Yes Virginia, Samuel Langhorne Clemens had an economist streak about him. The following quotation from Clemens’ A Connecticut Yankee in King Arthur's Court is as fitting a statement in these times as it was when he originally wrote it.
It isn't the sum you get, it's how much you can buy with it, that's the important thing; and it's that that tells whether your wages are high in fact or only high in name. Mark Twain, A Connecticut Yankee in King Arthur's Court.
It is what your earnings can buy that serves as a real measure of your wages or salary; and lately, our wages and salaries have not enabled us to purchase very much. Today’s diminished, middle class- and working class-buying power and the impact of that lost purchasing power are examined on the other side of the jump.
The problems of reduced wages and there causes were recognized and written about prior to and during this present economic crisis. As we examine the wage issue a nice little economic lesson from Paul Krugman seems apropos.
Some economists and politicians have argued that we cannot increase wages during an economic downturn, and those arguments may not hold water. Professor Krugman wrote a piece titled "Wages and employment in the 30s" and posted on his blog "The Conscience of Liberal" that makes the case that improved wages do not necessarily cause greater harm to the economy during a downturn. The crux of Professor Krugman’s argument is that the aggregate demand curve changes its slope during severe economic downturns; consequently Krugman concludes:
People who assert that New Deal support for wages made the Depression much worse aren’t thinking it through. They’re implicitly assuming – not demonstrating – that the AD curve had a "normal" slope, even in the depths of the Depression. But it didn’t. Paul Krugman, New York Times (contains a link to a paper in PDF medium), 2008.
In addition to Krugman’s lesson on wages and demand, a quotation – courtesy of economist James K. Galbraith – puts an exclamation on the argument for addressing the lost buying power of the middle class. Galbraith, in a response to the suggestion that "sticky wages" may contribute to the severity of the present economic downturn (remember people are taking cuts in pay and hours worked), offered the following comment:
[Robert] Litan [Vice President of Research & Policy, Kauffman Foundation] makes a point: this topic will provide future employment to economists.
Otherwise, to say that sticky wages (or prices) play a role in unemployment is a bit like blaming gravity for the collapse of a bridge. It's not of any use to the civil engineers.
James K. Galbraith, National Journal Online, 2009.
Moving on to the effect of the drop in real wages and from the short economic lesson just presented, we can begin a deeper look at real wages via a 2006 New York Times article, "Real Wages Fail to Match a Rise in Productivity." The article emphasizes the fact that real, median hourly wages had declined two percentages since 2003 – this is post Bush’s 1.3-trillion dollar tax cut of 2001.
I wonder who benefitted from that enormous tax cut. Certainly the middle class or working class didn’t get many, if any real and lasting benefits from the Bush/Republican tax cut – their real wages declined after passage of the Bush/Republican tax cut.
Although the decline in real wages since 2003 is bad, the real impact of the decline in buying power for the middle and working classes is best captured by the following passage from the article.
_________The drop has been especially notable, economists say, because productivity — the amount that an average worker produces in an hour and the basic wellspring of a nation’s living standards — has risen steadily over the same period.
As a result, wages and salaries now make up the lowest share of the nation’s gross domestic product since the government began recording the data in 1947, while corporate profits have climbed to their highest share since the 1960’s. UBS, the investment bank, recently described the current period as "the golden era of profitability."
Basically, the middle and working classes have regressed economically while a very few Americans have reaped most of the nation’s wealth sowed by increased worker productivity.
Private sector economists also recognized the problem that declining real wages presented.
Richard Benson, founder of the Specialty Finance Group, wrote about wages and debt servicing in 2004. Benson’s article, "Debt vs. Income: At the Point of No Return" was prescient in its warning about debt servicing and insufficient wages and jobs.
The passages from Benson’s article, presented below, illustrate well Benson’s point about wages and debt. Boldfaced emphases were added.
On wages being too low, Benson writes:
The savings rate is actually materially overstated. Personal Income, according to the Bureau of Economic Analysis, includes a few hundred billion dollars in "imputed income" for owning your own home and receiving value for other "non-cash services". Imputed income is significantly greater than the 1.5% savings rate! Unfortunately, debt can only be repaid with actual cash flow. In January, Personal Income rose at about a 2% annual rate and very few jobs were created. Consumers are spending every last penny to live, and many are "tapped out".
What is perfectly clear from simple arithmetic is that without a sudden increase in the number of jobs and the wages they pay, individual debt can not be serviced by personal income. Worse yet, not only are people not saving, but their financial reserves are not in real cash. The only thing keeping the "national ponzi scheme" going is the illusion of wealth created by the Federal Reserve’s low interest rates and liquidity that has allowed stock market valuations and housing prices to artificially inflate. Richard Benson, 2004.
In addressing debt and wages, Benson offers the following comments:
The market value of homes in 2003 rose about $1 Trillion and stock market values rose about $1.5 Trillion. The rising asset prices look like they balance rising debt on household balance sheets. Tragically, the increase in asset prices will vanish the day that interest rates rise, but the debts will still remain. Indeed, not only will the debt remain, but the cost of servicing it will go up dramatically. As interest rates rise, wages and salaries must increase or massive debt defaults will follow.
Income and job growth are so low that we have certainly passed "The Point of No Return". There cannot be an easy resolution to the debt bubble and resolution will only come when a crisis forces change. Perhaps, for this election year, crisis can be postponed by continuing to facilitate an increase in borrowing so that debts can be rolled over, but increased. By 2005, the ultimate outcome to resolve the debt problem looks like it will be a combination of inflation, rising interest rates and debt default. Richard Benson, 2004.
This diary’s last excerpt from Benson’s article should put the final nail in the coffin of Republican economic philosophy.
The reason we do not believe that job and income growth will save the day for the American worker is we have never before seen in history such increases in government spending, tax cuts, federal budget deficits, consumer spending and borrowing, with so little job growth. The massive fiscal and monetary stimulus has mostly been spent. There will be some nice tax refunds this spring, and that’s it! The peak of mortgage refinancing is already past. Construction spending is at a peak and the percentage of people who own their homes is at a record 69%. Mortgage underwriting shows that 5% of homebuyers in 2003 really couldn’t afford to buy a home, and another 5% could lose their home if one spouse becomes unemployed. Richard Benson, 2004.
From the preceding discussion and citations, it is abundantly clear that the problems caused by declining real wages – a result of the illiberal economic policies of the Bush Administration, a Republican-controlled Congress and an ideologically-driven Alan Greenspan-led Federal Reserve Bank – were recognized and written about as early as 2004.
Also completely evident is that to repair and reinvigorate our economy, President Barack Obama and Congress must do more than just save a few mega-financial institutions. They must get on with increasing the minimum wage for Americans and addressing the general decline in real wages and losses in jobs – an economy based on a living wage must be established.
Lastly, President Obama and the Democratic-controlled Congress should remember that equitable and real national prosperity have mainly come from the efforts of progressive groups; abolitionists, suffragists, unionists, civil rightists and environmentalists.