Asset-driven recovery still needs work

Robert Reich

TEXT OF COMMENTARY

Kai Ryssdal: Yes, the recession is technically over. And yes, a lot of companies are reporting pretty good profits. But I bet if you stopped 10 people randomly on the street this afternoon, most of 'em would say they are still very much undecided about whether things have really turned around. What gives?

Commentator Robert Reich says it's not all that hard to figure out.


ROBERT REICH: How can the stock market hit new highs when unemployment continues to hit new highs? Simple. Corporate earnings are up because companies are cutting costs. And the biggest single cost is their payrolls. So they let people go and, presto, balance sheets look much better, and stock prices rise.

In the old-fashioned kind of recession decades ago, big companies laid off people with the expectation of rehiring them when the economy turned up. Then a few recessions back, companies started laying off people for good, never rehiring them even when the economy recovered.

In the Great Recession of 2008-2009, companies are going a step further. They're using the sharp downturn to cut payrolls even below where they were when times were good. Outsourcing abroad, contracting out, replacing people with software and automated machines, whatever it takes to get payrolls down so earnings bounce up.

Caterpillar earned $404 million in the third quarter, or 64 cents a share. Analysts had expected only 5 cents. How did Caterpillar do it? Not by selling more bulldozers. But by cutting over 37,000 jobs.

We're having an asset-based recovery, not a Main Street recovery. The surge in productivity is a mirage. Worker output per hour is skyrocketing because, hey, companies are getting almost as much output with fewer workers and fewer hours.

The Fed, meanwhile, is collaborating in all this, making it as cheap as possible for companies to axe their employees. Money costs so little these days it's easy to substitute capital for labor, and burnish balance sheets.

The Fed, in effect, is placing a huge bet on a recovery driven by asset prices. That's a bad bet. The great disconnect between the stock market and jobs is pushing stock prices way out of line with the real economy. That's not sustainable. No economy can recover without consumers. But consumers -- facing mounting job losses as well as pay cuts -- are in no mood to buy and won't be for some time.

Now, I'm not predicting a major correction or double dip any time soon, but watch your wallets.

Ryssdal: Robert Reich teaches public policy at the University of California, Berkeley.

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