Monday, July 31, 2017

Are Central Bankers Turning Marxist?

Workers aren't the only ones frustrated over low wages.

By Daniel Moss
The Bloomberg View
July 31, 2017

Philip Lowe has been in office for a little less than a year and he's treading into territory central bankers have traditionally feared to enter.

The Reserve Bank of Australia governor has decried weak 2 percent wage growth (he's called the trend "insidious"), urged workers to demand higher pay and warned that year-after-year of mediocre compensation gains erodes support for "sensible economic policy." The last comment is a not-so-thinly veiled swipe at populism.

Something extraordinary is going here. What's a central bank chief doing urging workers to rise up and save the economy? Normally such officials are loath to discuss even banal technocratic matters outside their strict purview, such as budgets and taxes. A firestorm engulfs most of them when they do.

Lowe still believes in models such as the Phillips Curve, developed by economist William Phillips about 60 years ago, which links low levels of unemployment with pay and prices. The idea is that an ever-tightening job market must eventually translate into higher wages and inflation. Understandably, then, Lowe is frustrated that full employment isn't getting inflation up off the floor. The sentiment is shared by Janet Yellen, Mario Draghi and their peers around the world.

It's one thing for central banks to say, diplomatically, that fiscal policy needs to carry more of the burden of reviving growth and inflation. It's entirely another to put the onus on labor. Given the decades-long decline in union membership, the increasingly globalized nature of the workforce and the tendency of many employers to lay off staff at the first sign of a downturn or trouble with their business model, workers simply don't have the clout necessary to force wages higher.

And in any event, what can a central banker do about it? He doesn't control workplace regulation, he isn't a union leader and he certainly can't make tax changes or institute other incentives to encourage companies to raise wages. At most, he can keep interest rates relatively low in order to bolster business confidence, and the RBA is doing that. (Caveat: Unlike many of the biggest central banks, the RBA never went to zero rates, let alone negative rates, and didn't have to resort to quantitative easing.)

I checked with Stephen Jen, a classmate of Lowe's at the Massachusetts Institute of Technology and a director of Eurizon SLJ Capital Ltd. in London. Jen gives Lowe credit for raising important issues, but sees little or no role for central banks in resolving them.

"When China and other EM economies truly entered the global economy in 2001, the world had to change in favor of the owners of capital and expense of workers in the West," Jen wrote in an email. "All of our models need to be recalibrated."

For workers, the key probably lies in growing more innovative and productive, rather than simply insisting on higher pay for the same work, unless you're sure that you can't be easily substituted for dozens of others who can do the same job. That's especially true since increasingly, those others may well be in another country offering their labor for less.

That's the price of the globalized economy. And it's important to remember that there are many benefits as well. Australia was able to rack up record exports of its commodities as China underwent its period of truly rapid growth and wages -- even for plumbers, welders and the like -- skyrocketed. That leverage to the China boom also helped insulate the country from the downturn of 2007-2009. There's no way to turn the clock back and no reason to do so. Workers and central bankers alike are simply going to have to find a new path forward.

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