Business & Economics

The Wageless Recovery

Robert Reich

This week’s biggest economic show occurs tomorrow (Wednesday) when Fed chair Ben Bernanke steps in front of the cameras for the Fed’s first-ever news conference. The question on everyone’s mind: Will the Fed signal it’s now more worried about inflation than recession?

Much of Wall Street thinks inflation is now the biggest threat to the US economy. As has been the case in the past, the Street is dead wrong. The biggest threat is falling into another recession.

The most significant economic news from the first quarter of 2011 is the decline in real wages. That’s unusual in a recovery, to say the least. But it’s easily explained this time around. In order to keep the jobs they have, millions of Americans are accepting shrinking paychecks. If they’ve been fired, the only way they can land a new job is to accept even smaller ones.

The wage squeeze is putting most households in a double bind. Before the recession, they’d been able to pay the bills because they had two paychecks. Now, they’re likely to have one-and-a half, or just one, and it’s shrinking.

Add to this the continuing decline in the value of the biggest asset most people own – their homes – and what do you get? Consumers who won’t and can’t buy enough to keep the economy going. That spells recession.

Why doesn’t Wall Street get it? For one thing, because lenders always worry more about inflation than borrowers – and, in general, the wealthier members of a society tend to lend their money to people who are poorer than they are.

But Wall Street’s inflation fears are also being stoked by several specifics.

First are price upswings in food and energy. The Street doesn’t seem to understand that when most peoples’ wages are dropping, additional dollars they spend on groceries and at the gas pump means fewer dollars they have left to spend in the rest of the economy. Rather than cause inflation, this is likely to lead to more job losses.

The Street is also worried that the Fed’s easy money policies are pushing the dollar down and thereby fueling inflation – as everything we buy abroad becomes more expensive. But if wages are stuck in the mud and everything we buy abroad costs more, Americans have even fewer dollars to spend. This also spells recession, not inflation.

Finally, the Street worries that if Democrats and Republicans fail to agree to a plan to cut the budget deficit, the credit-worthiness of the United States as a whole will be in jeopardy – causing interest rates to rocket and inflation to explode. Standard & Poors, the erstwhile credit-rating agency, has already sounded the alarm.

The Street has it backwards. Over the long term, the deficit does have to be tackled. But not now. When job growth remains tepid, when wages are dropping, and when the value of most households’ major asset is declining, government has to step in to maintain overall demand.

This is the worst possible time to cut public spending or reduce the money supply.

The biggest irony is that the Street is doing wonderfully well right now, in contrast to most Americans. Corporate profits for the first quarter of the year are way up. That’s largely because corporate payrolls are down.

Payrolls are down because big companies have been shifting much of their work abroad where business is booming. The Commerce Department recently reported that over the last decade American multinationals (essentially all large American corporations) eliminated 2.9 million American jobs while adding 2.4 million abroad.

What the Commerce Department didn’t say is the pace is picking up. In 2000, 30 percent of GE’s business was overseas and 46 percent of its employees; now 60 percent of its business is outside the U.S., as are 54 percent of its employees. Over the past five years, Oracle added twice as many workers overseas as in the US; 63 percent of its employees now work abroad.

Corporations are simultaneously finding ways to cut the pay of their remaining U.S. workers – not just threatening job losses if they don’t agree to the cuts, but also automating the work or sending it to non-union states. (The Wall Street Journal’s editorial page, an unremittingly reliable barometer of Street thought, argued earlier this week that such states offer workers the freedom to choose whether to join a union – in reality, the freedom to lose even more bargaining power and be forced to accept even lower wages.)

America’s jobless recovery is becoming a wageless recovery. That puts the odds of another recession greater than the risk of inflation. Wall Street and its representatives in Washington don’t understand – or don’t want to.

Cross-posted from Robert Reich’s blog.

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Comments to "The Wageless Recovery":
    • Owen Meany

      We’ve let corporate America dictate our lives long enough. The 99% of us who are not corporations should demand our elected officials start defending our jobs by making it more difficult to go abroad and do business. KEEP THE JOBS AT HOME!

      [Report abuse]

    • SARAH WYGANT

      ROBERT, I READ EVERY ARTICLE YOU WRITE IN THE BRYAN TIMES, BRYAN, OHIO AND I AM WONDERING WHY YOU HAVE NOT RUN FOR PRESIDENT. YOU SEEM TO UNDERSTAND CLEARLY WHY THIS COUNTRY IS IN THE MESS IT IS IN TODAY. MAKE NO MISTAKE ABOUT COMPANIES WANTING TO RID THIS COUNTRY OF ALL UNION BARGINING RIGHTS. THEY ALL WOULD LIKE TO CUT THE WAGES OF THE BLUE COLLAR WORKER DOWN TO $5.O0 AN HOUR AND SAY TAKE IT OR LEAVE IT! MY QUESTION IS: HOW COULD OUR GOVERNMENT, BOTH PARTIES, STAND BY IN THE PAST AND SIGN NAFTA AND CAFTA AND CLAIM THEY DIDN’T KNOW THESE AMERICAN CEO’S WERE GOING TO TAKE ADVANTAGE OF THE SITUATION. I WORKED IN A FACTORY PRODUCING HEATING AND COOLING UNIT FOR 28 YEARS AND HAD THE HIGHEST RESPECT FOR MY EMPLOYER UNTIL THEY TOOK MUCH OF THE PRODUCTION TO MEXICO. I COULD NOT BELIEVE THEY WOULD DO THAT BUT IT PROVES THE POINT THAT THE ONLY THING THAT MATTER ANY MORE IS THE PROFITS COMPANIES ARE STICKING IN THEIR POCKETS!!!! SARAH

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    • Kathy

      “Consumers who won’t and can’t buy enough to keep the economy going. That spells recession.” That pretty much sums it up. There is no need to make the economic situation any more complicated than it is. It is a cycle that must be kept in motion or it comes to a halt – for everyone. No pay, no buy. No buy, no production. No production, no jobs. No jobs, no pay. Profit is a job. Take too much out of the system and it falls apart. The engine works when it completes the cycle where it starts. Transfer one part to another area and it falls apart. It is NOT more complicated than that.
      The company I worked for, for 17 years, boasted in an annual report to the stockholders that they had managed to ship 70% of the jobs overseas in the previous year. The next year, the report lamented that business was way down. Nobody was buying their product. Didn’t really take great brains to figure out why. It was a product of use only to the local community. Who had no jobs and could not afford it any more. Duh. But profits were higher that -one- year.

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    • Anthony St. John

      Prof. Reich, your posts make it appear that you have solutions to America’s financial problems.

      Could you take the time to demonstrate your expertise by leading UC in setting an example for Congress, the California legislature and California cities by fixing UC’s budget problems, such as implementing more savings like those documented in the Sacramento Bee:

      “UC plans to cut administrative waste by $500 million”
      http://www.sacbee.com/2010/05/20/2763606/uc-plans-to-cut-administrative.html

      Please make it possible for qualified California students to afford UC once again as UC’s highest priority.

      [Report abuse]

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