Makin' Money

The troubled economy’s epicenter: Stagnant incomes

Chris Farrell Aug 10, 2011

There are lots of factors behind the disappointingly weak economy. Dysfunctional politics in Washington and a national unemployment rate of 9.1%. Europe’s never-ending Mediterranean sovereign debt crisis. A slowing global economy.

The epicenter of America’s sputtering economy is the long-term trend of stagnant to lower earnings for everyone but the top 1% of the income spectrum. Over the past four decades Corporate America has restructured, downsized, right-sized, and reengineered millions of people out of their jobs while putting the squeeze on the wages of remaining workers.

Daily living has turned into a high-wire act for just about everyone–from the blue-collar worker that managed to find a job as a security guard making minimum wage to the local government payroll processor worried that his job might be outsourced to India to the middle manager turned consultant after her position was eliminated during the Great Recession. Pensions are vulnerable to the manic whims of the market.

Put it this way: When do you think ordinary workers with families will feel comfortable walking into the boss’s office and saying, “Give me a 10% raise or I’ll quit!” The most likely answer for years to come will be, “We’ll miss you. Goodbye.”

Eventually, we might get a substantial bounce in the economy. But the economy will continue to sputter along over the long haul without substantially improving the wages and incomes of ordinary workers and not just the rewards to CEOs and hedge fund managers.

The veteran value investor Jeremy Grantham of the money management firm GMO in his latest newsletter emphasizes the tenuous position of the U.S. worker. (The newsletter is rich with insight about the economy and investing. It’s a must-read. I’m focusing on what he says about the plight of the U.S. worker.)

Two years ago Grantham argued that the faced 7 painful, lean years of economic growth recovering from the housing bust and Great recession. In GDP terms, that means growing at a 2% to 2.25% annual rate, far below the 3.5% pace we got used to in the previous three decades.

The current economic and financial environment is even worse than he expected. “Today the artificial sugar-coating of increasing debt has been removed and we must live with the reality that an average hour’s work has not received a material increase for 40 years,” he writes.

The wealthy can buy Chanel suits and BMWs. But most people are struggling to make ends meet for robust economic growth. A healthy economy requires dividing the economic pie more evenly.

That would mean lower income and sales taxes for the bottom 75% of earners and higher taxes for the top 10%! We have allowed the vagaries of globalization and the plentiful supply of cheap Chinese labor to determine our income distribution, which has become steadily steeper, to the point where we have become one of the least egalitarian developed societies. Wouldn’t it be better for us to decide deliberately and by ourselves that income distribution which creates the best balance of social justice and incentive to work? I am not suggesting that we become some goody two-shoes Scandinavian country. But how about going back to the levels of income equality that existed under the Presidency of that notable Pinko, Dwight Eisenhower.>

Robert Reich, professor at the University of California Berkeley and Marketplace commentator, has repeatedly and eloquently highlighted the critical role income inequality plays in the economy troubles. For instance, check out his book Aftershock: The Next Economy and America’s Future

The U.S. needs to move away from a reliance on debt-fueled consumption ingrained in our tax code and so many public policies. Instead, we should focus far more on improving education, infrastructure, research and development, and savings. Those are the building blocks of a productive economy.

Here’s an intriguing post by Michael Mandel on what that might mean.

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