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Thursday, June 07, 2007

Economic Bitter Fruit of an Unfettered Free Market

Note: This is cross posted at Raising Kaine

Republicans like to tout the strong economy as a sign that their conservative, free market philosophy still works and that they are still “the party of ideas.” Indeed, with foreign policy and the war in Iraq in shambles, their economic success is all they’ve really got.

Hate to be the bearer of bad news, but that ain’t a whole lot. In fact, there are a couple of pieces of just plain rotten news about the economy today.

First, according to former Georgetown economics professor, Alfred Tella, writing in today’s Washington Times, there is a discrepancy between the rosy unemployment numbers that we’ve gotten and what may be a real and troubling trend toward higher unemployment. He writes here:

“Nonfarm payroll employment perked up in May, rising a respectable 157,000, about twice as much as in April. Since the end of 2006, payroll jobs, as measured by the government's employer survey, are up 664,000. The unemployment rate was unchanged in May, and at 4.5 percent, was the same as last December.
In contrast, total employment as measured by household survey (a more comprehensive count that includes the self-employed, agricultural, private household and unpaid family workers, and workers on unpaid leave) has been stagnant so far this year -- a puzzling inconsistency. In the three prior years, both employment series were on a generally rising trend.

According to Tella, the real rate of unemployed Americans may be closer to 4.9% or higher.

You see, the unemployment rate just measures those out of work who are currently looking for a job. But in a bad job market many people get discouraged and stop looking and then they are no longer counted. So a lower rate may not necessarily mean that the country is at full employment or that every able bodied American who wants to work has a job. It could just mean they couldn’t find a job and gave up. It also could mean that while they have dropped out of the labor market they are doing menial chores or “consulting,” i.e., picking up small, piece meal jobs that bring in some income but could hardly be considered real employment. And, of course, people who are consulting don’t have health benefits or pension plans. Consulting is sometimes genuinely lucrative and attractive to entrepreneurial types. But lots of times it’s merely a face saving term for folks just scrapping by after being laid off. But those folks don’t count as part of the unemployment rate.

So on paper the economy looks like it’s stronger than it is. Indeed, what we have is a paper pushers’ good economy. Investors push around paper profits but our country doesn’t manufacture much. CEOs, corporations and large investors are doing fine; but since not much is produced here, workers are losing ground every day.

And there’s more economic bad news on the doorstep today too.

According to this piece in today’s Wall Street Journal (sorry, you gotta pay - they're capitalists), productivity is down significantly and that raises fears amongst both economist and the Federal Reserve about inflation. Here’s the Wall Street Journal quote from Mark Whitehouse:

“New evidence that American companies are having a hard time keeping labor costs under control raised worries about a pickup in inflation, sending stocks tumbling. The Labor Department reported that the sum nonfarm businesses pay their workers for each unit of production rose at an annualized rate of 1.8% in the first quarter, sharply exceeding its initial estimate of 0.6%. The jump in so-called unit labor costs stemmed from a combination of factors: sharper compensation growth, which was revised upward to 2.8% from 2.3%, and lower growth in productivity -- or output per hour -- which was revised down to 1% from 1.7%.”
Of course, what’s bad for one segment of the economy isn’t necessarily grim news for another. While productivity is down, wage growth is up

I’ve been arguing for years that the old formula that higher productivity eventually produces higher wages is wrong. It used to be true that higher productivity led to higher profits, which employers passed on to their workers. The reason for this was that demand for the company's goods grew so they needed more workers to produce more widgets (or whatever it was they manufactured). But that’s not been true for a long time. Instead, higher productivity has been fueled by technology and automation and to a lesser, but significant extent, by outsourcing and off shoring. Because of those factors, even as productivity and profits climbed there was little demand for new workers to produce more goods and services.

Even higher productivity doesn’t eliminate the law of supply and demand. In the “new economy” the demand for labor is lower because of efficiencies that make the production of goods cheaper and less labor intensive, so corporations don’t have to share their profits with workers. Bosses never pass on their profits in the form of wage hikes simply out of the goodness of their heart or out of a sense of noblesse oblige. If businesses don’t have to hire more staff to meet rising demand for their goods, the demand for labor doesn’t rise. And with automation and off shoring, the demand for workers won’t rise even as consumer demand for their goods does. So companies get to keep their profits and they don’t have to share or play nice with workers. That includes not having to provide decent health benefits or pensions to compete for employees.

The only time bosses give raises or offer decent benefits is when they have to do so to retain their workforce. If they don’t need that workforce, then wages will stagnate no matter how high corporate profits climb.

The Washington Post, bless their little free trader hearts, never got that part right. Their business writers spent most of the last seven years assuring readers that higher productivity would trickle down to workers and raise their salaries. Now, though, the Wall Street Journal, a far better business publication that actually understands economics, tells the truth with this explanation:

“While strong growth in jobs and wages is good for workers, it raises the possibility that companies, unable to offset higher labor costs by increasing productivity, will try to pass those costs along to consumers, a trend that could fuel inflation and prompt the Federal Reserve to raise interest rates in response. "Even if economic growth is not gangbusters, the Fed could end up with an inflation problem," said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Conn.
And therein lies the problem. What’s good for workers – higher wages – is bad, not only for business but for investors, because it cuts into profit. Of course, one could question why exorbitant pay and extravagant perks for CEOs doesn’t affect the bottom line or push inflation pressure upward. That, for some reason, seems a reasonable investment in talent. CEOs, basketball stars, and coked out starlets all appear to have "talent" that make them valuable commodities on the free market.

On the other hand, the educators who teach your kids, the cops who protect your life and limb, and the guy who sacks your groceries don’t have value in the marketplace, even though they contribute immeasurably more to your life.

So much for the wisdom of unfettered markets and other ideologies that don't match the reality on the ground.

Meanwhile, look for investors and business types to push the panic button and try to slow growth, especially wage growth in order to put a break on inflation. That’s just one more proof that the interests of the average wage earner are not the same as their boss’s interests. And one more sorry example that the good times passed the American worker by. All those years when the corporate profits were rolling in and CEOs were living extravagantly never trickled down. Only the economic downturns trickle down to workers. It is the bitter fruit of a free market economy indeed.


brimur said...

A very impressive and thoughtful piece. But it seems your argument never reaches your thesis. How does all this reflect on the "free market" (or perhaps my confusion is that you never defined that term since it is so imbued with political meaning)? Productivity growth may indeed exist on an axis independent of wage growth in the era of instant communication and global transportation but I don't believe wages lag far behind. We are certainly dealing with a lot adjusting to a different economy and there certainly are some robber barons capitalizing.

But I'm not so sour on the free market. I think we can do a lot through the government to catch those workers caught in the cracks and we can do even more to broadly ease our economy's transition to a high technology economy just as we eventually transitioned from a farm economy to a manufacturing economy.

Do you think anyone back in those days could have imagined that we'd look on the manufacturing era as "the good times"- the dangerous, de-humanizing factory as "the good times"? Because of course as we transitioned into that economy the labor movement helped us rid ourselves of the worst aspects of that economy and create new benefits. There is no reason that this new economy cannot perform just the same trick in this transition.

The globalization of the labor movement will be a critical component of this process. I heard on NPR the other day, Hoffa visited China for the FIRST time. That's crazy. We're at the beginning of a whole new economy and I look forward, as a progressive, to figuring out how to make it work for everyone.

AnonymousIsAWoman said...

Brimur, thank you; your points are very well taken. This post was just supposed to be explanatory and to explain why the conventional wisdom, as espoused by the Washington Post and some other amateur economists and business writers, is not accurate.

I got tired of hearing that higher productivity automatically translates into higher wages for workers down the line and I wanted to challenge that supposed conventional wisdom because I saw a flaw in it. The evidence didn't back it up.

I just found some articles in respected business journals, like the WSJ, that seemed to back up what I suspected.

Once you realize that no automatic law will ensure social justice or fair wages and that the free markets produce a smaller amount of winners, sometimes at the expense of a large number of losers and of the common good, you look for ways to adjust the system.

I'm sorry if I came off too harsh on the free market system. I don't want to throw the baby out with the bath water. It's still a far better system than socialism, especially government induced socialism.

I just wanted to challenge the "keep your hands off" notion that nothing should be allowed to interfere with the functioning of free markets, regardless of how harsh the consequences for real, living, breathing people.

As a matter of fact, what brought up wages and provided an era of unheralded prosperity for millions of ordinary workers in the fifties and early sixties was not the working of an unfettered market. It was the institution of collective bargaining, union activity, and negotiation, which led to better working conditions, safer workplaces, health and pension benefits, and better salaries that allowed the working class to become the backbone of the middle class.

As Paul Krugman, in the NYT, frequently points out, there is a connection between the weakness of unions and the ground that middle class workers have lost.

That won't be fixed by trashing our economic system but by fixing where it has gone off balance.

And you're absolutely right, organized labor has to think globally not locally any more because their employers are.