Wednesday, July 14, 2010

A Tale of Two Economies

It's earnings season on Wall Street, and despite all that you hear about the terrible economy you might be surprised to learn that corporate profits are just fine, thankyouverymuch.
The corporate earnings season, that quarterly rite of Wall Street, begins in earnest on Monday, and investors are hoping for some good news. Major corporations are expected to report some of their strongest profits in years.“It has been one of the strongest profits recoveries ever,” said David S. Bianco, chief United States equity strategist for Bank of America Merrill Lynch. “You have got to go back to the Depression to find a profits recovery that outpaces this one.”
Why are corporate profits so rosy? We keep hearing about low consumer confidence numbers, high unemployment and sluggish growth rates, so how are they doing it? Higher worker productivity and lower wages:
The 6.8 million Americans out of work for 27 weeks or longer -- a record 46 percent of all the unemployed -- are providing U.S. companies with an eager, skilled and cheap labor pool. This is allowing businesses to retool their workforces, boosting efficiency and profits following the deepest recession since the 1930s, and contributing to a 61 percent rise in the Standard & Poor’s 500 Index since March 2009. “Companies are getting higher-productivity employees for the same or lower wage rate they were paying a marginal employee,” said James Paulsen, who helps oversee about $375 billion as chief investment strategist at Wells Capital Management in Minneapolis. “Not only are employees higher skilled, you have a better skill match. You have a more productive and more adaptive labor force.”
Meanwhile, the top 500 corporations are sitting on a mountain of cash, $1.8 trillion in cash. What's causing their reluctance to hire? According to the head of the US Chamber of Commerce - failure to extend the Bush tax cuts for the rich! The watered down financial industry regulations that might finally pass! Long overdue health care reform! The mere mention of a cap and trade bill! According to corporations, it's the "uncertainty" created by these incredibly tepid steps away from the blank check days of the Bush administration that's throttling business. What a crock.

So let's review. Corporate profits are as high as they've been in years. Corporations are sitting on the largest pile of cash in history. 6.8 million persistently unemployed American workers are desperate and willing to take lower wage jobs, work longer hours for less pay, and in nearly every way make sacrifices to their own well-being to contribute to the most rapid earnings recovery ever. Meanwhile on Main Street, we're mired in one of the slowest job recoveries ever, and people are justifiably angry about it. They deserve better - they've seen their job disappear, or their hours cut, or their wages slashed in the name of the economic downturn. They've seen their home value plummet and their equity erased. Their pensions have been axed, their retirement threatened and delayed. And despite all this, it's the workers' fault. To borrow a phrase from Tim Pawlenty, they were "overpaid and overbenefited."

This imbalance has gotten so far out of hand that pinko commie mutual fund managers are talking about it. Fund manager John Hussman pretty succinctly captures the bizarro nature of the two economies and the eventual consequences here:
If we as a nation fail to allow market discipline, to create incentives for research and development, to discourage speculative bubbles, to accumulate productive capital, and to maintain adequate educational achievement and human capital, the real wages of U.S. workers will slide toward those of developing economies. The real income of a nation is identical its real output - one cannot grow independent of the other.

One might think that as long as labor takes the hit, our misallocation of resources will still be all well and good for profits - after all, if labor is plentiful and capital is scarce, one would expect high returns to capital. Indeed, it is true that as long as we continue to misallocate capital, productive capital will continue to be scarce and profitable, but also utterly stagnant. Economies that generate high profits, weak wage gains, and low capital accumulation are like old-style monopolies that create an ever-widening distribution of income but fail to produce long-term prosperity or growth. No economy in the history of the world has tolerated that sort of situation for long without responding with prohibitively high taxation, regulatory intervention, or in some countries, revolution.
This makes the next truth absolutely infuriating to me - the right-wing has largely gotten away with framing greedy workers as the cause of the downturn, and framing austerity measures imposed on workers as the solution to the downturn. Neither is true, and the latter is nothing more than a further transfer of wealth from workers to the corporate bottom line. Blaming workers and consumers for the ills of corporate America has become a well-accepted right-wing trope, and its one that needs a vigorous response from progressives.

It's jobs and wages, stupid.

Locally, the impact of the Tom Emmer tip penalty saga is that it has revealed his beliefs that workers make too much and that business owners are oppressed and impoverished by the greedy demands of spoiled workers. But unless Democrats can articulate a job and wage agenda that goes beyond taking potshots at a hapless Emmer campaign's gaffes they will pay the price in November. So far, the GOP has dominated this debate by defining all job losses as the result of heavy handed government intervention. But the surging profits on Wall Street put the lie to this story, and Democrats nationally and locally need to think deeply about how to refocus.

Once again - it's jobs and wages, stupid.

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