Whom Will Our Leaders Defend?

[stone]

I thought this an interesting article.
http://www.hussman.net/wmc/wmc110905.htm

As HB reader said, Hussman writes interesting stuff even though his fund strategy seems off.

[MediumTex]

As long as we are in an environment where consumers can't even comfortably service their existing debt, why would anyone think that they would want to take on even more debt, no matter how favorable the terms?

The problem is that people in recent years started to use credit spending as a substitute for wage gains.  This was obviously not something that could go on for very long, and it didn't.  Now, however, these same consumers have the same wages that they had before (if they still have a job), but without the accumulation of additional credit it appears in economic models as if these consumers have dramatically cut back spending when all they have really done is restored their spending levels to what their incomes will actually support.

For a few years starting some time in the 1990s a lot of companies got the idea that it would be possible to not increase the wages of their U.S. workforces without it showing up in softening demand in the overall economy.  For a few years this worked, as workers compensated for static wage levels by increasing the amount of consumer and housing debt on their balance sheets.  When, however, this obviously unsustainable arrangement ended, companies acted like they had no idea what was going on, and they are still acting like they don't know what is going on.

If all workers across the whole economy are not seeing any real wage gains, how on earth are companies selling to this group of consumers going to see any increases in profits?  Where will the money for the increased profits come from if consumers are not getting any wage increases?  Obviously, some companies will do fine (like Apple), but from a macroeconomic perspective, a consumer economy is not going to expand if the consumers on which it relies are not seeing any increased spending power through the combination of contracting credit and static wages.

For a real nightmare, imagine what would happen if consumers not only cut back their spending to levels that their incomes would actually support, but also further cut back their spending so that they could adequately service their existing debt as well.

For example, let's say that I make $50,000 per year.  Over the last few years I have lived the lifestyle of a person making $60,000 per year by borrowing $10,000 each year in various forms of consumer debt.  Now I realize that I made a mistake.  From here forward, I am going to live only the lifestyle that $50,000 will support.  As I start down this path, however, I make the unhappy realization that I can actually only live the lifestyle of a person making $40,000 per year because I have to set aside $10,000 per year to service the debt I ran up over all of those years of living beyond my means.  From a macroeconomic consumption perspective, if will appear as if I have seen a 33% pay cut (i.e., $60,000 to $40,000) when my actual income hasn't changed at all.

What puzzles me, though, is why so few people are talking about this stuff.  I'm not an economist and it is obvious to me.  I think it might be because the only real answer is massive debt forgiveness and some means of getting U.S. wages off of their multi-decade flatline.  One way or another, that would mean pinching corporate profits (especially profits within the financial sector), which is normally something that we are not allowed to discuss.

[stone]

Medium Tex, talking about it has to be a grass roots thing. The grass roots have to make their voice heard above those in denial I guess.

[MediumTex]

I completely agree with you, but how would you pinch these profits and not have it ultimately pinch wages?

You may have seen a chart floating around lately showing how wages as a percentage of corporate revenue has been declining for many years.

I am just suggesting that wages be restored to something close to the historical mean.

If a company makes $1 billion dollars and offshores every job it can and cuts the hours and wages of those U.S. workers that it can't get rid of, OR the same company makes $800 million and keeps more jobs in the U.S. and provides a level of wages that will actually allow its employees to have families and the possibility of economic security, which approach is better for the whole economy?

[Storm]

If a company makes $1 billion dollars and offshores every job it can and cuts the hours and wages of those U.S. workers that it can't get rid of, OR the same company makes $800 million and keeps more jobs in the U.S. and provides a level of wages that will actually allow its employees to have families and the possibility of economic security, which approach is better for the whole economy?

Careful, MT, with that kind of rhetoric some might mistake you for a closet socialist...

Any suggestion that "trickle-down" economic theory isn't effective seems to be greeted by the cries of "socialist!"  I would argue that the last 30 years have been a grand experiment in trickle-down economic theory, started under the Reagan administration and continuing through the last four presidents.  We can see where it has gotten us.  The idea that the top 0.1%, if given more money, will somehow spend it all and create more jobs for the bottom 99.9% just isn't realistic.

[FarmerD]

What puzzles me, though, is why so few people are talking about this stuff.  I'm not an economist and it is obvious to me. 

I think it's obvious BECAUSE you're not an economist. 

Simple logic is that consumers will be deleveraging for the forseeable future.  Governements will be deleveraging for the forseeable future.  Banks will proabably by deleveraging as well.  In light of this, how can we expect the economy to grow in a robust manner anytime soon?

[stone]

My understanding was that activity by firms only happens if it is profitable and the only two possible source of profits (in an accounting sense) are increasing debt or spending of existing profits. The Kalecki profit equation neatly spells that out http://en.wikipedia.org/wiki/Micha%C5%82_Kalecki.
So distributing profits to people who spend them is the key thing. That only happens if the profits are spread widely across everyone IMO. Perhaps paying everyone in the form of a profit share would help. Having lots of small private firms (such as Mom and Pop stores, backstreet car repair shops etc etc) would also help. Our problem is that profits get saved- typically after first being siphoned off by the finance industry.
Also that harebrained citizens dividend/asset tax thing on the other thread would sort it out IMO .

[Lone Wolf]

If a company makes $1 billion dollars and offshores every job it can and cuts the hours and wages of those U.S. workers that it can't get rid of, OR the same company makes $800 million and keeps more jobs in the U.S. and provides a level of wages that will actually allow its employees to have families and the possibility of economic security, which approach is better for the whole economy?

What mechanism for achieving this are you suggesting?

If such grand profits can be realized in industry X, why would this company not have any competitors delivering the same product less expensively?  You don't seem to expect any reduction in the overall price level but with a highly profitable industry and overall slackening demand in the economy, a general reduction in prices seems inevitable (setting aside, for a moment, the printing presses that are robbing workers of the value of their money.)

Any suggestion that "trickle-down" economic theory isn't effective seems to be greeted by the cries of "socialist!"  I would argue that the last 30 years have been a grand experiment in trickle-down economic theory, started under the Reagan administration and continuing through the last four presidents.  We can see where it has gotten us.  The idea that the top 0.1%, if given more money, will somehow spend it all and create more jobs for the bottom 99.9% just isn't realistic.

There is actually no such thing as "trickle-down economic theory" in all of economic history.  Thomas Sowell explains this here.

[MediumTex]

If a company makes $1 billion dollars and offshores every job it can and cuts the hours and wages of those U.S. workers that it can't get rid of, OR the same company makes $800 million and keeps more jobs in the U.S. and provides a level of wages that will actually allow its employees to have families and the possibility of economic security, which approach is better for the whole economy?

What mechanism for achieving this are you suggesting?

Perhaps a higher level of enlightenment among the executives running the company.  (Don't laugh.)

One of the especially galling things about offshoring is when you know that the workers you are offshoring the work to are less efficient than the U.S. workers who are currently doing the work.  Thus, for example, you take away the jobs of 100 U.S. workers and create jobs for 225 Indian workers, but it is still cheaper, even though you are swapping a more efficient workforce for a less efficient one.

At some point, it seems like the duty of management to do nothing but enhance shareholder value begins to turn on itself.  In other words, if seeking profit causes the entire economy to no longer be able to deliver profits to ANYONE because consumers no longer have enough disposable income to provide the revenue streams necessary to generate corporate profits in the first place, how effective was the initial "profits at all cost" approach ultimately?

Actually, what I am describing probably ought to be more of a guideline when shaping public policy, but it would require enligtened politicians to do that, which we don't currently have.

I just see the harm that seems to result from that push for a little extra profit in the form of lost jobs, but I don't see the corresponding benefit to the economy that flows from that small bit of incremental profit.  Even shareholders would probably say that they often don't see the extra value either, since bear market P/E compression could easily gobble up whatever share appreciation would have otherwise occurred as a result of offshoring more U.S. jobs.

I don't know that the answer is, but what is happening now doesn't seem to be leading to anything good.  It just looks to me like lots of structural unemployment, which leads to all sorts of other social ills that further destabilize the entire economy.

[moda0306]

Trickle-down economic theory is the nick-name of supply-side economics... which is indeed very real.

I'm trying to do a "fair" paraphrasing here... LW, point out if you think I'm skewing it.

Supply-side economics suggests that "aid" to suppliers and owners of the means of production (whether through tax cuts, deregulation, tax credits, low fuel costs, etc) will spur on economic growth, prosperity, low unemployment, etc.

Demand-side (Keynesian, in some sense) economics, at least in its analysis of our current slump, the depression, and most other recessions, suggests that when demand falls, unemployment is high, companies are under full capacity, and interest rates are low (pretty much any typical recession), this is a perfect recipe for government to borrow and spend to spur on demand, with most of the spending being put directly into the hands, mostly, of those most likely to spend.  It also suggests that any effort to use supply-side efforts to cure what is essentially a demand shortage in the economy will ultimately fail to raise GDP, put people to work, and generate prosperity.

One can argue that Demand-side seems to be inherantly more "socialistic" than supply-side, and that supply-side seems to have a "trickle-down" aspect in terms of how certain help for the wealthy will eventually help the poor & middle class, (with the opposite being "trickle-up"), but instead of assigning labels, I tend to try to look at whether the assertions of each theory ring true.

Other than the obvious environment of "low-enough" taxes, "fair-enough" regulation, and "abundant-enough" resources obviously being a good thing for business and society, I don't see how supply-side economics, both in general logic based on what short to mid-term problems seem to be, and in the last 30 years of economic history has vindicated itself at all.

From 1941-1980 (with the exception of a period of some ugliness in the 70's), we had a period of steady GDP growth, low unemployment, and relative prosperity, all with pretty basic but strict bank regulations, extremely high taxes on the means of production and wealthy, and strong unions.

In the 80's & 90's & 2000's banks were deregulated, taxes were lowered considerably on the wealthy, especially capital gains (a very supply-side type tax) with much-more accelerated depreciation and easy "entitization" of business, and uniions started to weaken.  During this period and beyond, we saw some pretty good periods of prosperity, but most of it is built on the worsening of private-sector balance sheets (debt) and stagnant wages, not to mention good demographics (until the last decade), low oil prices and computer technology helping the boom considerably.  Now look where we're at... not that it was supply-side's fault 100%, but supply-side economics suggests that we should have been MUCH better off after 3 decades of their taxes and regulation than after 4 decades of super high taxes, regulated banks, and strong unions.

So here we are today, with companies hoarding cash and under capacity, taxes considerably lower than they've been most of the last century, weak unions, 9.?% unemployment, awful underemployment, and 2% yield on our 10-year bond... and we're told that we need lower taxes, deregulation, and drilling, for the most part, from most of our supply-side influenced candidates... and that this will get America back to work.

I know our problem is bigger than a president or a congress can fix, but I'm not understanding how supply-side economics is going to put anyone to work.  Until there is aggregate demand in excess of what the current workforce can provide, why would companies hire anyone?

[moda0306]

I think the key for US prosperity is going to have to be much more education here or unionization elsewhere... or at least enough political jerkery in enough other countries to make the risks of doing business appear too high to businesses.

There is simply much too large of a disequilibrium between American wages and foreign wages for the same work.  I don't know how this will play out, but the phrase "something's gotta give" seems appropriate.

[MediumTex]

I think the key for US prosperity is going to have to be much more education here or unionization elsewhere... or at least enough political jerkery in enough other countries to make the risks of doing business appear too high to businesses.

There is simply much too large of a disequilibrium between American wages and foreign wages for the same work.  I don't know how this will play out, but the phrase "something's gotta give" seems appropriate.

It seems obvious that free trade in a world of dramatic wage differentials is certain to create higher unemployment in the high wage countries as work is shipped to areas with lower labor costs, in some cases even if the lower cost labor force is less efficient.

What bugs me is we never really had a national debate about this issue.  It just sort of evolved and a lot of American workers have just been displaced without anyone really telling them that their jobs were lost as part of a calculated effort to increase corporate profits by offshoring as much production as possible.

It also bugs me that I don't really feel like corporate shareholders have benefited in proportion to the loss that U.S. workers have had to face as the trend of offshoring jobs has progressed.  If share prices in recent years had been surging upward in response to offshoring of jobs, at least you could point to the higher share price as a justification for the structural unemployment that accompanied it, but instead we have seen mostly falling or static share prices in recent years.

[moda0306]

As soon as we realized that a couple billion people on the other side of the world were willing to work twice as hard for 1/10 as much as we were, and were willing to educate the crap out of themselves to boot, and that the governments were willing to play ball with corporations and "private property" at least to some degree, we should have realized then that we had no other option than to stay at the absolute top of the educational spectrum... it should have been a huge point made by administrations that had the political flexibility to do so.

[Storm]

I think the key for US prosperity is going to have to be much more education here or unionization elsewhere... or at least enough political jerkery in enough other countries to make the risks of doing business appear too high to businesses.

There is simply much too large of a disequilibrium between American wages and foreign wages for the same work.  I don't know how this will play out, but the phrase "something's gotta give" seems appropriate.

It seems obvious that free trade in a world of dramatic wage differentials is certain to create higher unemployment in the high wage countries as work is shipped to areas with lower labor costs, in some cases even if the lower cost labor force is less efficient.

What bugs me is we never really had a national debate about this issue.  It just sort of evolved and a lot of American workers have just been displaced without anyone really telling them that their jobs were lost as part of a calculated effort to increase corporate profits by offshoring as much production as possible.

It also bugs me that I don't really feel like corporate shareholders have benefited in proportion to the loss that U.S. workers have had to face as the trend of offshoring jobs has progressed.  If share prices in recent years had been surging upward in response to offshoring of jobs, at least you could point to the higher share price as a justification for the structural unemployment that accompanied it, but instead we have seen mostly falling or static share prices in recent years.

I agree we've never had a chance to discuss this in a national debate.  Offshoring didn't require many laws, and those laws were easily bought and paid for by expensive lobbyists.  Now, though, I think we've reached a tipping point where for the next few years, the bourgeoisie can continue with the status quo, which is wage arbitrage, at their own peril.  I know it isn't happening right away, but by around 2014 or 2015, if high unemployment persists and the US public is still getting shafted, there will be massive public protests and the eventual French revolution style "off with their heads" approach to dealing with this.

Europe is currently going through a French revolution style approach to this issue - see Greece and Italy for examples.  I think a couple more years of prolonged pain from the US middle class will be enough to get people marching in the streets and sharpening the guillotines.

[stone]

Medium Tex "If share prices in recent years had been surging upward in response to offshoring of jobs, at least you could point to the higher share price as a justification for the structural unemployment that accompanied it, but instead we have seen mostly falling or static share prices in recent years."

I guess it is a mistake to hope that distributing profits via share buybacks acts to sustainably raise share prices. I guess the profits have got distributed but that distribution has been focused to those shareholders who sold at the opertune moments. Getting rid of the buyback system would IMO result in profits getting distributed to more people (such as retirees and dumb retail savers such as us). Any idiot can get a dividend. Getting the benefit of a buyback requires the expertise that is normally limited to those who will save rather than spend the profits and so not break the downward spiral.