The Invisible Handcuffs of Capitalism: How Market Tyranny Stifles the Economy by Stunting Workers (6 page)

The Federal Reserve had to show that when faced with the painful choice between maintaining a tight monetary policy to fight inflation and easing monetary policy to combat recession, it would choose to fight inflation. In other words, to establish its credibility the Federal Reserve had to demonstrate its willingness to spill blood, lots of blood, other people’s blood.
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Interestingly, the intended enemy of this war—the workers—went unmentioned in this recollection, as did the collateral damage to farmers and the Latin Americans. But what had workers done to make the state treat them as enemies? Were these people culpable of some evil act for wanting more than a pittance?

The Federal Reserve serves the needs of the powerful. Its role is to protect capital against the interests of labor. In order to maintain labor discipline, the Federal Reserve Board is entrusted with the task of maintaining a level of unemployment high enough to keep workers fearful of losing their jobs.

The Treatment of a Different Kind of Worker

Just compare the bloodlust of those leading the attack on labor with the lax disciplinary mechanisms for the corporate elite. Based on an extensive survey of major corporations, Michael Jensen, professor emeritus at Harvard’s Graduate School of Business, found 94 percent of all contracts for chief executives prevent them from being fired for unsatisfactory work without a big severance package. Remarkably, in 44 percent of the contracts, this protection included those convicted of fraud or embezzlement.
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This should be a national scandal. As Warren Buffett told his shareholders:

Getting fired can produce a particularly bountiful payday for a CEO. Indeed, he can “earn” more in that single day, while cleaning out his desk, than an American worker earns in a lifetime of cleaning toilets. Forget the old maxim about nothing succeeding like success: Today, in the executive suite, the all-too-prevalent rule is that nothing succeeds like failure.
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Soon afterward, Stanley O’Neal proved Buffett to be correct. In 2007, after announcing an initial estimate that his firm had lost almost $8 billion that quarter, Merrill Lynch let him go with $161.5 million in stock, options, and other retirement benefits. One compensation expert said, “I wish my performance was so bad that I could get $160 million to leave.”
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As the economic crisis unfolded, O’Neal’s successor and a host of other failed executives collected comparable rewards.

Sado-monetarism is not so much a matter of monetary discipline, as most economists would have it, but of class discipline. Earlier, in the 1960s, Harry Johnson, a conservative professor from the University of Chicago, writing in a journal dominated by the conservative perspective of his school, offered a shockingly honest evaluation of the class bias of monetary policy:

From one important point of view, indeed, the avoidance of inflation and the maintenance of full employment can be most usefully regarded
as conflicting class interests of the bourgeoisie and the proletariat, respectively, the conflict being resolvable only by the test of relative political power in the society and its resolution involving no reference to an overriding concept of the social welfare.
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The Dread of Unemployment

The level of unemployment provides a rough indication of the difficulty of getting a new job. But what about the probability of getting an equally desirable job? Recent economic changes have made such prospects increasingly unfavorable. In today’s job market, losing a well-paying job generally means downward mobility—having to settle for less desirable employment in the future.

Not surprisingly, unemployment takes a heavy toll on people’s psyches. Unemployment and the threat of future downward mobility mean humiliation not only for the worker but also for the entire family. Losing access to what one considers a normal level of consumption can be a wrenching family experience. Children and spouses suffer embarrassment when they are unable to afford the kind of consumption to which they had become accustomed.

Being unemployed is more stressful than divorce or marital separation.
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People can get over the pain of divorce or separation, but the psychological toll of unemployment lingers. Psychologists have found that people who have lost a limb are naturally unhappy about their condition, but, after a while, they return to their previous level of happiness. But the unemployed do not. Richard Layard, a respected British economist who recently turned to the subject of happiness, observed:

So unemployment is a very special problem. Moreover, it hurts as much after one or two years of unemployment as it does at the beginning. In that sense you do not habituate to it (though it hurts less if other people are out of work too). And even when you are back at work, you still feel its effects as a psychological scar.
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Psychologists also know that dread—anticipatory fear of a likely experience—can be even worse than the event itself. So long as workers feel a strong dread of unemployment, a lower threshold of unemployment will be sufficient to make workers compliant.

This psychological knowledge played an important role in setting economic policy during the late 1990s. At the time, the economy was growing. Low-interest rates first fueled the dot-com bubble, and then, after its collapse, led to the housing bubble. Unemployment was creeping downward. Wages were increasing, but only modestly. Even so, business feared that unemployment was headed to dangerously low levels, yet Alan Greenspan, chairman of the Federal Reserve Board, refused to increase interest rates, knowing that despite lower unemployment, the dread of unemployment by itself was sufficient to keep wages in check.

One major factor in the intensification of dread was the effect of globalization. Greenspan understood he did not have to use the powers of the Federal Reserve to create unemployment. The pool of unemployment had expanded to include hundreds of millions of workers outside the United States. Workers who make strong demands are likely to be met by an employer threat to move production offshore. In this environment, the danger of higher wages and a decline in labor discipline were insignificant. This realization gave Greenspan confidence to keep interest rates low. The high stock market and housing prices were not a matter of concern for him.

Traumatized Labor

Greenspan’s confidence was a reflection of what George Orwell called “the haunting terror of unemployment.” In Orwell’s words, “the working man demands … the indispensable minimum without which human life cannot be lived at all. Enough to eat, freedom from the haunting terror of unemployment, the knowledge that your children will get a fair chance.”
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Greenspan explained his monetary strategy in similar, but less eloquent terms, bluntly noting the state of what he
called the “traumatized worker.” He was not referring to the traumatization of the unemployed workers, but rather that of the employed workers who dreaded the possibility of unemployment.

Traumatization refers to a condition that causes people to suffer serious disorders—the kind with potentially grave consequences. The association of post-traumatic stress disorder and the threat of unemployment might seem far-fetched, if the source were someone less eminent than Alan Greenspan.

As Bob Woodward reported, Greenspan saw the traumatized worker as “someone who felt job insecurity in the changing economy and so was resigned to 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.”
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With wages held in check while the economy boomed, inequality soared during the late 1990s. In 1997, responding to a question from Representative Patrick Kennedy, Greenspan, who made a science of public evasiveness, blamed the resulting growth in inequality on technology and education, excusing his own contribution:

It is a development which I feel uncomfortable with. There is nothing monetary policy can do to address that, and it is outside the scope, so far as I am concerned, of the issues with which we deal.
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I do not believe that Greenspan ever used the expression “traumatized worker” in his public pronouncements. He always chose his words carefully, and he perfected a language that was legendary for its obscurity. Still, his less inflammatory words still conveyed the same message. For example, he testified before Congress: “The rate of pay increase still was markedly less than historical relationships with labor market conditions would have predicted. Atypical restraint on compensation increases has been evident for a few years now and appears to be mainly the consequence of greater worker insecurity.”
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Greenspan was correct in his assessment of the situation facing workers. He had numbers to back him up, reporting:

As recently as 1981, in the depths of a recession, International Survey Research found twelve percent of workers fearful of losing their jobs. In today’s tightest labor market in two generations, the same organization has recently found thirty-seven percent concerned about job loss.
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Greenspan was not the only official at the Federal Reserve who appreciated the benefit of low unemployment without wage increases. One of the governors of the Federal Reserve, Edward W. Kelley Jr., spoke at a meeting of the Open Market Committee about “the good results that we are getting now.” He went on to say:

I don’t know how much has to do with the so-called traumatized worker. How long is the American workforce going to remain quiescent without the compensation increases that it thinks it should get? When employment is as strong as it is right now, I don’t think we can depend on having permanently favorable results in that area. This has been a rather big key to the present happy macro situation where we have a high capacity utilization rate and a relatively low inflation rate. We all feel rather good about that.
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Economists also realized what was happening to labor. Not long after Greenspan’s comments about identifying speculative bubbles, Nobel Laureate Paul Samuelson told a conference sponsored by the Federal Reserve Bank of Boston that “America’s labor force surprised us with a new flexibility and a new tolerance for accepting mediocre jobs.”
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Work stoppages offer a quantitative measure that suggests how effectively labor was tamed. Between 1966 and 1974, the number of work stoppages involving a thousand workers or more never fell below 250. The average was 352, with a peak of 424 in 1974. Work stoppages then began to fall off rapidly, reaching a low point of fourteen in 2003, and rising slightly to twenty-one in 2007.
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Then as the economic crisis took hold, many workers had to accept serious declines in wages and benefits.

One might expect that lower wages would cut into consumer demand, but, according to a study in the
Journal of Consumer
Research
, “people use consumer purchases to compensate for psychological states of insecurity.”
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Many families had to take on considerable debt to maintain their standard of living, and this debt reinforced the dangers of unemployment.

Worker acceptance of mediocre jobs at modest wages paid handsome dividends for business, creating more demand (through debt) while making workers even more fearful of losing their jobs. In addition, workers’ insecurity also meant that they were less likely to quit in search of better employment, allowing employers to avoid the costs of recruiting and retraining replacement workers. Perhaps best of all, employers could enjoy this bounty without having to call upon the Federal Reserve to slow down the economy.

William McChesney Martin, chairman of the Federal Reserve between 1951 and 1970, used to say that the job of the Fed was to take away the punch bowl when the party gets going. With labor traumatized, the Federal Reserve no longer had to maintain a watchful eye over the economy. Instead, the Fed carelessly spiked the punch bowl with low interest rates and limited oversight of the financial system, fueling a series of bubbles during the Greenspan years. If economists paid a small fraction of the attention they paid to the purchase price of labor to labor’s contribution to the process of production, perhaps policymakers would pay more attention to the system of production and be less likely to allow such bubbles to get so far out of hand.

The bursting of those bubbles ultimately traumatized much of the world. Although Greenspan was confident that labor was in no position to challenge capital, many of the rest of the economic pundits were still obsessed with keeping labor tamed, so much so that they were unable to pay attention to the impending disaster.

In stark contrast to the sadistic attitude toward labor, when speculative excesses or some other miscalculation create adverse economic conditions that threaten to harm powerful business interests, especially in finance, the Fed is almost certain to rush in to the rescue, throwing money at business interests while letting labor hang out to dry.

More Discipline

Public policy has further traumatized workers. Since the 1970s, the U.S. government has shredded the social safety net. Access to supports such as welfare and public housing is fast becoming a thing of the past. To make matters worse, governments are making laws to make life difficult for those without employment. For example, some cities have criminalized feeding groups of poor people unless those organizing the food distribution have a permit, but then city officials refuse to issue the necessary permits when requested.