Monetary Policy and Industrial Decline: Effect on Labor from the 1970s to the Pandemic
Joseph Newswander
Contemporary Labor Issues, Professor Suarez
December 15, 2022
Labor’s ideal political and economic climate is challenging to determine, as many structures of power and capital compete with the working class, making laborers’ objectives of reduced inequality by wage growth and insulation from inflation seemingly contradictory. Multiple factors contribute to the growing inequity and the inflations and recessions that often further these disparities. Global competition, domestic policy, and market factors contribute to the sectoral shift in our economy, and the working class is seldom given a voice in favorably structuring this shift. This essay examines the historical trends of financialization and the relationship between labor power and inflation, deindustrialization and the transition to service based industries, and the constant disruption by tech and financial firms. The COVID-19 pandemic highlighted how these factors contribute to the decline of working class representation in the conditions and compensation within their workplace. Despite seemingly grim conditions, it’s imperative to explore targeted solutions to mitigate the detrimental effect this decreased worker representation can have on the population.
Piketty’s theory of growing inequality predicts that the return on capital will continue to outpace wage-based income. He refers to the Marxist principle of infinite accumulation, that as assets apart from real property had no natural limit, wealth disparity would continue to widen. This gap in economic class was especially apparent in the 1970s when the Federal Reserve took action in favor of maintaining capital accumulation over the immediate interests of the working class. Many parallels can be drawn between the trajectory of industry and policies of the 1970s and how both monetary policy and technology affect worker power today. Our economy has become increasingly reliant on services due to multiple factors of monetary policy, lack of fiscal investment, and disruptive competition from global and tech-based firms. The reclassification of workers within the burgeoning service economy was accelerated during the pandemic, highlighting disparities in the service sector.
The Federal Reserve is tasked with maintaining the money supply by increasing or limiting cash flow amongst banks and the entire economy. J.W. Mason describes the result of Fed management with the analogy of cash flow pipes. “[The] plumbing is defective– it’s a source of instability and crisis, as the supply of credit is either cut back to a trickle or pours out in floods” (2). The restlessness of the currency means that the Fed’s sweeping monetary policy often is too much and too late for the working class. The unsurprising result of these jolts of instability is that it affects those with the least padding against fluctuations most adversely. Despite purported bipartisanship, the Fed is indisputably a political organization that must appease the often opposing interests of financial institutions and the general public. As J.W. Mason discusses, finance lenders favor preserving the dollar’s value above maintaining high employment and social stability. Too often, the Fed is more aligned with the aptitudes of capital accumulation and lenders’ profitable recovery of their liens.
A strong US dollar comes at a cost. High-interest rates and less liquidity result in lesser investment into industry and more hoarding. While this may slow inflation, it comes at a high social cost of increased unemployment which can lead to other issues, such as rising “suicide rates and alcoholism” (Barker). When Volker utilized contractionary monetary policy in the 70s, it reduced the leverage that workers had accumulated and instead reverted to the demands of those who held the scarce dollar in capital quantities, the financial institutions. Banks can thrive and profit regardless of monetary policy, as they pass the bulk of the interest rate hikes onto those they lend to while rarely increasing the interest rate paid to consumer accounts. An increased interest rate effectively maintains and highlights the inequality of those possessing long-term inherited wealth and its accumulation while hitting working-class populations and debtors the hardest.
In the late 1970s, Paul Volcker was appointed Chairman of the Federal Reserve. Those close to Jimmy Carter, who made the appointment, said that he had “had finally caved to Wall Street’s demands for an aggressive attack on inflation without regard for the social costs.” (Friedman) Volcker pointed the money supply into a nosedive due to pressures from Wall Street and European trading partners. The effect of this was coined the Volcker shock. Following the Volcker shock, interest rates steadily declined again, increasing capital liquidity and encouraging speculative investing. Financial institutions benefited from this return to easy money, but the workers had not yet regained their leverage as jobs were still insecure. The speculative investment propelled asset prices, which, combined with stagnated wage increases, kept those not bought in effectively locked out of the housing market. In an economy that rewards property ownership above all else, this is a devastating blow without a clear laissez-faire path to recovery. “The Asset Economy” essay from the Los Angeles Review of Books notes,
“The dramatic divergence between wages and property prices in large cities over the past decade… ‘The young are locked out.’ In almost all large Western urban centers, property prices have reached levels that make renting very expensive and put home ownership effectively out of reach for many. Property inflation in large urban centers is the linchpin of a new logic of inequality.”
In an economy where asset growth over time in the market outpaces wage growth over time in the workforce, this phenomenon continues to widen equality gaps today. Housing unaffordability is just one example of the quality of life reduction workers take the brunt of with the increasing financialization of the economy.
However, some economists argue that labor movements brought these pitfalls upon themselves by asking for too much. Those supporting Volker’s policies assert that labor had too much power just before the shock, claiming employees had too much leverage and the wage spiral they created was threatening the motive of capital to invest profitably, thus necessitating swift intervention. This presumption assumes that free market wage competition is viable for individual employees to bargain meaningfully. Organized labor provides a platform for competition more favorable for the employees than the alternative, but it still does not create the perfect balance that the free market promises. Critical in this analysis is evaluating employers’ position in an increasingly monopolistic economy. Just as monopolies become price-setters in the trade of goods, large employers have a massive sway in the price they pay for labor. Employers are better positioned to price gouge on a whim than even the largest unions could demand outlandish wages. Thus, placing the blame entirely on labor organizing and effectively bargaining for the adverse effects of inflation doesn’t paint the complete picture.
Samir Sonti emphasizes the importance of acknowledging the risk of inflation that progress toward reduced inequality may induce. It’s paramount to mitigate this inflation wherever possible through policy so it does not reach extreme levels, which would often nullify much of the progress made if real buying power does not outpace the inflation. If all the labor movement achieves is incremental wage gains, and inflation keeps relative pace, it’s arguably still better than the dreaded “stagflation .”Sonti quotes economist Joan Robinson as describing inflation as “an expression of the ‘class war’.” Inflation is propagated by the consistent interest of the shareholders to maintain maximal share of company revenue, regardless of workers’ demands; any labor concessions will be considered an extra expense to pass to the consumer rather than a reduction in the profits reported to shareholders. So while working-class gains may contribute to inflation, the subsequent price/wage spiral cannot be attributed solely to such demands for moderate revenue redistribution. In “Bad Samaritans,” Ha-Joon Chang states, “Indeed, even many neo-liberal economists admit that, below 10%, inflation does not seem to have any adverse effect on economic growth.” (141). Rampant inflation is not sought for, but a policy-induced recession can exemplify symptoms felt by an economy.
Volcker was effective in busting labor’s market power, and workers have since struggled to regain a semblance of the leverage once held in organized and even unorganized labor. Immediately following Volcker’s constrictive policies, rapid downsizing affected manufacturing, mining, and construction the hardest, especially exports, as “It was costly for businesses to pay their debts and borrow money to invest, while a strong dollar made American exports even less competitive internationally.” (Barker) The lack of competitiveness in global markets cedes the US industry’s valuable market share to cheaper producers. In certain core industries, quick re-entry into that market is not likely. Judith Stein, a distinguished CUNY historian, emphasizes the effect of foreign trade policy, or a lack thereof, is solely to blame for this loss of US market share during the late 1970s. She points to the US modus operandi of aggregate manipulation rather than targeted microeconomic policy as causing much of the decline of global competitiveness. The strict adherence to macroeconomic policy certainly had an effect, but arguably this was not solely due to the policies promoting international free trade. Just as Stein highlights, “No economy was separable from the society it served, ” so does this sentiment apply to monetary policy; the flow and value of fiat effects the society(s) it serves. Monetary policy’s casualties are not indiscriminate or inevitable as neoliberals would like to claim; African American workers and immigrants saw incrementally higher unemployment rates, hindering effective economic and social recovery from the ailments burdened on those communities years past.
A potentially problematic contributing factor is deindustrialization. It’s not a given that a reduction in manufacturing and other tradable goods slice of the economic pie is a negative factor. Still, it does have the potential to separate workers from the products of their labor in more service-based industries, making measurement of output difficult, thus potentially decreasing the bargaining power of service-based workers. “High-interest rates imply higher cost for domestic firms, but as manufacturing firms face foreign competition, they cannot pass the cost onto consumers by raising its price.” (Mikayilov & Najafov 214). A reduction in market share in globally tradable industries leaves the US economy more vulnerable to a domestic downturn; when people spend less on services, fewer services will be needed, and manufacturing may not be fervent enough to prop up the recovery.
Services is an umbrella term to describe value provided by resolving a problem, whether it’s a matter of life or death or of convenience. The term “services” encompasses sectors from banking, to barbers, to healthcare. The dependency on certain services for economic prosperity and quality of life was especially apparent during the COVID-19 pandemic as the type of services in demand dramatically shifted, and the availability of laborers was inadequate to meet such needs. Furthermore, it brought to light what kinds of jobs are considered “essential” and whether or not those holding such necessary occupations are appropriately compensated for their indispensable role. As Garbiel Winant describes in “Deindustrialization, Working-Class Decline, and the Growth of Health Care”, “The [2020] phenomenon of “essential workers” emerged—with all of its outrages of insufficient staff, equipment, and pay—because we had already designated an enormous workforce as simultaneously necessary for our society’s survival and reproduction, yet individually disposable.” As to be expected, amidst a global pandemic, medical services were most essential for the general public’s well-being in their ability to return to and remain in good health. Medical workers are often overworked and undervalued, and their compensation reflects that. Winant traces the devaluation of care-based services to the economic climate during the healthcare boom of the 1970s. Plausibly, the healthcare sector looked to hire primarily women facing income insecurity following their partners’ lay-offs. African-American men were first to be laid off in the event of a downturn, leaving shaken families to seek whatever employment was available, which was increasingly concentrated in care services as the population aged with their relatively new health insurance and immediate poverty. The care sector has seen continually decreasing staff-patient ratios, which was only exacerbated during the pandemic. Nurses and other staff aren’t compensated for the increased workload, and stress levels quickly rise as the quality of care declines.
Two sectors, in particular, have played an instrumental role in the current state of service work. First, the financialization of all industries has put much power in the hands of a few, specifically private equity firms that buy majority advisory ownership in a business with the sole purpose of optimizing the company’s profitability and offloading the liability for a windfall as quickly as possible. In the case of healthcare, clinics and nursing homes are acquired and stripped of their already faltering resources to provide adequate care, namely faculty members maintaining an acceptable level of care. The equity firm has no loyalty to the company itself but to its shortlist of investors. Ironically, financial services is considered a service, although not necessarily an essential one. Second, developments in computer technology have disrupted the service sector in a myriad of ways. Unfortunately, many of these developments have been used to veil regressive labor practices and absolve the firm of liability. Most prominent in this tactic has been in the taxicab industry, with giants such as Uber facilitating seemingly painless independent contracts for their drivers, who they can classify as “users” because they are a “technology company.” This obfuscation of their actual product, the rides they connect you with, and their political sway allows Uber to skirt existing laws regulating existing car services. Many similarly structured tech firms offer a variety of services, which saw increased utilization by both consumers and workers during the crux of the pandemic. The independent contractor relationship is not new to the taxi industry (Dubal) nor the broader service sector. Support staff such as cleaners and cafeteria cooks at office buildings, including but not limited to financial and tech services, often work on contracts that diminish worker power and protection. Anna Stansbury, a distinguished guest on the Odd Lots podcast, argues that sectoral bargaining, practiced in some European countries provides a viable protection against the precarity of a contract that leaves these workers quite vulnerable. For example, Germany has established sectoral bargaining at a national level and also requires that a firm’s board allocates just under half of the executive power to worker-elected representatives.
The desired outcomes of growth and affordability for all are not mutually exclusive. Industrial planning and more targeted policies to accompany it can help our economy flourish and bring workers up with it. In similar cases of extreme, unsustainable inflation, many more will benefit if the majority burden is allocated to monopoly powers that propagate the inflation. Clearly, the free market is not effectively self-sustaining, and some level of intervention is often needed, so it would be best to target price gouging and anti-competitive behavior rather than let the bottom rung of the economy face the most devastating of the consequences when the delicate balance of the economy shifts. Samir Sonti explores how windfall profit taxes and price controls have been adequate to slow inflation in times of crisis and how these could work today. Many industries prone to monopolization or gouging already have some level of price controls in place and can still thrive within the confines of stability. In addition, an increased investment into service-based and supporting trade-based industries will diversify our domestic production and hedge against future downturns. Biden’s Inflation Reduction Act is a step in the right direction for reinvigorating industrial investment, but it lacks substantial labor standards. Meticulously planned infrastructure and industry development will benefit many, but protections for independent contract work, healthcare cost reduction and quality improvement, and sectoral bargaining still have much to overcome. Democratization of the workplace could once again realign companies’ interests with their workers, who are also their consumers, rather than solely asset-rich shareholders wishing to expand their wealth exponentially. Some form of temporary inflation may mount as we work out the kinks of progressive fiscal policies, but that would not excuse us from turning and run back to the falsehood of free-market neoliberalism contributing to inequality today.
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