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Business and Labor

The Deathblow to Automatic Stabilizers

Click to enlarge.

Click to enlarge.

(Analysis) A true free-market revolution began with the Administration of President Ronald Reagan (R). The notion that the root of all problems in the US could be attributed to government became a rallying cry among a new breed of populists. This anti-government populism thrives today in the Tea-Party movement. It is very likely responsible for our economy’s inability to recover from recessions without nasty side effects to labor.

Elevated unemployment saps the bargaining power of labor vis a vis business. The threat of the “sack” is very real in an economy that exhibits a double-digit U6 rate and long-term unemployment. This allows business to renegotiate its relationship with labor, and until business is completely satisfied, investment will not be forthcoming. It is akin to economic blackmail, if you will.

Each recessionary episode after 1980 demonstrates an increasing time until re-employment of labor is achieved (see chart). This is potential evidence for a tactic of economic blackmail, in order to browbeat labor into submission. Expect no recovery of investment – and hence no recovery of employment and output – until business has successfully rewritten all labor contracts to their complete satisfaction. Consequently, expect further weakening of labor in a society where economic power is easily transferred into political power.

The chart above suggests that there is clearly some behavior occurring during recessionary episodes not strictly continuous with respect to time, for a (linear) trend of greater time to employment recovery is clearly visible with respect to the occurrence of recessionary episodes since 1980. This indicates that some behavior is triggered during each recessionary episode since 1980 that leads to greater time until employment recovery. The hypothesis here is that it is business withholding further investment until labor’s bargaining position is sufficiently weakened.

For the simple reason that automatic stabilizers – not directly managed counter-cyclical fiscal policy – serve to place a floor below which employment will not fall during recessionary episodes, they are opposed by business. Taking into account any possible stimulus effects from automatic stabilizers, their slow death has arguably served to generate sustained periods of unemployment after recessions since 1980 – a boon to business and those who earn “rentier” income.

NOTE: employment since the recession of 2008-9 still lags levels reported before the recession.



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