Economic columnist Henry C. K. Liu of the Asia Times makes a crucial point: despite the reams of ink spilled over the "banking crisis", an essential link is missing. At root, the world is having its worst economic downturn since the Great Depression because of a global wage crisis:
The whole world is now producing goods and services made by low-wage workers who cannot afford to buy what they make except by taking on debt on which they eventually will default because their low income cannot service it....[T]he basic problem of the global economy for the past three decades [has been l]ow wages even in boom times [that] have landed the world in its current sorry state of overcapacity masked by unsustainable demand created by a debt bubble that finally imploded in July 2007....
Worse, says Liu, the actions of central bankers around the world are only exacerbating the ultimate problem rather than ameliorating it.
H/t to Bigchin who sent me the link to Liu's article, which continues:
"the Fed's new money has not been going to consumers in the form of full employment with rising wages to restore fallen demand, but instead is going only to debt-infested distressed institutions to allow them to deleverage from toxic debt. Thus deflation in the equity market (falling share prices) has been cushioned by newly issued money, while aggregate wage income continues to fall to further reduce aggregate demand.
...[T]he working poor pay for the pain of [this] inflation by giving the rich a bigger share of the monetized wealth created ..., so that the loss of purchasing power from inflation is mostly borne by the low-wage working poor and not by the owners of capital....
All the stimulus spending by all governments perpetuates this
dysfunctionality. There will be no recovery from this dysfunctional financial system. Only reform toward full employment with rising wages will save this severely impaired economy.
The entire article is well worth your reading. Liu's analysis crystalizes the source of the global economic crisis. Workers can no longer afford, via wages or refinancing of debt, the goods that had been produced. As I've written previously, there can be No Long-term Recovery without real Wage Growth. The massive injections by the Fed and the Treasury are stimulative, but they cannot determine where the liquidity ultimately winds up. For example, who knows whether TARP money has found its way via various back doors into commodity speculation -- thereby directly profiting banks/speculators while impoverishing the middle/working class taxpayers who forked over the money and will be expected to pay back the bondholders for the new national debt. I suspect the answer is more likely in the affirmative than not. Thus, the huge financial bailouts only further enrich entrenched financial wealth at the expense of the average worker -- even if the bailouts work as intended, to reliquify (or more truly, to re-solvence-fy) the investment banks whose recklessness got us here.
Liu proposes that "the cost of wage increases be deductible from corporate income tax and make the savings from layoffs taxable as corporate income." Unfortunately, I suspect that corporate tax lawyers would be able to circumvent such restrictions fairly easily ("Oh, that income wasn't from layoffs, it was from, erm, extra unused office space"), but at this point, almost anything is worth a try.
It is both sad and outrageous that two years into this crisis, and still addressing the crisis of consumer income and demand is not even being considered. According to Satyajit Das, that is no accident:
Mancur Olson, the American economist, in his books (The Logic of Collective Action and The Rise and Decline of Nations), speculated that small distributional coalitions tend to form over time in developed nations and influence policies in their favor through intensive, well funded lobbying. The policies result in benefits for the coalitions and its members but large costs borne by the rest of population. Over time, the incentive structure means that more distributional coalitions accumulate burdening and ultimately paralysing the economic system causing inevitable and irretrievable economic decline.
A modern industrial economy cannot ultimately function unless the average worker can actually afford the goods being produced. The words of FDR's great Fed Chairman Marriner S. Eccles on the cause of the Great Depression ring true again today:
As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery. [Emphasis in original.] Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped. That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system.
Ultimately there must be a real political power realignment. Policy makers not just in the US, but around the globe need to learn that there will be no meaningful, lasting recovery unless there is real wage growth.