When Profits Rise but Wages Stagnate

Profits Rise Wages StagnateThe recently published report ( Greenhouse, NY Times, January 12) that virtually none of the increases in productivity that have occurred in the last few years, have gone into wages fills me with trepidation. The last time this happened for an extended period was the 1920′s and many historians view this as the most significant underlying cause of the Great Depression.

In the 1920′s, a time of rapidly rising productivity when virtually no important industries were unionized, profits outpaced wages by a 2 to 1 ratio. For a while, the underlying lag this would place on consumption was hidden by consumer credit ( the 1920′s was when buying big ticket items on the “installment plan” became common); but when the stock market crashed after speculative financial products created as an outlet for surplus capital tanked ( sound familiar?) the whole economy went into a tail spin which led to a financial collapse because no one could pay back their loans.

Now segue to our current economic situation. Profits, executive compensation, and investment income have far outpaced wages for the past thirty years, but a significant portion of the working class and middle class didn’t feel the pinch for a while because they went deep into debt through credit cards, home mortgages, and school tuition.
But in the last five years, the housing bubble and the credit card bubble collapsed, leaving those strategies for funding consumption severely weakened. Soon the student loan bubble will collapse, causing more hardship and leaving the last major credit outlet for the population severely constricted.

Let’s do the math. In an economy where between 60 and 70 percent of GNP flows from consumption, where is the economic growth going to come from if credit dries up and wages remain stagnant? Not only will it be impossible to have a new wave of economic growth, but we could easily plunge back into Recession, or worse.

mark naisonAs I survey the current political climate here is what I see- weak unions, unable to press employers to raise wages; an economic leadership stratum that continues to monopolize what income growth takes place; a political climate which makes it impossible to redistribute income through taxation; and a student loan higher education bubble that is about to burst.

Anyone who thinks that we can stimulate economic growth without policies which funnel income and productivity into wages must have magical powers of insight this writer sorely lacks.

Mark Naison

Published by the LA Progressive on January 13, 2013
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