Guest Post: Why the Rich Love High Unemployment
Submitted by Mark Provost of Truthout
Why the Rich Love High Unemployment
In the last installment of this three-part series, Mark Provost again examines the myths perpetuated by the ruling class to frame massive transfers of wealth to the rich as well-intentioned economic "recovery" policies. Parts 1 and 2 appeared on Truthout in December 2010 and January 2011.
Romer, former member of President Obama's Council of Economic Advisors,
accuses the administration of "shamefully ignoring" the unemployed.
Paul Krugman echoes her concerns, observing that Washington has lost
interest in "the forgotten millions." America's unemployed have been
ignored and forgotten, but they are far from superfluous. Over the last
two years, out-of-work Americans have played a critical role in helping
the richest one percent recover trillions in financial wealth.
Obama's advisers often congratulate themselves
for avoiding another Great Depression - an assertion not amenable to
serious analysis or debate. A better way to evaluate their claims is to
compare the US economy to other rich countries over the last few years.
On the basis of sustaining economic growth,
the United States is doing better than nearly all advanced economies.
From the first quarter of 2008 to the end of 2010, US gross domestic
product (GDP) growth outperformed every G-7 country except Canada.
But when it comes to jobs, US policymakers
fall short of their rosy self-evaluations. Despite the second-highest
economic growth, Paul Wiseman of the Associated Press (AP) reports:
"the U.S. job market remains the group's weakest. U.S. employment
bottomed and started growing again a year ago, but there are still 5.4
percent fewer American jobs than in December 2007. That's a much sharper
drop than in any other G-7 country." According to an important study by
Andrew Sum and Joseph McLaughlin, the US boasted one of the lowest
unemployment rates in the rich world before the housing crash - now,
it's the highest.
The gap between economic growth and job
creation reflects three separate but mutually reinforcing factors: US
corporate governance, Obama's economic policies and the deregulation of
US labor markets.
Old economic models assume that companies
merely react to external changes in demand - lacking independent agency
or power. While executives must adapt to falling demand, they retain a
fair amount of discretion in how they will respond and who will bear the
brunt of the pain. Corporate culture and organization vary from country
In the boardrooms of corporate America, profits aren't everything - they are the only thing. A JPMorgan research report
concludes that the current corporate profit recovery is more dependent
on falling unit-labor costs than during any previous expansion. At some
level, corporate executives are aware that they are lowering workers'
living standards, but their decisions are neither coordinated nor
intentionally harmful. Call it the "paradox of profitability."
Executives are acting in their own and their shareholders' best
interest: maximizing profit margins in the face of weak demand by
extensive layoffs and pay cuts. But what has been good for every
company's income statement has been a disaster for working families and
Obama's lopsided recovery also reflects
lopsided government intervention. Apart from all the talk about jobs,
the Obama administration never supported a concrete employment plan. The
stimulus provided relief, but it was too small and did not focus on job
The administration's problem is not a question
of economics, but a matter of values and priorities. In the first Great
Depression, President Roosevelt created an alphabet soup of
institutions - the Works Progress Administration (WPA), the Tennessee
Valley Authority (TVA) and the Civilian Conservation Corps (CCC) - to
directly relieve the unemployment problem, a crisis the private sector
was unable and unwilling to solve. In the current crisis, banks were
handed bottomless bowls of alphabet soup - the Troubled Asset Relief
Program (TARP), the Public-Private Investment Program (PPIP) and the
Term Asset-Backed Securities Loan Facility (TALF) - while politicians
dithered over extending inadequate unemployment benefits.
The unemployment crisis has its origins in the
housing crash, but the prior deregulation of the labor market made the
fallout more severe. Like other changes to economic policy in recent
decades, the deregulation of the labor market tilts the balance of power
in favor of business and against workers. Unlike financial system
reform, the deregulation of the labor market is not on President Obama's
agenda and has escaped much commentary.
Labor-market deregulation boils down to three
things: weak unions, weak worker protection laws and weak overall
employment. In addition to protecting wages and benefits, unions also
protect jobs. Union contracts prevent management from indiscriminately
firing workers and shifting the burden onto remaining employees. After
decades of imposed decline, the United States currently has the fourth-lowest private sector union membership in the Organization for Economic Cooperation and Development (OECD).
America's low rate of union membership partly
explains why unemployment rose so fast and, - thanks to hectic
productivity growth - hiring has been so slow.
Proponents of labor-market flexibility argue
that it's easier for the private sector to create jobs when the
transactional costs associated with hiring and firing are reduced.
Perhaps fortunately, legal protections for American workers cannot get
any lower: US labor laws make it the easiest place in the word to fire
or replace employees, according to the OECD.
Another consequence of labor-market flexibility has been the shift from full-time jobs to temporary positions. In 2010, 26 percent of all news jobs were temporary - compared with less than 11 percent in the early 1990's recovery and just 7.1 percent in the early 2000's.
The American model of high productivity and low pay
has friends in high places. Former Obama adviser and General Motors (GM)
car czar Steven Rattner argues that America's unemployment crisis is a sign of strength:
Perversely, the nagging high
jobless rate reflects two of the most promising attributes of the
American economy: its flexibility and its productivity. Eliminating jobs
- with all the wrenching human costs - raises productivity and,
Unusually, US productivity grew right through
the recession; normally, companies can't reduce costs fast enough to
keep productivity from falling.
That kind of efficiency is perhaps our most
precious economic asset. However tempting it may be, we need to resist
tinkering with the labor market. Policy proposals aimed too directly at
raising employment may well collaterally end up dragging on
Rattner comes dangerously close to
articulating a full-unemployment policy. He suggests unemployed workers
don't merit the same massive government intervention that served GM and
the banks so well. When Wall Street was on the ropes, both
administrations sensibly argued, "doing nothing is not an option." For
the long-term unemployed, doing nothing appears to be Washington's
The unemployment crisis has been a godsend for
America's superrich, who own the vast majority of financial assets -
stocks, bonds, currency and commodities.
Persistent unemployment and weak unions have
changed the American workforce into a buyers' market - job seekers and
workers are now "price takers" rather than "price makers." Obama's
recovery shares with Reagan's early years the distinction of being the
only two post-war expansions where wage concessions have been the rule
rather than the exception. The year 2009 marked the slowest wage growth
on record, followed by the second slowest in 2010.
America's labor market depression propels
asset price appreciation. In the last two years, US corporate profits
and share prices rose at the fastest pace in history - and the fastest
in the G-7. Considering the source of profits, the soaring stock market
appears less a beacon of prosperity than a reliable proxy for America's
new misery index. Mark Whitehouse of The Wall Street Journal describes Obama's hamster wheel recovery:
From mid-2009 through the end of
2010, output per hour at U.S. nonfarm businesses rose 5.2% as companies
found ways to squeeze more from their existing workers. But the lion's
share of that gain went to shareholders in the form of record profits,
rather than to workers in the form of raises. Hourly wages, adjusted for
inflation, rose only 0.3%, according to the Labor Department. In other
words, companies shared only 6% of productivity gains with their
workers. That compares to 58% since records began in 1947.
Workers' wages and salaries represent roughly
two-thirds of production costs and drive inflation. High inflation is a
bondholders' worst enemy because bonds are fixed-income securities. For
example, if a bond yields a fixed five percent and inflation is running
at four percent, the bond's real return is reduced to one percent. High
unemployment constrains labor costs and, thus, also functions as an
anchor on inflation and inflation expectations - protecting bondholders'
real return and principal. Thanks to the absence of real wage growth
and inflation over the last two years, bond funds have attracted record
inflows and investors have profited immensely.
The Federal Reserve has played the leading
role in sustaining the recovery, but monetary policies work indirectly
and disproportionately favor the wealthy. Low interest rates have helped
banks recapitalize, allowed businesses and households to refinance debt
and provided Wall Street with a tsunami of liquidity - but its impact
on employment and wage growth has been negligible.
CNBC's Jim Cramer provides insight
into the counterintuitive link between a rotten economy and soaring
asset prices: "We are and have been in the longest 'bad news is good
news' moment that I have ever come across in my 31 years of trading.
That means the bad news keeps producing the low interest rates that make
stocks, particularly stocks with decent dividend protection, more
attractive than their fixed income alternatives." In other words, the
longer Ben Bernanke's policies fail to lower unemployment, the longer
Wall Street enjoys a free ride.
Out-of-work Americans deserve more than
unemployment checks - they deserve dividends. The rich would never have
recovered without them.
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