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“Workers Are At The Mercy Of Markets”: The Great Recession Shifted Bargaining Power To Employers

The questions hanging over Labor Day 2014 are whether and when the United States gets a pay raise. Ever since the 2008-2009 financial crisis, the job market has been in a state of heartbreaking weakness. But the worst seems to be over. As Janet Yellen, chair of the Federal Reserve Board, recently noted, monthly increases in payroll jobs have averaged 230,000 this year, up from 190,000 in 2012 and 2013. The unemployment rate dropped to 6.2 percent in July from 7.3 percent a year earlier and a peak of 10 percent in October 2009.

Gains are also reflected in cheerier (or less gloomy) popular attitudes, says public opinion expert Karlyn Bowman of the conservative American Enterprise Institute. A year ago, Gallup found that 29 percent of workers feared being laid off; that’s now 19 percent. (Millennials are exceptions; their unemployment fears rose slightly.) In March 2010, 85 percent of Americans judged jobs “difficult to find,” a Pew survey reported. In July this year, the figure was 62 percent. Although confidence hasn’t returned to pre-recession levels, there’s been a genuine improvement in mood, says Bowman.

What’s missing are wage increases. Since late 2009, hourly earnings have risen at an annual rate of about 2 percent, but when corrected for inflation, “real” wage increases vanish, reports the Economic Policy Institute, a liberal think tank. The EPI says that median hourly wages were actually 0.4 percent lower in the first half of 2014 than in 2007. Using a different inflation adjustment (the “deflator” for personal consumption expenditures instead of the consumer price index) produces a 1.7 percent gain over the same period, says Scott Winship of the Manhattan Institute. Either way, wages are basically flat.

We should do better.

The Great Recession shifted bargaining power to employers. With jobs scarce, “workers just take what they can get,” says economist Dean Baker of the Center for Economic and Policy Research, a liberal think tank. Companies have controlled costs through layoffs, skimpy wage increases and greater reliance on independent contractors, jobs which often pay less and provide fewer fringe benefits. The unwritten post-World War II labor contract — in retreat since the late 1970s — finally expired. That contract presumed that large companies would provide workers with stable jobs and “real” annual increases in wages and fringe benefits.

Forget it. Wage increases aren’t guaranteed, and longtime workers are regularly dismissed. “There really is no security in the labor market,” says former Fed economist Stephen Oliner, now at AEI. On the labor market’s edges, firms like Uber (an on-call transportation company) and TaskRabbit (an online service that allows customers to solicit bids for specific jobs) have created digital markets for freelance workers. The temporary jobs provide cash and flexibility — but not much certainty or security.

Too many workers have chased too few jobs, weakening wages. But now the pendulum may be swinging in workers’ direction. Some economists contend that it already has. Two bits of information are routinely cited: the unexpectedly fast fall in unemployment; and the rise in reported job openings to 4.7 million in June, more than double the recession low and slightly higher than the pre-recession peak.

The worry is that the growing supply of openings and the shrinking pool of available workers might trigger an inflationary wage-price spiral. This concern seems premature. Other economists, including Yellen, have argued that there’s still substantial labor market “slack” (surplus workers wanting jobs), keeping a lid on wage gains. Their evidence seems stronger. Consider the U-6 jobless rate (U-6 includes the officially unemployed, discouraged workers and part-timers who want full-time jobs). In July, it was 12.2 percent, down from a monthly peak of 17.2 percent, though still higher than 2007’s 8.3 percent, before the recession.

But suppose we are nearing an inflection point, where worker supply and demand are in closer balance. That certainly wouldn’t be bad. Workers’ bargaining power would improve with tighter markets: markets where businesses have to pay a bit more to keep employees; where younger workers might have competing job offers; and where someone could quit with a reasonable expectation of finding another job. (Note that unions aren’t a plausible alternative to markets because they represent only 7 percent of private workers. The minimum wage suffers from a similar scale problem.)

A wage explosion seems unlikely; companies were too traumatized by the Great Recession to let costs get out of hand. Even in 2007, wage increases — unadjusted for inflation — were running only at about a 3.5 percent annual rate.

What’s ultimately at stake is the Great Recession’s lasting effect on labor markets. Are they in the process of reverting to their modern role, promoting steadier employment and higher living standards? Or has there been a major break from the past, ushering in a harsher, more arbitrary system whose outlines are still faint? On this Labor Day, the verdict is unclear.

 

By: Robert Samuelson, Opinion Writer, The Washington Post, August 31, 2014

September 1, 2014 Posted by | Great Recession, Labor Day, Wages | , , , , , , | Leave a comment

“Taking On Too Big To Fail”: Financial Reform Is About To Catch A Second Wind And Elizabeth Warren Is Ready To Ride It

Financial reformers seeking new rules beyond the range of the Dodd-Frank law haven’t had much to cheer about this year. The chances of Congress passing new regulations—OK, passing anything—look bleak, and the Obama Administration wants to simply finish implementing the last set of reforms. But reformers are playing a longer game, biding their time until the conditions are ripe for a dam burst. That could happen sooner than you think. High-profile champions for reform are gradually bending regulators to their will, and a pile-up of big bank abuses have eroded Wall Street’s reputation in Washington. Most importantly, a new report detailing the extraordinary largesse granted banks during the financial crisis, and questioning whether Dodd-Frank would prevent a rerun, could set off a fresh spark.

An unlikely bipartisan duo, Senators Sherrod Brown and David Vitter, have tried all year to focus attention in Congress on ending “too big to fail,” the perception that large financial institutions will inevitably receive government bailouts if they run into trouble. This allows banks to take on outsized risks with implicit government support, and receive a de facto subsidy, with lower borrowing costs than their smaller competitors, because investors believe a backstopped institution will always pay them back. Brown and Vitter introduced legislation earlier this year to significantly raise capital requirements, which they say will reduce reliance on bailouts by forcing banks to pay for their own losses.

Brown and Vitter commissioned a study from the Government Accountability Office (GAO) to quantify the public subsidy bestowed on banks, which could give them powerful evidence to rally support for their legislation. GAO released the first part of the study last week. It mostly looks backward at the “extraordinary support” given to banks from 2007-2009 to weather the financial crisis, and whether the Dodd-Frank financial reform law ended this tendency toward bailouts. The more controversial part of the study, on how much the government subsidizes big banks considered too big to fail, isn’t due until next year.

But the report still contains some explosive material. It details how banks received trillions of dollars in capital injections, emergency lending and debt guarantees during the financial crisis, offered with more favorable terms than they could have found in the private market, and secured by junk collateral that non-government lenders would never accept. Some debt guarantees given by government agencies to banks were up to 10 percent cheaper than private alternatives, saving the banks billions of dollars. Banks with over $50 billion in assets used the crisis-era programs nearly twice as much as their smaller counterparts. Outside of the broadly available emergency programs, JPMorgan Chase received a $30 billion loan from the New York Federal Reserve (then run by Timothy Geithner) for its purchase of Bear Stearns, and both Citigroup and Bank of America received special direct assistance of $20 billion each. According to a summary released by Brown and Vitter, those three banks, the U.S.’s largest, would have been insolvent without the government support provided during the crisis. Since the biggest banks are even bigger today (the report states that the nation’s four largest banks are $2 trillion larger than they were in 2007), it’s hard to believe that similar support wouldn’t be granted if needed.

Dodd-Frank’s architects claim the law would prevent future bailouts. At least some of the market is convinced it would; the rating agency Moody’s downgraded the debt of major U.S. banks last week, after determining they would not have the advantage of future government support in a crisis (it’s worth noting that rating agencies receive the majority of their funding through the structured finance deals of these same big banks). But the GAO report concludes that Dodd-Frank “implementation is incomplete and the effectiveness of some provisions remains uncertain.”

The best example of this is the Federal Reserve’s Section 13(3) authority, a primary vehicle for emergency lending during the crisis. Dodd-Frank prevents the Federal Reserve from using section 13(3) to assist an individual institution, restricts even broad-based 13(3) programs from lending to insolvent firms, and adds other requirements and limitations. But the Fed has not written any 13(3) regulations yet, nor has it set any time frames for doing so. GAO recommended that the Fed establish a timeline for drafting 13(3) procedures, and the board accepted that recommendation.

The report comes at an interesting moment. Readers of this magazine may have heard of a certain Massachusetts senator named Elizabeth Warren. She has also taken on too big to fail, as an antecedent to her agenda of building an economy that works for ordinary Americans, rather than using them as giant wealth-extraction machines. And Warren has something Brown and Vitter don’t—a national platform, with the ability to shape and transform the national debate. She has already used this power to provoke incremental changes, mostly because regulators would rather be on her side than in her crosshairs. Nobody is better positioned to put this new set of facts from the GAO to use than the Warren wing of the Democratic Party.

To see this attitude change in real time, simply review the Senate Banking Committee confirmation hearings for Janet Yellen, nominated to take over the chair of the Federal Reserve. In 2009, Ben Bernanke sought confirmation for the same position, and when he was questioned about the Fed’s failures in financial regulation before the crisis, he vociferously defended the institution’s actions. Yellen, right in her opening statement, added financial regulation to the Fed’s core responsibilities, along with full employment and price stability—a huge shift. During questioning from Warren, Yellen agreed that the Board of Governors should reinstate regular principals meetings on financial supervision for the first time in 20 years, instead of relegating the decision-making to the staff level.

 

By: David Dayen, The New Republic, November 21, 2013

November 25, 2013 Posted by | Big Banks, Financial Reform | , , , , , , , | 2 Comments

   

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