Reports from the Economic Front

a blog by Marty Hart-Landsberg

The No-Raise Expansion

Our current economic expansion is now past the five year mark and the gains for most working people are hard to find.  Media attention has largely focused on the weak record of job creation.  Less attention has been given to the lack of growth in wages and benefits.

As Bloomberg News explains:

Meager improvements since 2009 have barely kept up with a similarly tepid pace of inflation, raising the real value of compensation per hour by only 0.5 percent. That marks the weakest growth since World War II, with increases averaging 9.2 percent at a similar point in past expansions, according to Bureau of Labor Statistics data compiled by Bloomberg.

The chart below looks at the inflation adjusted growth in hourly compensation (wages and benefits) for 11 different economic expansions.  The gains are for the first five years for those expansions that lasted longer. Full business cycle dating can be found here.

compensation comparisons
The following chart highlights the widening gap between the growth in compensation during the average post-war economic expansion and the current one.

compensation trends

Clearly, business feels no pressure to boost compensation—and it is worth underlining that we are talking about wages and benefits—despite the severity of the past recession and the growing length of the current recovery. It is no wonder that many workers are even reluctant to believe we are in recovery.

To make matters worse, economists Martin Feldstein and Robert Rubin are now calling on the Federal Reserve to slow growth.  In a Wall Street Journal op-ed they expressed their fear that new asset bubbles are growing dangerously large.  However, as Dean Baker points out:

Given their enormous stature, Feldstein and Rubin undoubtedly expected their joint bubble warning to have considerable weight in economic policy circles. Of course this raises the obvious question, why couldn’t Feldstein and Rubin have joined hands to issue this sort of bubble warning ten years ago in 2004 about the housing bubble? If they used their influence to get a column about the dangers of the housing bubble in The Wall Street Journal in the summer of 2004 it might have saved the country and the world an enormous amount of pain. . . .

It would have been great if Feldstein and Rubin had used their stature to warn of the dangers of the housing bubble in 2004, but they were otherwise occupied. Feldstein was on the board of AIG (yes, that AIG), where he was pocketing several hundred thousand dollars a year for his services. Rubin was a top executive at Citigroup, which was one of the biggest actors in the securitization of subprime mortgages. He walked away with over one hundred million dollars for his work. So it was easy to see why Feldstein and Rubin could not have been bothered a decade ago to warn about the housing bubble.

Making matter worse, their current warnings are completely misplaced. The Fed has to concentrate on trying to promote growth and getting people back to work. The risk from the inflated asset prices that they identify are primarily a risk that some hedge funds and other investors may take a bath when asset prices (like junk bonds) move to levels that are more consistent with the fundamentals. . . .

So there you have it: two extremely prominent political figures who got rich off the housing bubble, now taking time from their busy schedule to call on the Fed to raise interest rates and destroy millions of jobs. In the “show no shame” contest, this looks like a real winner.

To this point, Janet Yellen, the head of the Federal Reserve Board, has wisely resisted their advice.  But the problem is that the status quo is far from satisfactory.


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