Which Side Are You On? Four Facts and Two Promising Prescriptions for Dampening Inflation

As mine owners and their goons terrorized striking miners and their families during the Harlan County Coal wars in 1931, Florence Reece penned the iconic labor song, “Which Side Are You On.” It pleads for unity and collective resistance. As one verse puts it, “they say in Harlan County there are no neutrals there.” 

I recalled these lyrics while listening to a cable channel business report contending that “skyrocketing worker wages” are driving up prices and inflation. That is balderdash. Workers’ incomes aren’t rising significantly, nor are wage increases causing inflation to accelerate. For some policymakers and commenters, claims like the cable report justify jacking interest rates ever higher and accepting the rising likelihood of a recession, protecting the interests of those with high income and wealth. They would sail onward unmolested, but workers would lose jobs and income.  The little power workers gained recently to win better wages and working conditions would sharply diminish.  Raising interest rates to cause a recession to control inflation is choosing sides against workers and their communities.

Wages are not skyrocketing, nor are they a primary cause of inflation.  As economist Milton Friedman explained succinctly, “inflation is too much money chasing too few goods.” Pandemic-related supply chain woes and geopolitical instability made some goods scarce, and that exacerbated rising prices across many commodities. But if there really is “too much money,” who has it? It certainly is not workers. To understand what’s really going on, we need to remember 4 facts.

Fact 1: Workers’ incomes are barely keeping even with the cost of living.  Between September in 2019 and 2022, the Consumer Price Index (CPI) rose by 7.5% on an annual average basis. Wages are up too, but not enough to fully offset inflation. After crushing job losses and soaring unemployment early in the pandemic, the job market tightened as COVID eased. Many workers won modest wage gains while others jumped to new and better jobs.  Despite those trends, wages are barely keeping up with inflation.

As chart 1 shows, the cost of living has risen just about as much as median weekly earnings of full-time wage and salary workers. In fact, workers did better against inflation prior to the pandemic.  Between 2013-2019, median weekly earnings grew ahead of inflation.

The people commonly bearing the burdens of low-wage work are women and/or Black and Latinx.   Black and Latina women would barely make $40,000 a year if they were paid the median usual earnings for 52 weeks per year (an optimistic assumption). That may be above poverty level, however, it is only about half of the “living wage” in many states and cities for a family with two children and one wage earner.

The data is clear. Modestly rising workers’ pay is not driving inflation.  That is not where “too much money” lies.   

Fact 2: Rich households have the resources to “bid up” prices.  Because too many jobs pay at or near poverty, most workers’ families are not the source of the “excess demand” that may push inflation. Rather, they navigate inflation by tightening their budgets and focusing on essentials, not frills.  Many lack savings to cover an unexpected $400 emergency bill.  They are not prepared to weather inflation, and a likely recession will just make things worse. 

As charts 3 and 4 make clear, the income of the rich is rising faster than the cost of living. The bottom two fifths of the household income distribution achieved at best modest gains before the pandemic, and they lagged badly behind in the past two years. The top fifth enjoyed robust pre-pandemic gains and garnered even larger increases in the past two years.  Further, America’s uber-rich top billionaires thrived extraordinarily through the pandemic and recovery. Their cumulative wealth jumped a whopping 58% or +$1.71 trillion according to inequality.org’s analysis of Forbes data. That’s who is responsible for the “too much money chasing too few goods” that drives inflation.

Fact 3: Corporate profits are driving inflation more than labor costs. The Economic Policy Institute’s Josh Bliven’s analysis (Chart 5) shows labor factor costs are a minor contributor to inflation. The biggest culprit, corporate profits, contribute seven times more.

Fact 4: Another recession will harm millions of workers and communities. Some may never fully recover. After the recent Federal Reserve interest rate increases, Chair Jerome Powell noted that the likelihood of a recession was growing and the possibility that inflation could be controlled without one was declining. While inflation is harmful to many, a severe or sustained recession will inflict great pain on millions of working people and their families.  The burden is heavier still for white women and Black and Latinx people regardless of gender who are too typically last hired, first fired, and paid less than white male counterparts.

The recent midterm elections will likely lead to pitched battles over the direction of country, including federal economic policies. Now is the time to set the workers’ agenda for the Lame Duck interval before Democrats lose their narrow control of federal policy levers. We need to set some boundaries for negotiations with the Republican House for the two years ahead.  

What should we do to choose the worker side?

Adopt fairer taxes. To tackle inflation, let’s adjust taxes not just interest rates. Tax strategies can help ensure that the sacrifices entailed in controlling inflation are more equitably shared. Higher tax rates at the top rungs and a new wealth tax could dampen their spending and investment. Excess corporate profits are adding to inflation, too. In Europe, excess profit taxes have already been proposed. A parallel proposal could draw from the proposed Ending Corporate Greed Act.    These tax changes could prompt those at the pinnacle of the economic pyramid to cinch their belts for a change, but that’s only fair. We should not expect the poor, near poor, and working class to carry a larger burden of the inflation fight. Added public revenues could also reduce the federal deficit.  That helps because a rising federal deficit increases expectations of higher inflation ahead and may erode confidence in the US dollar.

Ensure an adequate safety net.  Our country should act on the difficult lessons learned through the pandemic’s hard times and earlier recessions.  We must prepare now to help workers and families in or near poverty through the coming crises. Let’s fix unemployment insurance, which failed too many in the pandemic recession. That should include investing in and modernizing the states’ capability to administer the payment system.  We should also raise minimum benefit levels and again extend payments to gig workers and others who are often ineligible.  The larger, refundable child tax credit should also be restored and extended.   And it’s long past time to hike the federal minimum wage – stalled at a paltry $7.25/hour since 2009!  These approaches may support some consumption, but they will soften the blows on lower income families and dramatically cut child poverty. Spending to help families out of poverty or financial ruin is no more inflationary than tax breaks for businesses and investors or spending on defense contractors.  And it is critically important to protect the safety and well-being of our society.

Now is the time to set an agenda that will not exacerbate poverty or class, gender, and racial inequalities.  Let’s not again pick “heads we win, tails you lose” options that impoverish working families while favoring corporations and wealthy investors. We must instead join together on behalf of the many not just the wealthy few.  

Mark G. Popovich

Mark G Popovich is the Director of the Good Companies Good Jobs Initiative at the Aspen Institute Economic Opportunities Program.  The views expressed are his own.  The author deeply appreciates the informative discussions about these issues with Maureen Conway, and thanks Sherry Linkon for her assist in shaping and editing the post.