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Restore the basic bargain

Robert Reich, professor of public policy | November 29, 2011

For most of the last century, the basic bargain at the heart of the American economy was that employers paid their workers enough to buy what American employers were selling.

That basic bargain created a virtuous cycle of higher living standards, more jobs, and better wages.

Back in 1914, Henry Ford announced he was paying workers on his Model T assembly line $5 a day – three times what the typical factory employee earned at the time. The Wall Street Journal termed his action “an economic crime.”

But Ford knew it was a cunning business move. The higher wage turned Ford’s auto workers into customers who could afford to buy Model T’s. In two years Ford’s profits more than doubled.

That was then. Now, Ford Motor Company is paying its new hires half what it paid new employees a few years ago.

The basic bargain is over – not only at Ford but all over the American economy.

New data from the Commerce Department shows employee pay is now down to the smallest share of the economy since the government began collecting wage and salary data in 1929.

Meanwhile, corporate profits now constitute the largest share of the economy since 1929.

1929, by the way, was the year of the Great Crash that ushered in the Great Depression.

In the years leading up to the Great Crash, most employers forgot Henry Ford’s example. The wages of most American workers remained stagnant. The gains of economic growth went mainly into corporate profits and into the pockets of the very rich. American families maintained their standard of living by going deeper into debt. In 1929 the debt bubble popped.

Sound familiar? It should. The same thing happened in the years leading up to the crash of 2008.

The latest data on corporate profits and wages show we haven’t learned the essential lesson of the two big economic crashes of the last seventy-five years: When the economy becomes too lopsided – disproportionately benefiting corporate owners and top executives rather than average workers – it tips over.

In other words, we’re in trouble because the basic bargain has been broken.

Yet incredibly, some politicians think the best way to restart the nation’s job engine is to make corporations even more profitable and the rich even richer – reducing corporate taxes; cutting back on regulations protecting public health, worker safety, the environment, and small investors; and slashing taxes on the very rich.

These same politicians think average workers should have even less money in their pockets. They don’t want to extend the payroll tax cut or unemployment benefits. And they want to make it harder for workers to form unions.

These politicians have reality upside down.

Corporations don’t need more money. They have so much money right now they don’t even know what to do with all of it. They’re even buying back their own shares of stock. This is a bonanza for CEOs whose pay is tied to stock prices and it increases the wealth of other shareholders. But it doesn’t create a single new job and it doesn’t raise the wages of a single employee.

Nor do the wealthiest Americans need more money. The top 1 percent is already taking in more than 20 percent of total income — the highest since the 1920s.

American businesses, including small-business owners, have no incentive to create new jobs because consumers (whose spending accounts for about 70 percent of the American economy) aren’t spending enough. Consumers’ after-tax incomes dropped in the second and third quarters of the year, the first back-to-back drops since 2009.

The recent small pickup in consumer spending has come out of their savings. Obviously this can’t continue, and corporations know it. Consumer savings are already at their lowest level in four years.

Get it? Corporate profits are up right now largely because pay is down and companies aren’t hiring. But this is a losing game even for corporations over the long term. Without enough American consumers, their profitable days are numbered.

After all, there’s a limit to how much profit they can get out of cutting American payrolls or even selling abroad. European consumers are in no mood to buy. And most Asian economies, including China, are slowing.

We’re in a vicious cycle. The only way out of it is to put more money into the pockets of average Americans. That means extending the payroll tax cut. And extending unemployment benefits.

Don’t stop there. Create a WPA to get the long-term unemployed back to work. And a Civilian Conservation Corp to create jobs for young people.

Hire teachers for classrooms now overcrowded, and pay them enough to attract people who are talented as well as dedicated. Rebuild our pot-holed highways. Create a world-class infrastructure.

Pay for this by hiking taxes on millionaires.

A basic bargain was once at the heart of the American economy. It recognized that average workers are also consumers and that their paychecks keep the economy going.

We can’t have a healthy economy until that bargain is restored.

Cross-posted from Robert Reich’s blog.

Comments to “Restore the basic bargain

  1. For 8 years it was all Bush’s fault. Now, it is never Obummer the idiot’s fault. You get F- and are on probation.

  2. Your statement “These politicians have reality upside down.” says it all, because clearly the ‘politicians-for-life’ have no clue about how the real world works.

    I just read the Occupy LA clean up could cost the American tax payers $1 million dollars, they don’t seem to realize the members of Occupy LA are the real American taxpayers. And, they are paying for everything anyways, and instead of kicking them in the pants, they should be shown the same respect that they would show their employer.

    It seems American politicians and our police departments are confused about who they are working for and who they are protecting.

  3. The problem might be — study it — that the so-called neoliberal model (meaning, I suppose, no longer liberal model) is a very bad plan which has been foisted on the USA (and much of the world as well) by economists essentially working for the benefit of big capital rather than for “the people”. I’ve just read the article in the New Yorker about Brazil’s economy. I’d call it a must read for people interested in rescuing sick economies.

  4. Your line on Ford paying its new hires the same as it did a few years back reminds me of a conversation I had with an “Eisenhower-Republican” a few months back:

    I was part of a group of Minnesotans pulled together to propose a way to solve our State’s budget mess. Beforehand, participants had a little socializing time. A nice man from the outer ring suburbs and I started talking. He shared that he was an “Eisenhower-Republican.” Today, that meant he could vote Democrat or Republican depending on the situation.

    He noted that he was retired now, but a decade ago he was a big-guy in one of the multinationals with headquarters in Minnesota. He became ill and had to leave his nice career to take care of himself. He was (and is) doing alright financially, but he hated not working. So, he decided to do some part time managing at one of those big box chains because “he was good at that kind of thing.”

    He went from salaried work to hourly wage work just to keep himself busy.

    Eventually, his illness required more attention … I think he said it was around 2004 or so. So he had to quit that job.

    A couple years later he was all better (and still doing quite well financially), so he decided to see if the big box chain still had a job for him.

    They did. The same job, in fact. But now it was paying a few dollars less per hour.

    He looked at me and said, “You want to know one major reason why government can afford its bills anymore? It’s because corporations are paying workers less even though they are being more productive. Lower wages equal lower taxable income equals less money available for government to pay for the things it does.”


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