President-elect Joe Biden wants to reverse the decades-long trend that has seen workers get an ever smaller piece of the economic pie.
And no matter which political party ends up controlling the Senate, Democrat Biden’s best bet for achieving that could rest with a Republican: Federal Reserve Chairman Jerome Powell.
From a higher minimum wage and increased power for unions to bigger taxes on capital gains and the wealthy, Biden has outlined an ambitious agenda to lift labor’s share of the income the economy generates.
“It’s time to reward work, not just wealth, in America,” Biden told reporters after a Nov. 16 meeting with union and corporate leaders to discuss the coronavirus pandemic’s effect on the economy.
The trouble for the president elect is that much of his program hinges on the Democrats taking control of the Senate, something that won’t be known until early January after run-off elections for Georgia’s two seats. If his party falls short -- as many political analysts expect -- he’ll have to largely fall back on executive and regulatory actions to try to tilt the playing field in the direction of workers.
Fortunately though for Biden, he’ll have a Fed chair in Powell who’s committed to returning the labor market to its pre-pandemic glory -- when unemployment was at a 50-year low of 3.5% and a wide swath of workers were enjoying wage gains. And Powell overhauled the central bank’s strategic framework to help bring that about.
That’s an approach backed by Biden’s reported pick for Treasury Secretary, Janet Yellen, and one that is likely to endure even if Powell isn’t re-nominated for a second term when his current one ends in February 2022.
While bigger wage gains would be good for workers and help boost household spending, they might be a mixed blessing for companies and the stock market. Corporate revenue will climb as gross domestic product expands, but a smaller share of that will be going to the bottom line as profits.
“It’s possible that Biden’s plans could hurt the stock market even if they helped growth,” said Harvard University professor Jason Furman. “I’m not saying they would but the stock market cares not about overall GDP but the fraction of GDP that they get as profits.”
The Fed’s new monetary policy framework underscores its determination to achieve maximum employment that is broad-based and inclusive. No longer will it pre-emptively raise interest rates to head off higher inflation as unemployment falls. Instead, the Fed will allow joblessness to drop as far as possible and only seek to slow growth after inflation has moderately run above its 2% target for some time.
“The end result of the shift will be that we’ll test new lows in unemployment,” said Peter Hooper, Deutsche Bank’s global head of economic research. “That is going to ultimately raise wages and labor’s share” of the economic pie.
Under the Fed’s old modus operandi, the labor market was very tight less than 5% of the time since 1980, he said. Its new approach will make that happen more frequently, giving workers added leverage.
Fed Vice Chairman Richard Clarida, who played a leading role in fashioning the new framework, has pointed out that taut jobs markets boost labor’s share of income. That’s exactly what happened prior to the pandemic when joblessness was at a half-century low.
Economists have posited various reasons why workers have lost ground for decades. Some cite globalization and labor-saving technology. Others blame the declining power of unions. Still others cite the rise of dominant companies that hold sway over employees.
Biden has proposed numerous measures in response, from imposing a 10% tax penalty on companies that offshore operations to making it easier for workers to form unions.
But even if the Democrats narrowly take control of the Senate, they won’t be able to come up with the 60 votes required to end filibusters by Republicans on the bulk of Biden’s legislative program for labor, according to analysts Andy Laperriere and Don Schneider of Cornerstone Macro.
“The new president is going to have to focus on the executive agenda,” said Economic Policy Institute Senior Economist Heidi Shierholz.
Biden could require federal contractors to pay a higher minimum wage and meet other criteria favorable to workers. He also could revise overtime pay rules and tell regulators to carry out more robust pandemic-related enforcement of workplace safety.
In the end, though, his best bet for turning the tide in favor of workers rests with Powell.
As a former Fed chair, Yellen will presumably play a key role in deciding whether Powell gets another term, assuming she’s nominated and confirmed as Treasury secretary.
The two policy makers’ relationship is complicated: While they worked together at the central bank for six years, Powell did beat out Yellen for the Fed’s top post when President Donald Trump tapped him for the job.
Yellen has criticized some of the steps that the Powell Fed has taken to ease bank regulation.
But she also has praised the Fed’s determination to pursue broad and inclusive employment “with vigor” following its strategic review.
“It’s the strongest contribution that central banks can make to try to deal with inequality,” she told Bloomberg’s New Economy Forum on Nov. 16.
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