Real Wages Plunge in March. As we would expect, Bush's popularity took a hit as well. The numbers are even worse than they appear, the CPI-W adjusted wages came out with an even bigger drop than before.
This is a big problem.
[Stirling Newberry is Chief Economist for Langner and Company the opinions expressed here are his own. Crossposted at Bopnews.]
Regular readers will know that the economy is at a crossroads: the Federal Reserve is tightening interest rates in hopes of squeezing out inflation. Greenspan has bet, for the second time, that increased interest rates would push money out of commodities and into equities, and that pricing power in protected sectors would abate.
That real wages are falling, and oil prices are rising again means that his bet is, again, not working. This means Wall Street is going to take another knock for the day. There was an earlier signal that wall street was headed for a down leg in this bear market.
But it is the big picture I would like to talk about here: and that is that our economy is sick. High housing demand drives oil demand, oil demand means money is moving out of stocks and into commodities. In essence, the entire economy is "rent heavy". The Republican Party is the party of rent, and they continually promise people the chance to be first, and then collect a toll from people who come afterward. The problem is that rent is the price we pay for information. Rent can only positively help if it reduces the cost of other rent paid, by making labor and capital more efficient, out of labor, by making capital more efficient - or out of both labor and capital. The last slows the economy, and eventually leads to bone crunching recessions.
The US, because it is able to borrow heavily is avoiding the immediate consequences of this situation, but we will not remain immune forever.
What is the solution. Looking at the supply side. No, really.
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The term "Supply Side economics" was coined by journalist Jude Wanninski, and used to support reductions in marginal tax rates under Reagan. However, as a branch of economic thinking, it remained limited to a few people, and never became rigorous or respectable. Then Paul Krugman - the man who, arguably knew more about the supposed roots of the idea than anyone - tore it apart in "Peddling Prosperity". The Republican Party, which had really only wanted the brand name to justify the only thing they care about - moving the burden of public income off the rich and on to others - dropped it.
In fact, Republican policies now are "demand side" - that is, they have been doing everything possible to stoke demand - demand for houses and stocks particularly. Even revenue reductions on income are, if you think about, a demand side policy. They increase demand for investment. That's demand side, not supply side, policy.
Liberalism is the original supply side theory of economics - first from the surplus of supply at the beginning of the Great Depression, then in a series of policy moves and changes which were targetted at making sure America had access to the supplies of resources, labor, and capital that it required. While Demand side thinking is the most celebrated aspect of Keynesian economics, demand side policies are the reward for keeping the supply side in order. In Keynesian economics, consumption and money and interest are all undifferentiated. To keep using Keynesian formulations - which are very power and useful - the responsibility of the policy making body - Congress and the President in our case - is to make sure that it stays this way.
This is why the liberal Keynesian order fell apart the first time: LBj fought the wrong war in the wrong place at the wrong time. Vietnam did not get us access to supplies of what we needed, and, in fact, allowed the middle east - where the oil bottleneck was developing - to fall apart. We could not have won Vietnam, because Vietnam wasn't the war we should have been involved in. Economists call this "opportunity cost", the opportunity cost of Vietnam was two Arab Israeli wars, and the resulting radicalization of OPEC.
The current Republican regime has pursued demand side policies all the way along - their idea of supply side was to invade Iraq to get a supply of oil. Invading Iraq for oil is the last war - not this war. The problem is not lack of oil, it is lack of investment supply. I've been saying this since 2001, and finally, of all people, Ben Bernanke agrees with this idea. Only being a demand side reactionary, he blames the "global savings glut". A savings glut is a way of saying there is too much investment demand for the investment supply. Ben is saying "the economy isn't overweight, it is undertall!"
This is why we are locked in the cycle we are in, and the Federal Reserve's demand side policy - remember, interest rates don't create supplies of anything, they increase the amount of demand by lowering the costs of borrowing - or they decrease demand by raising the costs of borrowing - isn't working. No amount of increased demand will generate new supply.
The second part of the failure of the Republican Party's policies is to confuse what supply means. There are two ways to increase supply. One is to get more of what you are short of. Problem, what happens if what you are short of is getting more and more expensive to get. Economists call this "diminishing returns", each dollar of new investment gets less and less of what you want out of it. Oil is exactly at that point - regardless of when oil peaks, it has already plateaued in our current structure. To get more oil means building out more infrastructure, if that would even work at all. One reason energy seems so cheap, is that very little energy infrastructure has been added - the last refinery in America came online in 1976. It is amazing how cheap things are if there is no capital expenditure cost.
The other kind of supply is finding a better way to get the same result. This is, in fact, the real supply side thinking: find a substitution, a more efficient way of doing things, or a way of regulating out inefficient use caused by market anomolies. A 1 mpg increase in Cafe would get more oil than all of ANWR. Making "passenger trucks" part of CAFE would get more oil than the insurgency there is costing us. And so on.
So today's action is a small postage stamp picture of the big problem. Today isn't a crash, nor even the beginning of the crash - but it is a clear warning that the micro-economic allocation pursued by the Republicans is not effective, and that the meso-economic expectations they have generated in housing is leading people to gut the rest of the economy so they can continue speculating on real estate - and burning gasoline to do it. In fact, as we move to the twilight of this housing boom, gasoline consumption will go up, as people race around to whack up even more houses while there is still time. It's the redneck dot com bubble.
And it has kicked into where internet stocks were in 1999 - that last big run before the end.
So in short, by squeezing wages, that squeezes everybody who makes things. That means less reason to invest, and that means more money piling up looking for a place to go. It goes into the mortgage market, which keeps rates low. That sells more houses, which mean that people burn more gasolien to build them and to commute to them. This pushes more money into commodities and takes it out of stocks. Which means less reason for other people to stay in stocks. A nasty bit of work that is.
Until real wages start climbing again, and the US goes to real supply side thinking - creating new products and better ways of doing things - the demand side problems with oil and money are going to simply make any interest rate moves worse. Alan Greenspan has helped make this bed, but at this point, he has very little control over what happens. He can only raise rates, and hopes the next quarter point does what the last 8 have not.
