Reich: If Consumers ‘Have To Rely On Their Sinking Wages, The Entire Economy Is In Trouble’
Reich: If Consumers ‘Have To Rely On Their Sinking Wages, The Entire Economy Is In Trouble’
During a conference call today, former Secretary of Labor Robert Reich explained vanishing consumer demand:
One big reason we are in the crisis we are in, apart from the meltdown from financial markets, is that consumers have run out of money. Consumer spending accounts for about 70% of this economy, and after the housing bubble burst, consumers were back to where they were before the housing bubble, which was not a very happy place. [...] The bursting of the housing bubble really cut off the last coping mechanism that many consumers had, and that was going into debt. If they can’t borrow any more and have to rely on their sinking wages, the entire economy is in trouble, because there’s just simply not enough demand out there.
One of the problems stunting the economy is that business capacity “far outstrips demand,” meaning that businesses currently have the capability to produce a lot more than consumers are willing to buy. “There is over-capacity in everything,” said Richard Yamarone, chief economist at Argus Research. “If capacity is too large, you don’t need that many people employed, which is another reason we’re seeing such high job losses.”
So how did this imbalance come about? It is partly a result of the current economic circumstances: “Consumers are slashing their spending because they’re perilously in debt and worried about keeping their jobs.” However, for years there has also been a general decline in wages as they relate to productivity:
If American workers were rewarded for 100 percent of their increases in labor productivity between 1980 and 2008 — as they were during the middle part of the 20th century — average wages would be $28.53 per hour — 42.7 percent higher than the average real wage in 2008.
As the Economic Policy Institute pointed out, “of the 20 richest countries tracked by the U.S. Bureau of Labor Statistics, the United States ranks 17th in hourly pay for production workers in manufacturing.” Of the 16 countries ranked higher in wages only one (Ireland) is more productive.
One way to correct this imbalance is increased unionization. As David Madland and Karla Walter found, “if unionization rates were the same now as they were in 1983 and the current union wage premium remained constant, new union workers would earn an estimated $49 billion more in wages and salaries per year.” That’s $49 billion in demand that the economy could desperately use right now.
11 Responses to “Reich: If Consumers ‘Have To Rely On Their Sinking Wages, The Entire Economy Is In Trouble’”
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Another reason that card check is a matter of national security.
February 18th, 2009 at 5:12 pmBush never made it about the people here or abroad. Although wages were depressed way before he got into office, Bush did exacerbate the situation by narrowly focusing on profit.
The Allard Amendment was introduced in 2006 or 2007 that would repeal the minimum wage all together. McCain along with 28 Senators voted against raising wages and voted for the Allard Amendment. Can you imagine what the economy would look like today if that were the case! It is not like it is bad enough.
I have nothing against profits, but unless consumers have money to spend private enterprise cannot survive.
February 18th, 2009 at 5:56 pmHey dummies! If this bunch of fools gets all the money it wants to spend it will equal 6 trillion dollars, not today but by the end of 2010. Election Day! But go figure on this: 6 trillion dollars divided by approximately 200 million taxpayers equals 30 thousand dollars per person!!!! Now don’t you think each of us could use that money to both our advantage AND
February 18th, 2009 at 6:01 pmAND to the advantage of this country without the stupidity of these robber barons? But they don’t trust us as individuals. Why? Because they won’t get any votes by giving us the money which belongs to US anyway.
February 18th, 2009 at 6:05 pmHow can so many be so stupid? Now you can see that elections have consequences.
NO I DIDN’T!
Unions are great but where are the jobs! Manufacturing in the toilet or overseas, Real Estate down the tubes for Developers for 5-10 years. Financial services (Wall St), down the shiter. Banking, ditto. Only bright spot is home remodel (weatherizing). Unionizing Wal-Mart and retail, such as Home Depot is great, and remember, you’ll pay more for those textiles and electronics made in China through unionized retail.
February 18th, 2009 at 7:35 pmIf we had a two-bracket system like Sweden’s, with 0% as the bottom bracket and 57% as the upper bracket (their cusp is about 10% above the median wage) then consumers would have a lot more money to spend, too. Since tax changes can be part of the budget (and thus not subject to filibuster) then we should do that of the National Security Council’s economists don’t agree with me that card check is a matter of national security.
February 19th, 2009 at 3:28 amI know I’m oversimplifying to a significant degree, but increased unionization=higher wages=higher cost to produce=higher cost of final product=A)not a very high net increase in purchasing power and B) either decreased exports and increased imports or tariffs and subsidies to make up for the lack of competitive prices. I just don’t see the value… increased wages doesn’t promise an increased consumption of domestic goods if those goods aren’t globally competitive.
February 19th, 2009 at 6:15 am[I meant to write, "...we should do that _if_ the National Security Council’s economists...." above.]
Anders,
If the people doing the purchasing are the same people making the increased wages, then it’s a wash. However, by increasing the size of the middle class, the number of people with the ability to make more discretionary purchases (who would not be as inclined to send their excess earnings to a tax haven) increases. Investment also increases through retirement pensions and accounts. Under unionization, it’s more likely that collective bargaining will keep executive salaries lower, and the executives are the ones likely to send their money to tax havens.
February 19th, 2009 at 7:37 amStrangely enough, if you look at the real figures for output and compensation they still track. But compensation is deflated with the CPI, while output is deflated per industry.
Another way of saying this is “it’s gotten cheaper to do business but not cheaper to live”. Unionizing might work, but only if collective bargaining can equalize the inflationary pressure on consumer and industrial goods.
February 19th, 2009 at 10:03 amI do not understand how there can be any debate about unionizing. The problem is simple. As a nation, we are spent financially. Up until the 70’s our standard of living rose due to increasing wages. Since Reaganomics it has risen with debt, both personally and nationally, while wages were stagnant or declining. We cannot afford to keep this 70% consumer driven economy on track. Things HAVE to change. If wages do not rise, the cost of goods will not matter. And without unions AND some form of economic nationalism, wages will not rise.
February 19th, 2009 at 1:13 pmWe used to be people, or citizens. Now we are consumers. If we don’t consume we aren’t doing what is necessary to keep the country moving forward.
February 19th, 2009 at 3:01 pmThe auto industry has to add hundreds of dollars to the price of their cars in order to pay health insurance premiums for their employees. It’s the same across the board. No manufacturing entity can compete globally because the rest of the “globe” taxes all its citizens to care for the health of all of its citizens.
I began asking ten years ago how can we support our industries when our wages don’t keep up with the cost of living?
What can we sell the rest of the world? Nothing!
The phamaceutical industry found a way to be profitable beyond belief by charging us two to three times more for their products than they charge the rest of the world. That, in turn, increased the premiums we have to pay for health insurance.
Are our leaders so dense that this is incomprehensible to them? Or, could it be, they have been purchased by short-sighted corporations unwilling or unable to realize that if we don’t make a living wage we can’t buy their products?
Union or no union, stagnant wages limits our buying power.
Thank you, Wal Mart, for dragging down our wages. When are you moving your corporate headquarters to China?