The good news about the economy's improved job creation dominated the weekend's headlines. Many commentators concluded that the economy is finally shaking off the effects of the financial collapse of 2008 and the long period of stagnation that followed.
The creation of 257,000 new jobs in January is surely good news, as is the long-awaited increase in wages, reported at half of one percent in that month. Even so, the one-year increase in wages has been only 2.2 percent, barely more than 1 percent when adjusted for inflation, and it's been a long time since most workers have seen substantial raises.
In this recovery, the economy has been creating more low-wage jobs than high-wage ones. The shift from standard payroll jobs to temp and contract work continues.
The uptick in the measured unemployment rate, from 5.6 percent to 5.7 percent, suggests that discouraged workers are only just coming back into the labor force and we are a long way from full employment. Even at the present rate of improved job creation, it will be 2017 before we get back to the pre-recession level of unemployment.
The beginning of a process where job creation actually translates into improved living standards is long overdue, but there are several dangers ahead.
Will the Federal Reserve Stay the Course?
The first danger is increased pressure on the Federal Reserve to raise interest rates to fend off (still imaginary) inflation. The more the economy recovers, the more the inflation hawks step up their pressure for the Fed to hike rates.
Why this perverse behavior? Even a bit of inflation could be bad for the bond market; and you can always count on Wall Street to favor slack labor markets and weak worker bargaining power.
The fact is that profit-share of GDPs is at record highs and the labor share at record lows. Wages could easily increase a lot more than they could without creating inflationary pressures.
The good news here is that the current Federal Reserve chair, Janet Yellen, is the rare Fed chief who actually cares as much about unemployment and worker earnings as she does about inflation. This is precisely in line with the mandate of the Humphrey Hawkins Act of 1978, which directs the Fed to target both price stability and full employment. But some conservatives are calling for a repeal of the Act.
The pressure on the Fed to choke off the recovery before we get significant wage improvements will only increase as the jobless rate comes down.
Will We Get Another Bubble Economy Before We Get Full Employment?
Critics of low interest rates cite the risk of more financial bubbles. When rates are very low, asset prices rise and new forms of speculation enrich insiders.
The solution, of course, is to crack down on financial speculation so that the real economy gets the low capital costs that it needs without the Wall Street abuses. But the same conservatives who want the Fed to raise rates prematurely are allies of those who would gut the controls of the Dodd-Frank Act, which are too weak as it is.
If you want to discourage bubbles, how about proper regulation of Wall Street? When the economy collapsed in 2008, it wasn't the low interest rates that had created the sub-prime bubble -- but the lax regulation.
Will Obama and the Republicans Give us the wrong tax reform? The third danger is that Republican and Democrats will get into a bidding war to give away tax revenues that we need to reinforce the recovery and job creation. Obama and the Republicans don't agree on much, but they both call for tax reform.
For now, Obama means revenue-positive tax reform -- raise taxes on the very wealthy, give working families more of a break, but have several hundred billions of dollars left over to restore the public investments that were gutted in the drive for budget balance. So far, so good.
However, when Republicans talk of tax reform, they mean tax cuts for business, and just to be fair, tax cuts for workers as well. This is more of the "starve the beast" strategy of destroying activist government. The problem is that when the eventual compromise comes, it would well be tax cutting without the revenue that government needs for investment in infrastructure and good jobs.
The economy is on the mend, but we can't restore decent wages on low interest rates alone -- and unless Yellen stands her ground, those rates could start to rise, strangling the recovery before it gets into high gear. Unless Obama hangs tough on what we mean by tax reform, we could get more of the business tax breaks that do so little for good job creation.
So while the jobs numbers are getting better, the real battles are just beginning.
Robert Kuttner is co-editor of The American Prospect and visiting professor at Brandeis University's Heller School. His latest book is Debtors' Prison: The Politics of Austerity Versus Possibility.
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