What with all the stuff that has been going on in the U.S. and abroad, and with Captain Chaos tweeting away from the White House, there was some good news last week that deserves more attention than it received. According to the U.S. Census Bureau, the incomes of ordinary American households, after stagnating for more than a decade, are finally picking up.
In 2015 and 2016, the last two years of the Obama Administration, median household income rose by about 8.5 per cent after accounting for inflation. Since the median household is the one in the very center of the income distribution, this means that the long-suffering middle class has made a bit of progress. And, in a break with recent history, some of the biggest gains, in percentage terms, were enjoyed by groups that have long seen their incomes lag. Among black households, for example, the median income rose by ten per cent; among Hispanic households, it rose by close to eleven per cent.
To be sure, these numbers need context. Wages and incomes fell so far during the Great Recession that median household income, as measured by the Census Bureau, is today still barely above the level it reached in 1999. Furthermore, in 2013 the Census Bureau changed its formula, introducing new methodology that has tended to raise reported incomes. When the Economic Policy Institute, a liberal think tank, reworked the Bureau’s numbers to make the methodology consistent over time, it found that median household income was still slightly below its 2007 level.
Even allowing for these qualifications, though, there is no doubt that incomes have jumped quite a bit since the end of 2014—coinciding with a drop in the jobless rate, from 5.6 per cent to 4.4 per cent. “It is quite impressive, the income growth of the last two years,” Larry Mishel, the president of the Economic Policy Institute, told me on Monday. “It points to the need to operate at very low levels of unemployment.”
Indeed it does. When the unemployment rate is high, full-time jobs are hard to find and workers have little bargaining power. That tends to depress wages and incomes. Conversely, when the unemployment rate is low, full-time jobs are easier to find. To keep their employees and attract new ones, firms have to try harder. Wages and incomes tend to rise. Over the past couple of years, according to the Census Bureau report, female workers, in particular, have gained from this trend. So have low-paid workers, who have also benefitted from the introduction of higher minimum wages in some parts of the country.
We’ve seen these trends—income rising in an environment of low unemployment—several times before. The same thing happened between 1995 and 1999, years during which the jobless rate fell all the way to four per cent, while median household income rose by ten per cent, from $53,330 to $58,665, in inflation-adjusted dollars. On a smaller scale, something similar occurred from 2004 to 2007, when the jobless rate fell below five per cent and stayed there for an extended period; median household incomes rose by 3.2 per cent.
For decades, center-left parties made maintaining full employment one of their central policy commitments. Building on the insights of John Maynard Keynes, post-progressive postwar economists, such as Nicholas Kaldor, in Britain, and Walter Heller and James Tobin, in the United States, argued that running an economy at high levels of over-all demand and low levels of unemployment created a virtuous circle, in which investment, productivity, and wages would all grow together. On the flip side, running an economy at low levels of demand, with high levels of unemployment, would lead to stagnation and the tragic wastage of resources, human and physical.
“Involuntary unemployment is the most dramatic sign and disheartening consequence of underutilization of productive capacity. . . . We cannot afford to settle for any prescribed level of unemployment,” John F. Kennedy wrote to Congress in the 1962 Economic Report of the President. “Ultimately, we must reduce unemployment to the minimum compatible with the functioning of a free economy.”
These words were written in the heyday of Keynesian economics. During the Kennedy Administration, Heller was the chairman of the White House Council of Economic Advisers, which produced Kennedy’s report. Tobin was also on the Council. The great inflations of the nineteen-seventies, which many economists attributed to policymakers trying to keep the rate of unemployment too low, discredited the Keynesian consensus. But the counter-reaction went too far.
Milton Friedman persuaded many economists that there is a natural rate of unemployment, below which inflation inevitably picks up and accelerates. But even if such a rate does exist—and it’s notoriously difficult to pin down statistically—it seems to be even lower than the current unemployment rate of 4.4 per cent. During the past year, the Federal Reserve’s preferred measure of inflation has fallen from a modest level of 1.8 per cent to an even more modest level of 1.4 per cent.
Fortunately, the Fed, under the leadership of Janet Yellen and Stanley Fischer, has taken seriously its congressional mandate to maintain both maximum employment and stable prices. By resisting the calls from some quarters for it to raise interest rates more rapidly, and thereby rein back the economy, the central bank has allowed the unemployment rate to decline further. The results can be seen in the Census Bureau update and in other reports that show the recent uptick in wages and incomes continuing into 2017.
Contrary to David Brooks, of the Times, this uptick doesn’t mean we’ve cured the plague of stagnant wages and rising inequality. It does demonstrate one way to tackle the problem: keep the unemployment rate low and boost the bargaining power of workers. If we can’t do this going forward, the recent upturn in wages and incomes will be just another blip rather than an enduring turning point. As Larry Mishel told me, that’s an excellent reason for Donald Trump to appoint Yellen to another term. But maintaining full employment shouldn’t be left to technocrats. It should be a central goal of any progressive movement, and of any responsible government.
