One thing I have never understood in America is the way that people who lose their jobs become pariahs in the job market. We’ve now had a spate of commentary on the fact that official unemployment figures are looking a tad less dreadful by dint of the fact that increasing numbers of the long term unemployed have dropped out of the job market entirely. Even the conservative Washington Post woke up last week, Rip Van Winkle like, to take note of the growing number of long-term unemployed. Bizarrely, or perhaps as a fit illustration of the spirit of the day, the article was titled: “Hidden workforce challenges domestic economic recovery.” In other words, they are Bad People because if the economy ever picks up, they might come out of the woodwork and start looking for jobs!

Many pundits, such as Paul Krugman in his latest New York Times op-ed, have decried the lack of anything remotely resembling adequate responses to the unemployment problem, particularly that of the long-term unemployed. Ronald Reagan, hero of the right, was concerned when unemployment rose over 8% and took a series of corrective measures, including the Plaza Accord, which was a G-5 currency intervention to drive up the value of the yen. So why do we have a nominally Democratic president sitting on his hands in the face of much worse unemployment?

I’d argue that the roots lie in a fundamental change in policy that took place around 1980. The lesson that economists drew from the stagflation of the 1970s was that labor had too much bargaining power. The excessive fiscal stimulus of the later 1960s and the oil price shocks of the 1970s had been amplified by the fact that workers had enough clout to demand and get wage increases when they faces sustained price increases. That of course led to more price increases since higher wages led to higher production costs which led business owners to increase prices of their goods and servicer, thus accelerating the inflation already under way.

The solution, per neoclassical economists, was to use unemployment to keep wage demands in check. Thus having a lower level of employment even in good times and taking other measures, like weakening unions, was key to keeping those pesky workers from ever serving to create a reinforcing inflationary dynamic.

As an aside, there were other convenient (to the capital-owning classes) side effects of this policy. Before, there had been an explicit agreement between unions and employers embodied in the so-called Treaty of Detroit, which was that workers were to share in productivity gains. President Kennedy even warned major corporations that if they did not adhere to this understanding, he’d push through legislation to make sure they did. Since wage growth and productivity growth marched in near lockstep from 1950 to just after 1980, it appears white collar worker benefitted from blue collar bargaining successes.

Mike Konczal points to a recent paperby Daniel J.B. Mitchell and Christopher L. Erickson that goes through twenty years of Fed transcripts. The Fed was clearly obsessed with unions; it sawn them as actively bargaining for higher wages, which in a central bank that kept fighting the last war of runaway inflation, was to be discouraged. And let us not forget that that viewpoint turned traditional growth models on their head: rising worked incomes had been seen as the driver of prosperity.

Yet as much as I’d love to take a few more notches out of Greenspan’s reputation, I’m not a believer that the non-existant growth in real worker wages can be laid at this feet. Both the wage stagnation and the cessation of workers sharing in productivity gains dates started before Greenspan took the helm. As much as he has been sanctified for breaking the back of inflation (and putting banks through a lot of pain to do so), he was also explicit about seeing weaker worker wages as a sign of success (he carried a card in his pocket in which he was logging construction worker wages; he wanted to see them fall before he was prepared to declare victory). The Volcker Fed was no friend to the ordinary worker; Volcker was simply willing to put the banks through a lot of short term pain for their own long-term benefit.

Konczal asks for falsifiable hypotheses on this idea that the Fed was a big culprit in the fallen standing of labor. I don’t think they can be constructed, since monetary policy is a blunt instrument, and even though Greenspan began to break with the Fed’s traditional stance re independence, he was not an active player in the Administration’s policy setting. Moreover, the Greenspan put, which took hold in the 1990s (starting with the derivatives wipeout of 1994-5) meant if anything that Fed policy was overly loose.

The reason that that didn’t lead to firmer employment, as former Fed economist Richard Alford argues, was inattention to persistent trade deficits, and that was due to policy measures outside the Fed’s purview. The Fed failed to factor that in fully due to its reliance on macro models that assumed any trade deficits were transitory and hence could be ignored. But older-school economists would have recognized that sustained trade deficits meant that US stimulus, including monetary policy measures, would leak into foreign demand. As we quoted Alford in ECONNED:

If you look at the difference between gross domestic purchases and potential output, by US consumers, businesses, and government—all are above potential output. The only time in recent memory when the difference between these two measures started to narrow was in 2001 when we were in a recession. . . . The policy goal has been to generate sufficient levels of demand to support full employment. . . . That would be fine if we did not have a net trade sector or at least had a stable net trade sector. But . . . we’ve had a flood of imports which have depressed prices in tradable goods. Fed Governor Don Kohn . . . said imported deflation knocked 50–100 basis points off measured per annum inflation. At the same time, rising imports have hurt American workers. . . . the underlying problem is not deficient US demand, but a structural external increase in supply (globalization). Given the inability of the dollar to serve as an adjustment mechanism, we are consuming too many imports, but instead of US policymakers addressing this global development, we created a number of unsustainable domestic imbalances to keep employment at politically acceptable levels. Higher levels of debt and asset bubbles have been the result of policy responses to external imbalances.

It isn’t as satisfying as pointing fingers at the Fed, but having lived through the 1970s and 1980s, it is hard to understate the shift in policies and values that started in the Reagan/Thatcher era, even if some of the foundations were laid earlier. And with that came the ascendance of neoclassical economists. The obsession in the FOMC transcripts with the now-discredited NAIRU (Non-Accelerating Inflation Rate of Unemployment) is one sign of the intellectual lock that neoclassical economics had established over policy thinking.

Another boost to the power of neclassical economists was the widespread depiction of the Volcker success in breaking inflation as a monetarist experiment. In fact, as William Greider’s Secrets of the Temple shows, Volcker simply used monetarism as an excuse to cover the fact that he did not want to be bound by a target interest rate. And efforts at his Fed and Bank of England showed that monetarism did not work; there was no consistent relationship between money supply growth and any macroeconomic variables. But the popular perception that Volcker had whipped inflation using monetarism gave a huge boost to Milton Friedman and the Chicago School of Economics, which allowed them to extent their influence over policymaking.

I think there have been significant second-order effects as a result of a restructuring of the American workplace by employer who like to claim that “employees are our most important asset”: but really treat them as expenses to be minimized, ruthlessly. One is the way unemployment quickly becomes a barrier to getting a job again. There has always been bit of a stigma surrounding unemployment, since the concern is that the individual lost his job for performance reasons, as opposed to bad luck (his company being acquired, say).

But I’ve seen the bias become far more ingrained over time, reinforced and rationalized by the bizarre way that companies now spec jobs. Whereas in the stone ages they’d hire a competent-seeming individual with some relevant experience, they now look for people who have done exactly the same job at a similar company. This overly narrow hiring spec then leads to absurd, widespread complaint that companies can’t find people with the right skills. That’s bunk. As Dean Baker has pointed out repeatedly, it means they need to pay more, or as I’d suggest, they need to broaden their horizon a tad. The idea that people need a lot of costly training is in most cases grossly exaggerated, a convenient “whocoulddanode” for manager who are quick to fire people and then discover when they want to gear back up that there are costs of brining new workers on, no matter how hard they try to minimize them.

This bias against those out of work is long-standing, although it has gotten worse over time. Talented people over 40 who have lost a corporate perch are pretty much unemployable; I cannot tell you over the last 15 years how many people I’ve seen retire early (and at a modest standard of living) who’d much rather be working. They are the high class version of this problem. And from what I can tell, a significant portion of new business formation is out of necessity: people who cannot find a job setting up their own single instead.

So this “skills” meme is basically an excuse for bad policy and lazy management. It allows for the rationalization of outcomes that would have been seen as unacceptable in the Reagan era. And it’s hard to pin this development on the Fed. This weakening of the position of workers is the result of both deliberate action and misguided economics frameworks. It’s time to take aim at the ideology, not just some of its key followers.