’ basements or wherever. If we want to think about full employment, then, we can ask, “What would it look like if you had sufficiently full employment that employers reached the ‘back of the line,’ and people who are disfavored because of their race started getting hired at the same rate as white people?” And then you can do the same analysis with gender. Education status is more complicated because in some cases, educational attainment is really germane to employability.
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