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November 18, 2014


My followers often read my offerings in which I differentiate between the two economies within our midst, i.e., one in which the rich/investment/corporate class numbers and the other one peopled by the rest of us, ordinary Americans who teach school, work in factories, offices, government etc. The investment class is composed largely of people and institutions who make money from money and who are always concerned with how their debt and equity investments are faring on the Dow and other measures of debt and equity while the rest of us, many of whom live from paycheck to paycheck, have little or no investments to worry about – and don’t.

How the Dow is doing is of little if any concern to the great majority of Americans for other reasons. For instance, the Dow is unreliable for our purposes because it doesn’t tell us how things are going in the domestic economy in which we live. It instead folds in results from corporations which may have extensive international operations and thus measures a mix of domestic and offshore results.

Thus the Dow may be measuring in varying degrees an American multinational corporation’s success in copper mining in Chile as well as Arizona, a decline in copra price in Indonesia, car leasing in Germany or Apple’s profits from cheap Oriental labor and tax-avoiding financial operations in Ireland, Luxembourg or wherever. While that is immaterial to the investment class who are into the exchange of paper based on overall corporate results and of marginal interest to some of our class who may have interests in pension funds whose managers have invested in Dow-measured public corporations, it is an unreliable measure of what is important to the great bulk of the American people.

The vast majority of America’s working class is not interested in Apple’s tax and cheap labor machinations or the cost of copra or the paper shuffling of the moneychangers on Wall Street. None of that represents the real economy in which they rightly see themselves as captive. They are instead interested in day to day survival in such things as enough wages and working hours to pay their bills and provide for a modest retirement, health insurance, outsourcing of jobs, trade agreements that are reducing their wages as they must compete globally while simultaneously bankrupting their country, the environment, education of their children etc., all areas of little apparent concern among the rich and investment class in their oblivious take-no-prisoners chase for profit, the same class that funds political opposition to the day to day concerns of the rest of us, like minimum wages and affordable health care.

A cursory glance at today’s America shows that the chasm between these two classes has widened from the economic to the social and political. We don’t and indeed can’t travel in the same circles. Cracks are beginning to show even within such classes. The Silicon Valley investors and innovators look down on other members of their corporate/investment class as inferior, not smart and uninteresting. There are also cracks within the real economy most people live in as some in the middle class look down upon the poor and disabled in the lower reaches of their class and agree with Romney’s celebrated 47% dictum, so there is no unanimity in either classification as to what tax and other policies should be legislatively approved by our politicians.

We are bombarded lately with the good news that employment numbers are up, but up in what areas? Part time jobs? Minimum wage jobs? McJobs? How much do these “new jobs” add to aggregate demand when their stagnant pay rates are a continuing and now chronic weakness in our economy and have been since the recession officially ended more than five years ago? For instance, are such newly employed workers able to spend more than they could have spent had they remained on food stamps and other welfare help? There is more to job addition than numbers. Quality as well as quantity must be considered. Why is the Dow up with such good news? Just how good is the “news?”

The best that can be said of the increase in employment numbers in poor quality jobs is that some of the newly employed may make enough to reduce their dependency on welfare help. Thus if the economy had added over 200,000 new jobs as machinists or CPAs for months on end as opposed to burger servers and holiday clerks,  I would lead the cheerleaders. Unfortunately, that is not the case, and aggregate demand will only get a moderate (if any) bump from the increase in new hires. Another reason not to expect a bump in demand under such circumstances is that the newly hired have old bills to pay which they ran up while unemployed which will reduce their ability to promptly add to demand.

The business page and Wall Street TV ballyhoo in re new hires can thus be seen for what it is, i.e., a cover for  further stalling on fixing what the real aggregate demand problem is, and it is this: wage inequality. Until that problem is solved via a sharing of the new wealth which underpaid employees have helped create, aggregate demand problems will persist. Obviously consumers with more money in their pockets are more likely to stimulate demand in the marketplace than those whose wage scales (if employed at all) amount to a paycheck to paycheck situation where only necessities can be purchased.

Following are some numbers to prove the above conclusions. America needs a raise, a real one that does more than match the rate of inflation which is not a raise at all, but amounts to treading water. Average hourly pay in October 2014 was just 2 percent above the average wage 12 months earlier and was barely ahead of a 1.7 percent inflation rate. Worse, median household income remains 3.9 percent lower than it was in 2009 and almost 8 percent lower than in 2007 right before Bush’s Great Recession. Given those numbers, can anyone pretend to be surprised by tepid demand in America’s marketplace?

Economists note that inflation has remained tame while the stock market has soared and profess to wonder why workers have not enjoyed wage growth, since it is (or was thought to be) an iron rule of economics that falling unemployment leads to faster income growth. Some have written that if that relationship has broken down, then perhaps we should abandon unemployment as a measure of the health of the economy, suggesting instead (horrors!) that we should be looking at wages as the new barometer of economic health. Well, duh! Isn’t that obvious? What other conclusion could one draw?

There are other views of why wages are so stubbornly stagnant. One is that employers are spoiled and are getting by on the cheap due to worker fear of unemployment, loss of health care coverage etc. I like the view in this connection of the economist Robert Samuelson, who wrote in the Washington Post that workers are so nervous about joining the ranks of the unemployed “that they’re afraid to abandon their present jobs for something better.” If they are so scared, companies don’t have to pay higher wages to retain them. So long as workers see companies being “quick to fire and slow to hire,” fear will tether them – and their wages – in place. Welcome to the new supply and demand in labor economics!

Here’s my iron rule – robust income growth equals robust aggregate demand. Let’s try it.    GERALD    E

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