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News ::
Clintonomics - low inflation/low unemployment : how its done (english)
19 Oct 2003
The old belief held that with a low unemployment rate workers would have the upper hand and demand higher wages. Yet the data showed that wages weren't rising that much (during the Clinton Administration). It was one of the central economic mysteries of the time.
In a previous article
I pointed out that it is impossible to eliminate poverty, homelessness, and malnourishment under the 'free market' system, because low unemployment fuels wage increases which fuels price increases, leading to galloping inflation. Thus the true policy of all governments, be they Democrat or Republican, despite election rhetoric about 'job creation', actually consists of 'job uncreation' in order to obtain the right mix of policies to ensure that the country always has the 'ideal' number of slums and the 'the most natural rate of poverty.' One should keep in mind that the actual rate of poverty is a multiple of the official rate of unemployment (so then if unemployment is officially at 5 per cent, then the actual rate of poverty would probably sitting somewhere at 15 per cent, since there is a lot of poverty that is not included, if people 'stop looking for work' and there is also low wage poverty, that is also not included in the official statistics). At the end of the piece, I appended a challenge to those who disliked this challenge to the supposed 'supremacy' of the 'free market' to avoid such tactics as indulging in spam on the subject of 'the evils of Chairman Mao' or extending invitations 'to leave the country if I don't like it' (such spam being appended to the article on the main indy site) and instead concentrate on reconciling the contradiction, instead of trying to change the subject.
This weekend the CounterPunch site features an article on Clintonomics, which, it turns out, is fine example of how one can lower the unemployment rate and still avoid galloping inflation. Since the policies of the Democrats under Clinton represent one way to resolve the contradiction, I thought I would bring this technique to everyone's attention.

Basically, Clintonomics is able to lower unemployment while not suffering galloping inflation by 'traumatizing the workers.' For example, by adopting 'free trade' policies, and allowing corporations to move plants overseas to sweat shops, workers can be 'traumatized' when it comes time to negotiate wages, through 'credible threats' to close the plant and move their jobs overseas. Similarly, union busting is also easier when an employer threatens to close shop and 'move to China' if workers vote to join the union. This simple formula for 'low unemployment\low inflation' policy never occured to me before, and since it worked under Clinton, I offer it up as one possible way to resolve the inherent contradictions of the 'free market' system.

According to the Counterpunch article, "Clinton himself acknowledged only weeks after winning the election that "We're Eisenhower Republicans here.We stand for lower deficits, free trade, and the bond market. Isn't that great?" Clinton further conceded during this same time period that with his new policy focus "we help the bond market and we hurt the people who voted us in."

The end result of these policies was "dramatic departures from past U.S. economic trends did occur during the Clinton era, including the simultaneous fall of inflation and unemployment... the simultaneous fall of unemployment and inflation clearly defied the expectations of virtually all orthodox economists...Most economists, adhering to the Natural Unemployment/Non-Accelerating Inflation Rate of Unemployment (NAIRU) doctrines dominant since the early 1970s, had long predicted that unemployment in the region of 4 percent, or even 5 percent, must lead to headlong inflation. This is because with low unemployment rates, workers would gain increased bargaining power. They would demand higher wages and businesses, in turn, would pass on their higher labor costs to their customers through price increases. "

However 'traumatized workers' caused this conventional thinking out the window. According to the article, "wage gains for average workers during the Clinton boom remained historically weak, especially in relationship to the ascent of productivity (see Figure 2.1 and Table 2.7). These facts provide the basis for the poll findings reported in Business Week at the end of 1999 that substantial majorities of US citizens expressed acute dissatisfaction with various features of their economic situation. For example, 51 percent of American workers interviewed by the magazine declared that they 'felt cheated by their employer'. When asked their view of what Business Week termed the 'current productivity boom', 63 percent said that the boom has not raised their earnings."

Clinton's miraculous policy of low inflation and lower unemployment caught the attention of all the economists. "Greenspan hypothesized at one point to colleagues within the Fed about the "traumatized worker"-someone who felt job insecurity in the changing economy and so was accepting smaller wage increases. He had talked with business leaders who said their workers were not agitating and were fearful that their skills might not be marketable if they were forced to change jobs ...Saluting the economy's performance that year as "extraordinary'" and "exceptional," he remarked that a major factor contributing to its outstanding achievement was "a heightened sense of job insecurity and, as a consequence, subdued wages."

The article concludes, "Overall then, the absence of inflationary pressures as unemployment fell under Clinton should be no mystery. Class conflict has always been the spectre haunting the analysis of inflation and unemployment. With the Clinton administration providing virtually no support to workers as the bargaining strength of business increased, it is not surprising that workers felt "traumatized"-as Alan Greenspan put it-and therefore scaled back their wage claims even in a period of low unemployment."
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