Recent increases in American business profits have come almost exclusively from decreased labor costs, combined with debt-financed consumer spending increases. Aggregate demand is essential for these profits.
Aggregate demand can only be maintained if wages are maintained, or if consumer borrowing increases enough to compensate for wage declines. Wages have
not been maintained, however. In fact, inflation-adjusted hourly wages have
declined 0.5% over the past year. In contrast, productivity has increased markedly over the same period. Corporate profits have also increased. Despite wage declines, consumer spending has actually increased. Consumer borrowing has been the source of this paradoxical increase. Consumer borrowing has prevented the consumer spending decrease that would've otherwise occurred. Consumer borrowing has maintained the demand necessary for businesses to profit. The aggregate demand needed to sustain our economy is being maintained
exclusively by increased borrowing.
There are 2 ways businesses can increase profits. They can increase the sale of production, or they can reduce the cost of production. Sale of production only increases if aggregate demand increases. If aggregate demand does not increase, the only way profits increase is by reduced production costs. This almost always comes from reducing labor costs. However, labor cost reductions reduce labor/consumer income, which reduces aggregate demand. If there's a total, nationwide reduction in wages, total product sales will also decline. The reduction in sales reduces profits and completely nullifies gains made from labor cost reductions.
Labor cost reductions may temporarily increase individual company profits. But this is true only on a small scale. If labor cost reduction is a nationwide phenomena, the aggregate loss in labor income becomes noticeable. It reduces the total amount of money available to buy goods. Here again, the reduction in aggregate labor costs is completely nullified by the reduction in total sales. There is simply NO benefit from aggregate nationwide labor cost reduction, because the loss of consumer sales equals the labor cost reduction. As a result, there is no aggregate increase in nationwide business profits. There is simply a shift in individual company profits away from companies not reducing labor costs, to companies that are reducing labor costs.
This effect does not remain "balanced," however. The nationwide (and global) decline in wages reduces aggregate consumer demand for production. This further reduces demand for labor to provide that production, causing further declines in labor income, consumer spending, and consumer production demand.
Thus, on a national or global scale, short-term profit increases from labor cost reductions cause long-term decreases in profits. This short-sighted concern with short-term profits is leading us toward a long-term economic decline.
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