osewalrus (osewalrus) wrote,


According to this NYT article, real wages adjusted for inflation have now hit an all time low, while corporate profitability has hit an all time high. In other words, increases in worker production no longer bring increased worker rewards. Instead, those rewards are captured by the firm as a whole.

I shall not bother with the equities of that. Either you think it's awful or wonderful or a product of a peculiar set of circumstances that will even out over time. "Equities" is invairably a philosophical argument not subject to rational proof (which does not, I stress, make it unimportant or not subject to rational debate, but I am careful about what I can and cannot prove).

So instead, I merely posit that this is unsustainable without some really massive change in circumstances and that a prudent individual (and a prudent government) will give some thought to how it breaks and what happens afterwards.

I posit this is unsustainable for several reasons. First, as a matter of basic economics, you cannot continue to increase productivity without providing some worker reward. The whole business about "incentives" that neo-cons like to yack about as applied to productive firms applies with equal force to productive workers. Yes, you can keep cheating for awhile with new technology and a slow labor market that provides incentive to work longer hours for the same pay. But eventually this runs out.

Nor do we have circumstances that would indicate a dramatic change in work environment to produce these two factors. Unless we massively changed our immigration laws, we have no constant supply of workers to keep wages down. Unless there is a tech miracle out there I am unware of, the ability of tech to improve productivity is likely to remain modest and incremental for the forseeable future (a by-product of the collapse in competition in the broadband and tech marketplaces).

Based on the above, I predict the ability to continue to extract productivity gains absent worker rewards is likely to diminish over time.

Second, American consumer spending (that is to say, the spending of workers earning those real wages) is a primary driver of the economy. This is why the Fed spent so much time lowering interest rates when the "new economy" crashed in 2000-01. Consumer retail outlets and consumer electronics suppliers are part of every major index to which economic activity (and economic confidence) is measured.

As predicted, rising interest rates, higher fuel prices, higher housing costs, and modest inflation overall caused by higher gas prices and other factors, are taking an increasing toll on consumer spending. This summer's retail numbers and vacation numbers are consistent with a large segment of the population trying to cut back on discretionary spending (while a small segment enjoying higher gains spends some on luxury items). Spending in resteraunts (except high-end resteraunts) is down. Hotels (except luxury hotels) are experiencing higher vacancies than in 2005. And, most importantly, the housing market has gone very soft. New home starts are down. Purchases of materials associated with home construction and home improvement are down.

None of this is in crisis mode. As commentators have noted, policy has actaully been to favor a slow down to ease inflationary pressures and to create a "soft landing" for the housing market. But it was also anticipated that the growth in the economy in 2004-05 would help to maintain or slightly improve real wages so that consumer spending could be sustained despite a drop in available credit.

But real wage growth has not increased. For whatever reason one wishes to assign, firms have captured the entire increase in productivity and the bulk of the econcomic growth as firm profit. Sustaining that trend means that consumers have less money to spend and more of it is tied up in "non-productive" uses -- such as paying down debt. That's a recipie for economic slow down and lay offs, as businesses strive to maintain profitability.

We've seen this before, of course. In the Post-WWII period, we've seen various changes in the economy save us from decline. In the 1990s, the mergence of internet and tech created a trillion dollar segment of the economy that had not previously existed. The 1980s saw the rise of new financial instruments and new forms of financing that both created new types of jobs, it made money available in wholly new and different ways.

So there may be some paradigm shattering development out there I can't see that will allow for creation of new kinds of value. Or something has to change that allows more of the increase in productivity to translate to rises in real wages as opposed to simply corporate profitability.

It will also be interesting to see how the pension fund crisis plays into this. Retired people on a comfortable pension spend money. People who have lost their pensions because a bankruptcy court waved its magic gavel and concluded that returning a company to profitability is more important than the interests of the unsecured pension fund holders do not. As this segment of the population grows, it will be interesting to see how it is possible to sustain the emphasis on corporate profitability.

One thing might change the status quo would be a rise in organized labor. Collective bargaining works to transfer corporate profitability to worker benefits. This is, of course, why Wall St. and those who focus on short-term profitability hate unions. But the best short term policy for maximizing revenue is hardly the best national policy.

Unfortunately, there is no indication that organized labor is on the rise. To the contrary, the recent decision by a federal court to prohibit a Northwest Airlines labor action (where the government supported management's position asking for the court to prohibit the walk out) indicates that we continue our slide backward to the Gilded Age. Alas, we lack the continuing tide of immigrants that made that model sustainable in at the trun of the previous century.

I wish I could end on some nice prediction, but I can't. It's all a big muddle. I just think that any illusion that we can maintain the current status quo is just that -- an illusion.

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