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Daniel Tarullo outlines long-term challenges for the US economy

Part 3
Daniel Tarullo outlines long-term challenges for the US economy (Part 3 of 6)

Why workers’ lagging share in the US economy is a real concern

Why Tarullo feels workers’ share in the U.S. GDP has been lagging

Daniel Tarullo delivered a speech on “Longer-Term challenges for the American economy” at the Hyman Minsky conference on the state of U.S. and Global economies held in Washington, DC, on April 9.

Daniel Tarullo is a member of the Board of Governors of the Federal Reserve. Other members include Janet Yellen (Chairwoman), Jeremy Stein, and Jerome Powell. The Federal Reserve uses monetary policy as its tool to achieve its dual mandate of maximum employment and price stability. The Fed has kept the Fed Funds rate near zero to boost the recovery. As the economy recovers, inflationary pressures rise, prompting the Fed to increase interest rates. An increase in interest rates would hamper the bond market (BND) and bond ETFs such as the 20+ Year Treasury Bond ETF (TLT), iShares Barclays 1-3 Year Treasury Bond Fund (SHY), iShares Barclays 7-10 Year Treasury Bond Fund (IEF), and iShares Barclays 3–7 Year Treasury Bond Fund (IEI).

Compensation as a percent of national incomeEnlarge Graph

The second adverse development Tarullo discussed was the apparent reduction in workers’ share in the overall national income. Workers’ share in GDP has been on a downturn since the 1980s and fell down to lowest since 1948, when the Bureau of Labor Statistics started collecting the data.

A falling share of wages in GDP means capital providers are getting higher returns on their investment. As an investor, you should be concerned about this phenomenon, as a rising share of return on capital in GDP signals an economic divide. A greater economic divide gives rise to social pressures resulting in higher crime rates, workers’ strikes, and a fall in productivity.

One possible reason is that technological developments have replaced labor with capital. To elaborate, automation has allowed companies to replace people with machines, leading to a falling share of wages in GDP. Further, as firms have gotten bigger, their bargaining power over employees has increased, leading to more money flowing to shareholders and debt-holders than to employees. To find out more about Tarullo’s comments on rising inequality in the U.S., read on to the next part of this series.

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