Biting the Hand that Feeds Them

Just about everyone is holding onto the belief that the economy will come back just like it did after every other recession. What if it doesn’t?

By MICHAEL P. COLLINS, Author, Saving American Manufacturing

Mike-CollinsAre we really in an economic recovery? In June 2011, unemployment rose to 9.2 percent and the number of unemployed is now 14.1 million — two years after the recession officially ended. Unemployment topped 8 percent for 29 months, the longest streak since the 1930s. New house sales keep falling and the seasonally adjusted rate is 319,000 units per year — that is less than half the 700,000 units that economists say we need to sustain a healthy housing market.

The Fed cut its economic growth forecast for 2011 from 3.3 percent to 2.7 percent, and growth was only 1.9 percent in the first quarter of 2011.

Fed Chairman Bernanke, when pressed by reporters, said “that some of these problems are stronger and more persistent, and that the problems could linger.” Perhaps these problems are not temporary, and linger may mean a more permanent economy with lower consumption and lower GDP growth.

Just about everyone, from government and economists to businesses and workers, are holding onto the belief that the economy will come back just like it did after every other recession. But what if it doesn’t? What if America is really undergoing a restructuring of the economy in a long, slow retreat from our No. 1 position in the world?

It is obvious the economy is changing. Manufacturing has lost more then 5 million jobs since 2000 and the number of low-pay service jobs has grown dramatically in the last 30 years. But I think the most important economic fact is that 70 percent of our economy is based on consumption. And the vast majority of this consumption comes from the middle class. To make America’s economic engine work, the middle class must have the wages to consume.

In the past, it was the middle class that has had the wherewithal to spend more and help the economy recover from recessions. But this group is not in a very good position to do it again. As a large group, they are still carrying a big debt load from credit cards, equity loans and mortgages. Plus, their wages have been either stagnant or declining for more than a decade.

In fact, a September 2010 report from Congress says, “Bush’s tax cuts did not translate into prosperity. Middle-class American’s income fell by over $2,600, or over 5.0 percent during Bush’s eight years in office.” Figure 2 of the report is a chart that shows all of the middle-class wages from 1967 to 2008. This is divided up into five quintiles or categories. The bottom three categories under $40,000 have not grown since 1967. The next category of $60,000 has grown a little bit since 1967. And the category of $100,000 per year had good growth until 2005. But since 2005, all five quintiles are stagnant or declining.

The census bureau says that they don’t have a definition of the middle class. But if you examine the source of income tables in their Current Population Survey (CPS), you would find that in 2009, 145 million workers were paid wages and salaries. If you remove every worker who made more then $100,000 per year (approximately 11,003,000 people made more then $100,000 per year), there were 134 million working people earning wages and salaries. This figure is very close to the number of non-agricultural jobs listed by the Department of Labor in January 2011 of 135,499,000 workers. I would submit to you that this is a good estimate of the middle class.

On the other hand, the S&P 500 corporations are doing well. About 40 percent of these companies are getting 60 percent of their sales from foreign markets. They have been able to stay profitable and have more than $1 trillion in cash without hiring more workers. To hire more workers, they say they need more customers. In other words, they need American consumers’ to buy more — but this may not happen.

So what can the government do?

Government already added to the deficit by doing the first stimulus package. The stimulus did bail out many state and local government programs, and supporters say it created 3 million jobs.

Almost everybody agrees that the U.S. is falling behind on infrastructure programs. We need to replace or repair highways, bridges, power grids, and sewer and water systems in every state. This could create millions of jobs and really improve the basic infrastructure that makes America competitive and prevent future disasters (such as bridges collapsing). But the new rant in Congress is for austerity and deficit reduction, so there is little chance government can provide jobs or stimulus that could lead to higher consumption.

The new study by the Congress, Income Inequality and the Great Recession, is eye-opening and is easy to look up on the Internet. Figure 1 in this report is a chart from 1917 to 2008 that shows income inequality and what happens to total income figures after a crash. Specifically, it shows that the income of the wealthiest 10 percent of the population rose significantly in the years before both the 1929 and 2007 crashes. The report also says that:

  1. “High levels of income inequality may precipitate the economic crisis. Peaks in income inequality preceded both the Great Depression and the Great Recession, suggesting that high levels of income inequality may destabilize the economy as a whole.”
  2. The report goes on to conclude: “Income inequality may be part of the root cause of the Great Recession. Stagnant incomes for all but the wealthiest Americans meant an increased demand for credit, fueling the growth of an unsustainable credit bubble. Bank deregulation allowed financial institutions to create exotic new products in which the ever-richer rich could invest. The result was a bubble based economy that came crashing down in late 2007.”
  3. The chart shows that, after the initial shock of the 1929 Great Depression, the highest incomes dropped for 15 years. According to the report, this was because: “In the decades following the Great Depression, policy decisions helped keep income inequality low while allowing for continued economic growth.” In other words, taxes were raised on the wealthy, which were as high as 80 percent until Reagan began to lower taxes in the early 1980s.

This study shows not only that income inequality is a general economic problem that has fueled the current Great Recession, but also that the stagnation of middle-class wages causes another macro economic problem — no growth of consumption. Approximately 70 percent of our total economy is based on consumption and most of this consumption comes from the middle class. You don’t have to be an economist to realize that if people don’t have the income to consume that, eventually, we are going to all be victims of an economy with little GDP growth. Middle-class wages and growth are directly related.

Businesses (particularly big businesses) have had the power to control or reduce wages, and eliminate union jobs. But they are inadvertently creating a long-term losing strategy. They are biting the hands that feed them — the hands of their customers who control the consumption part of the economy. It is very hard to say whether large businesses see this problem of lower growth coming at them, or they are giving up on America and focusing on foreign markets.

Even though there is a lot emotional discussion these days about tax increases vs. cuts in federal spending, history shows us that after an economic crash, tax increases become part of the solution. We all watch every night on the news the two political parties assailing each other with polarized positions on tax cuts vs. spending cuts, and no willingness to compromise. So we are now faced with two huge problems — reducing our deficit and declining incomes of the middle class.

It would seem that common sense alone would suggest that this problem cannot be solved unless the political parties can negotiate a compromise with both budget cuts and new taxes. Walking out of the negotiations is not an option.

Secondly, my view is that it is in the interests of big business, politicians and government to do everything possible to create more jobs and improve living standards of working people. Continuing to drive labor costs down woulod only reduce consumption and lead to reduced GDP growth.

We could begin this process by having Congress pass house Bill 2378: Currency Reform for Fair Trade Act. Passing this bill would force the Chinese to quit manipulating their currency, which could lead to more then 2 million manufacturing jobs being brought back to America. It isn’t the answer, but it is a good start.

The alternative is to do nothing on these two major problems and allow our politicians to remain polarized on these issues. I think this would lead to the divisive politics of anger — a situation in which eventually everyone suffers. If the politicians are not capable of negotiating compromises and the Great Recession drags on for the middle class, then eventually the issues will be decided by the people through their votes. And remember that the middle class has 134 million votes.

Michael P. Collins is the author of the book Saving American Manufacturing. You can find related articles on his website via www.mpcmgt.com.

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