IF THE PAY OF MOST AMERICANS IS IN DECLINE IN REAL TERMS
WHERE IS DEMAND GOING TO COME FROM IN THE FUTURE? DOES THIS MATTER?
CAN ANYTHING BE DONE?
"There is something wonderful in seeing a wrong-headed majority assailed by truth." John Kenneth Galbraith
MY OPENING REMARKS
I regularly harp on the fact the American Business Model (ABM) is deeply flawed, corrupt, and rigged to favor the rich. Doubtless, it has its good points as well—but, as matters stand, the bad outweighs the good.
The following points further illustrate the U.S.’s economic decline—even as the U.S. media—by and large—tout American economic success by world standards.
Growth in GDP (Gross Domestic Product)—even if measured and reported accurately (an assumption one would be wise not to make) is a truly inadequate, and misleading, way of measuring economic wellbeing. Beyond that, economic wellbeing should not be confused with quality of life.
Mind you, the U.S. is not doing too well in GDP either—and productivity, since the Great Recession, has been just plain lousy (not a surprise to this writer).
The ABM seems fixated on driving down U.S. worker pay—and is being remarkably successful at the task. Something most Americans don’t seem to realize is that it (the ABM) has been at it since the 70s. From the end of WW II until then, pay, productivity gains, and corporate profits were (more or less) shared fairly. Then came the corporate counter-attack, and both pay, and trade unions, came under systematic onslaught. Predictably, corporate power won—and continues to win. Then more recently, the Great Recession—caused by the Financial Sector—provided a perfect opportunity to tilt the playing field even further in favor of capital as opposed to labor.
It wasn’t a hard fight. The unions have been near obliterated in the private sector so workers have almost no bargaining power. Despite the aspiration of $15 an hour, the Minimum Wage, in real terms, remains at a historic low. Further, even where $15 has been mandated, it is being phased in rather more slowly than is needed.
But… actions have consequences—and capital’s victory over labor is not necessarily a good thing, even for capital. Particularly if a business is dependent on the home market, a firm’s workers are also its customers. If such workers have less money, they are likely to spend less on the firm’s products. By cutting labor costs, the firm has inadvertently cut its own sales and profits—and de-motivated its workers, thus harming productivity. Unhappy workers don’t work as well.
Read articles like those below every day—and a pretty clear pattern emerges. ABM policies are flawed—and they are having a directly negative impact on the U.S. Economy. In particular, management’s obsession with cutting labor costs—which have led to the closure of tens of thousands of U.S. manufacturing plants and the exporting of jobs to countries like China—have led to an inevitable, but disastrous, impact on U.S. demand. The country’s manufacturing base, while still containing pockets of world-class manufacturing expertise, has been largely hollowed out. Thousands of communities, which depended heavily on the payrolls and taxes from local plants, are struggling.
It hovers between hard and impossible to increase your sales and profits when your customers have declining purchasing power. The only way you can do it is by being exceptional in some way—which, generally speaking, requires a firm’s workers to be exceptional too. That is unlikely to happen unless the firm’s workers are well treated—which includes paying them adequately.
This is well demonstrated by the Costco experience. Costco pay well and thrive in a viciously competitive market sector, while Sam’s Club, it’s leading direct competitor (owned by Wal-Mart), which pays badly, languishes. Whereas it is certainly true that a business needs to watch its costs like a hawk, what really counts is cost effectiveness or productivity—not pure labor costs alone.
This is illustrated on a continental scale by Europe. Here you have country after country paying its workers better than the U.S., yet out-competing it internationally. The contrast in overall economic performances is truly striking. American managements believe in confrontation, authoritarianism, few worker rights and low pay. European firms practice cooperation, consultation, support extensive worker rights, and pay well. The outcome? European firms out-compete the U.S. hands down. In fact, where international trade is concerned, the U.S. hasn’t had a positive trade balance for decades.
I have been aware of this overall situation since 2004 (when I started researching the U.S. economy seriously) so I don’t really understand why it is taking so long for Americans to wake up. This is serious, folks!
- The U.S. Economy is largely (about 70 %) driven by domestic consumer demand. This is a significantly higher percentage than that of other countries—and I would argue is excessive to the point of being a distortion (but that is a subject for another day).
- Domestic purchasing power comes from domestic wages, salaries, pensions, dividends, and other sources of income. But, the vast bulk comes from the wages and salaries of average Americans.
- The earnings of most Americans are in decline—in real terms—after inflation is factored in.
- Squeezing pay—fairly obviously—also squeezes demand. So where, exactly, is growth going to come from? The rich—a tiny minority of the population as a whole—need to spend only so much to satisfy their needs (no matter how egregious), and thereafter tend to plow their money into the stock market, tax free investments like bonds, supposedly safe investments like land and property, and keep a high degree of liquidity. That doesn’t do a lot for overall consumption. GDP growth, the Holy Grail of American economic thinking, requires the population as a whole to row in.
- But do we need economic growth? That’s a whole separate subject (and an interesting one) but, if we are to cope, either we need a bigger cake, or to slice the existing one differently (a prospect that terrifies the rich). Here, as matters stand, it is also worth mentioning that we are not managing our affairs adequately with the economic resources we have. Not only can’t we balance the budget, but we are under-investing in such vital areas as infrastructure (the shortfall is in trillions of dollars). So, given our existing (screwy) priorities—which include excessive expenditure on the military and all matters to do with National Security , we certainly do need growth. Of course, if we changed our priorities, we might well find that we could live better on less (a downright heretical un-American thought).
But, back to the insanity at hand.
THE AUTO INDUSTRY & PAY
thefiscaltimes.com · by Beth Braverman
The recently released 2015 American-Made Index from Cars.com, which ranks cars with at least 75 percent domestic content, has just seven cars on it. That’s down from 29 cars five years ago.
Wages for autoworkers generally are on the decline. Employees at motor vehicle manufacturing plants earned a median $24.83 per hour in 2013, down 21 percent in the past decade, and employees at parts manufacturers earned an average $15.83, down 13.73 percent over 10 years, according to a November report by the National Employment Law Project.
PAUL RUGMAN EXTRACT
Many economists used to think of the labor market as being pretty much like the market for anything else, with the prices of different kinds of labor — that is, wage rates — fully determined by supply and demand. So if wages for many workers have stagnated or declined, it must be because demand for their services is falling.
In particular, the conventional wisdom attributed rising inequality to technological change, which was raising the demand for highly educated workers while devaluing blue-collar work. And there was nothing much policy could do to change the trend, other than aiding low-wage workers via subsidies like the earned-income tax credit.
You still see commentators who haven’t kept up invoking this story as if it were obviously true. But the case for “skill-biased technological change” as the main driver of wage stagnation has largely fallen apart. Most notably, high levels of education have offered no guarantee of rising incomes — for example, wages of recent college graduates, adjusted for inflation, have been flat for 15 years.
Meanwhile, our understanding of wage determination has been transformed by an intellectual revolution — that’s not too strong a word — brought on by a series of remarkable studies of what happens when governments change the minimum wage.
More than two decades ago the economists David Card and Alan Krueger realized that when an individual state raises its minimum wage rate, it in effect performs an experiment on the labor market. Better still, it’s an experiment that offers a natural control group: neighboring states that don’t raise their minimum wages. Mr. Card and Mr. Krueger applied their insight by looking at what happened to the fast-food sector — which is where the effects of the minimum wage should be most pronounced — after New Jersey hiked its minimum wage but Pennsylvania did not.
Until the Card-Krueger study, most economists, myself included, assumed that raising the minimum wage would have a clear negative effect on employment. But they found, if anything, a positive effect. Their result has since been confirmed using data from many episodes. There’s just no evidence that raising the minimum wage costs jobs, at least when the starting point is as low as it is in modern America.
How can this be? There are several answers, but the most important is probably that the market for labor isn’t like the market for, say, wheat, because workers are people. And because they’re people, there are important benefits, even to the employer, from paying them more: better morale, lower turnover, increased productivity. These benefits largely offset the direct effect of higher labor costs, so that raising the minimum wage needn’t cost jobs after all.
The direct takeaway from this intellectual revolution is, of course, that we should raise minimum wages. But there are broader implications, too: Once you take what we’ve learned from minimum-wage studies seriously, you realize that they’re not relevant just to the lowest-paid workers.
For employers always face a trade-off between low-wage and higher-wage strategies — between, say, the traditional Walmart model of paying as little as possible and accepting high turnover and low morale, and the Costco model of higher pay and benefits leading to a more stable work force. And there’s every reason to believe that public policy can, in a variety of ways — including making it easier for workers to organize — encourage more firms to choose the good-wage strategy.