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MARGINAL PRODUCTIVITY AND THE PACE OF RECOVEERY FROM BUSH’S GREAT RECESSION

December 20, 2014

MARGINAL PRODUCTIVITY AND THE PACE OF RECOVERY FROM BUSH’S GREAT RECESSION

Recently my daughter was privileged to attend a symposium in Washington under the auspices of the Economic Policy Institute where the keynote speakers were Paul Krugman and Senator Elizabeth Warren. There were two distinguished panels of economists present, one for the first topic which Senator Warren keynoted: Monetary Policy and the Economy, and one for the second topic which Paul Krugman keynoted: Regulatory Tools for Managing Financial Cycles. Josh Bivins, the Research and Policy Director of the Economic Policy Institute and author of a book entitled “Everybody Wins Except for Most of Us: What Economics Teaches About Globalization,” provided a paper entitled “Tightening Monetary Policy Now Is a Bad Mistake” for those attending this assembly which featured such a dazzling array of economic talent and erudition under one roof.

I would have been overjoyed to attend this fete, but I am in southwest Florida for the season while my daughter lives and works in that vicinity. She sent me a summary of the proceedings and the paper written by Bivins which confirms my wish that I could have been there. These experts talked about important factors bearing, for instance, on the pace of recovery from Bush’s Great Recession. Thus it is not only important for our economy to recover to it pre-recession levels (which were nothing to write home about); the pace or speed of the recovery is important as well, and our pace is agonizingly slow, characterized by (considering the depths from which we started) slow return to pre-recession levels of employment among the employment-defining age 25 -54 demographic.

There are other problems indirectly related to pace, such as the wage level of those newly hired. The majority of such new hires lately will be working at or near minimum wage, which does little  to stimulate aggregate demand which would otherwise and in turn stimulate ancillary employment (as I have noted in blogs before). It is a simple fact, i.e., when more people are working at higher levels of compensation, they will buy more durable goods and go to the store oftener and spend more while there, which will cause the storekeeper and manufacturers of durable goods to hire additional personnel to handle such increased demand which in turn will stimulate yet further demand as the cycle gains steam toward the ideal of full employment.  Classically, “full employment” raises wages as employers compete for labor’s services (unless corporations ramp up their foreign production which, perversely, brings on further malaise here as workers cannot afford to buy their imported products).

The upward spiral in employment due to substantial increases in aggregate demand (unless derailed by real estate or other “bubbles” in the marketplace or by – as of now – a failure in Wall Street banks’ derivatives or other trading) will reduce the labor pool of the unemployed, and per classic economic theory and noted above, employers will have to pay them better wages in order to obtain their services (though outsourcing and use of robots remain a potent drag on application of this classic rule of thumb).

Bivens notes in his paper that not everyone is in favor of low unemployment (which results in greater aggregate demand for goods and services in the marketplace). From the perspective of corporate management and capital owners (executives and shareholders), unemployment can get too low if it results in real (as opposed to inflation-adjusted) wage gains for low- and middle-wage workers where workers share in productivity gains as they did (by my reckoning)  from WW II until 1974.

My followers know that this failure of corporate America to continue to share productivity gains with its  workers as wages since circa 1974 is one of my major complaints in how  we have conducted our economy (or allowed it to be conducted by corporations as though they own it) since WW II. It is clear to me that this is not only a practice of wage inequality at its worst and unfair to corporate workers (since by such a measure it is their improved productivity and not that of the particular corporation with its better mousetrap that enhances corporate profit) but also throws a wet blanket on aggregate demand.

If corporate America had shared the marginal productivity of its workers with its workers after 1974 (as it did during WW II up until such time) instead of selfishly keeping such gains for its own, aggregate demand would have flourished as its workers would have been enabled to buy more of the goods and services such corporations produced, educate their children, provide for their retirement etc. A then-building robust middle class would have continued to build with yet improved marginal productivity and America would have prospered across the board, including America’s corporations, who would have made up in volume in a booming economy more than they would have shared with their workers.

It didn’t work out that way as corporate greed intervened, and with the exception of a few “bubble years” since, wages have stagnated as the corporations have gobbled up such additional productivity of its workers to stuff their own pockets in the name of “shareholder value.” Fear of outsourcing and right to work laws have conspired to further suppress wages AND aggregate demand where ultimately everyone loses, even the corporations. Maximizing profits first require profits, and profits require a market for the sale of goods and services. It follows that tepid demand finally depresses profits.

Corporate failure to share marginal productivity gains with its workers has been labeled a “class instinct” with the Marxian overtones such a phrase implies by a writer (Kalecki) as long ago as 1943 (when sharing of such gains was just getting started – and ending in 1974). He writes: “Indeed, under a regime of permanent full employment, the “sack” would cease to play its role as a disciplinary measure. The social position of the boss would be undermined, and the self-assurance and class-consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension. . . .  Their class instinct tells them that lasting full employment is unsound from their point of view.”

I think Kalecki’s take on the facts is correct but that his conclusion drawn from the facts is stale and unnecessarily injects class-consciousness into labor-management when the real issue is not who is boss but rather why corporations should greedily claim the marginal productivity of its workers for its own.

This failure to share corporate workers’ marginal productivity has resulted since 1974 in “raises” based on the rate of inflation (which are not “raises” at all since they only match inflation, and retrospectively at that). The value of such marginal productivity has been instead removed from wages paid and dumped into the capital side of the corporate effort, i.e., to shareholders and ridiculously overpaid corporate management in the form of salaries, stock options, bonuses etc. In my opinion, this is the major cause of our two-tiered economy – theirs (as defined by historic Dow averages as of late, and ours – as defined by decades of malaise and wage stagnation where “real” raises are few and far between.

So, pace of recovery? To what? More malaise and wage stagnation? How about sharing?    GERALD    E

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