Thread: Higher Wages or Bubblenomics: What's it gonna be?

Higher Wages or Bubblenomics: What's it gonna be?

By Mike Whitney

December 22, 2008 "Information Clearinghouse" -- - -Wages, wages, wages. It all gets down to wages.

A strong economy must be built on a solid foundation of steadily rising wages. If wages don't keep pace with production, the only way the economy can grow is through the expansion of debt, which leads to disaster.

Consider this: the US economy is 72 percent consumer spending. That means the Gross Domestic Product (GDP) cannot grow if salaries don't keep up with the price of living. Low Income Families (LOF)--that is, any couple making less than $80,000--represent 50 percent of all consumer spending. These LOF's spend everything they earn just to maintain their present standard of living. So, how can these families help to grow the economy if they're already spending every last farthing they earn?

They can't! Which is why wages have to go up. The cost to short-term profits is miniscule compared to the turmoil of a deep recession which is what the world is facing right now. The present crisis could have been avoided if there was a better balance between management and labor. But the unions are weak, so salaries have languished while Wall Street has grown more powerful, stretching its tentacles into the government and spreading its anti-labor dogma wherever it goes.

The investor class has rejiggered the system to meet their particular needs. Financial wizardry has replaced factories, capital formation and hard assets while real wealth has been replaced by chopped up bits of mortgage paper, stitched together by Ivy League MBAs, and sold to investors as priceless gemstones. This is the system that Bernanke is trying to resuscitate with his multi-trillion dollar injections; a system that shifts a larger and larger amount of the nation's wealth to a smaller and smaller group of elites.

When Alan Greenspan appeared before Congress a few months ago, he admitted that he had discovered a "flaw" in his theory of how markets operate. The former Fed chief was referring to his belief that investment bankers could be trusted to regulate themselves. Whether one believes Greenspan was telling the truth or not is irrelevant. What really matters is that the wily Maestro managed to skirt the larger issues and stick to his script. Congress never challenged Greenspan's discredited, trickle-down economic theories which guided his policymaking from the get-go. Nor was he asked to explain how a consumer-driven economy can thrive when salaries stay flat for 30 years. An answer to that question might have exposed Greenspan's penchant for low interest rates and deregulation, the two fuel-sources for the massive speculative bubbles which emerged on Greenspan's watch. These are the tools the Fed chief used for 18 years to enrich his buddies at the big brokerage houses while workers slipped further and further into debt.

There's no "flaw" in Greenspan's thinking; his views perfectly reflect his unwavering commitment to the rich and powerful. That's never changed. Since retiring, he has continued to ingratiate himself to his Wall Street paymasters while fattening his bank account with royalties from his best seller. Unfortunately, his success has come at great cost to the country.

Millions of homeowners are now facing eviction, consumers are tapped out, and the job market is in a shambles. When equity bubbles unwind, it's never pretty and the Greenspan implosion has been particularly nasty. Assets are being sold at fire sale prices and there's a frantic rush to the safety of US Treasurys. It's a catastrophe.

That said, it may seem like a bad time to boost workers' pay, but that's not the case. Crisis creates opportunities for change---real structural change. And that's what's needed.

The bottom line is that this whole mess could have been avoided if demand was predicated on wage increases instead of asset inflation. Of course, that precludes the Fed's traditional remedies for economic malaise--easy money and massive leveraging. Just last week, Bernanke announced a plan to buy $800 billion of securities backed by mortgages and credit card debt in an effort to stimulate more borrowing. The Fed chairman would rather drown the country in red ink than support pay raises for workers. Go figure? This just illustrates the class bias that underscores the Fed's policies, which is why pointless to debate the issue or try to find common ground. The only way to effect real change is with political power.

From Bernanke and Greenspan's perspective, any small gain by workers is tantamount to communism. They will continue to do everything in their power to preserve the current labor-debasing system which keeps workers just one paycheck away from the homeless shelter. This type of hostility is neither good for the economy nor the country. It just intensifies class animosities by accentuating the chasm between rich and poor. The only way to overcome these differences is by narrowing the wealth gap and rewarding hard work with fair pay.

John Bellamy Foster and Fred Magdoff explain how establishment economists and their corporate patrons developed their ideas of how to use equity bubbles to grow the economy and shift wealth from workers to elites. In their Monthly Review article "Financial Implosion and Stagnation":

"It was the reality of economic stagnation beginning in the 1970s, as heterodox economists Riccardo Bellofiore and Joseph Halevi have recently emphasized, that led to the emergence of “the new financialized capitalist regime,â€

A lot of us have been predicting this financial collapse for at least 2 yrs..I call it the "Trickle Up Effect" or "Common Sense Economics" which top economist seem to have not a clue of what this means.

In other words if Americans are encouraged to spend money they do not have and wages continue to fall who is going to buy from the greedy businesses who demand cheaper labor at inflated prices ?

Years ago we were encouraged,by our Government,to SAVE money instead of spend,spend,spend.Now the mantra seems to be if you don't have the money,put it on credit cards or otherwise borrow the money (Trickle Down Effect") !!!

Americans are smarter then the economist and have realized the Party is Over and are doing the right thing by paying off their debts and putting their money into savings.

The bailouts are a give away to the rich on the backs of average taxpayers.I say let the rich businesses fail and out of the ashes new,less greedy and powerful businesses with less control of our government will emerge.

Obamas plan for a HUGH stimulus package will not work ! Instead it will worsen our economy and may destroy our beloved country.

I have really never understood why economic growth has been the catch phrase for years. All we have seen as far as growth is jobs and industries going out of this country, while we are still supposed to be the consumer nation of the world. The drive for economic growth benefits a few who can afford lobbyists, while they are firing the American worker (aka consumer) for cheap labor. These corporations answer not to a national interest but being able to make dividend payments to the stockholders, and paying interest on their debt.
It has come to the point where maintaining the status quo as far as profits is something to be criticized. This profit-growth crap has stopped, ergo, the bailouts we have to pay for.
And what is laughable, at least in this administration, is sending every kid to college to study something for thousands of dollars a semester, to do what? We love to import cheap educated labor as well as allowing jobs for those never in college to lose out on cheap uneducated and illegal labor.

Only when Americans go back to producing real products like houses and cars can there be the beginning of real prosperity. If the U S manufacturing base is in ruins then everything else will be in bad shape too. Manufacturing is fundamental. Most of the services produced in the economy depend on manufacturing. So the first step should be putting people back to work making things we need like cars, houses, infrastructure, etc.

You are right, justthatguy. But there have been so many basic industries that have left the country, are being cheaply produced (and augmented with melamine and lead) and arrived here, are assembled here and stamped with product of USA or distributed by such and such a company.
Airplane repair is almost not done in this country, but rather in India. The construction industry is dying because the American people can no longer buy new homes, or new cars, as they have no income. What few pennies we still earn goes to taxdollars to bailout companies making bad business decisions. And GWB has just signed some sort of resolution, that these businesses no longer need to recruit American workers first before hiring those from another country.
This is absolute (simple math) insanity if you remove the paychecks from the citizens of the consumer nation of the world, they won't consume much, at least not enough to keep this ball rolling.
Our roads and bridges (infrastructure) are already being leased or sold to foreign interests, so why not our homes? And with so many foreign-owned banks holding mortgages on American homes, throw us out and bring in their folks! This all will not end well.