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Tuesday, January 17, 2006

Robert Solow: An Economy That Doesn't Distribute Gains Widely is ''Poorly Performing''

Bloomberg says there is friction between the administration and the Fed over how far unemployment can be reduced without creating inflation, and Robert Solow says the unusually small share of income going to workers during the recovery indicates an economy that is not performing optimally:

Bush's Expansion Leaves Workers Behind, Sparking Fed Friction, Bloomberg: American workers have rarely taken home a smaller share of the nation's prosperity, a condition that is undermining bipartisan support for free trade and creating friction between President George W. Bush's administration and the Federal Reserve. After 16 consecutive quarters of economic growth, pay is rising at a slower rate than in any similar expansion since the end of World War II. ...

Such a disparity, partly the result of globalization of the labor market, helps explain why the Bush administration is struggling to muster support for lower trade barriers even with the jobless rate at a four-year low. The imbalance has also triggered a debate between Bush's Treasury Department and the Fed about how low unemployment can go without kindling inflation.

''There is no doubt that something is happening'' to reduce labor's share of income, says Robert Solow, a Nobel Prize- winning economist ... An economy that doesn't distribute its gains widely is ''poorly performing,'' he says.

From the final quarter of 2001 through last year's third quarter, total compensation paid to employees ... rose at a 4.3 percent average annual rate... That's the slowest growth for any similar period in post-war expansions lasting at least four years. ... Treasury Secretary John Snow said Jan. 6 that wage growth will pick up. ''We are at that tipping point where labor's share of national income will be rising,'' he said. That may require further declines in the unemployment rate, something the Fed is likely to resist... as an inflation risk. ...

Treasury officials object to that idea. ''Nobody knows what the full employment, non-inflationary number is,'' Snow said after the government published a 4.9 percent unemployment rate for December. ''I'm confident it's considerably lower. We have room to bring it down.'' ...

This is not an explicit dispute as far as I'm aware, at least from the Fed's point of view, but in any case I'm glad the Fed is independent.

    Posted by on Tuesday, January 17, 2006 at 01:35 AM in Economics, Inflation, Monetary Policy, Unemployment | Permalink  TrackBack (0)  Comments (25)

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