RK ARCHIVE - Economic Bitter Fruit of an Unfettered Free Market

Republicans like to tout the strong economy as a sign that their conservative, free market philosophy still works and that they are still "the party of ideas." Indeed, with foreign policy and the war in Iraq in shambles, their economic success is all they've really got.

Hate to be the bearer of bad news, but that ain't a whole lot. In fact, there are a couple of pieces of just plain rotten news about the economy today.
First, according to former Georgetown economics professor, Alfred Tella, writing in today?s Washington Times, there is a discrepancy between the rosy unemployment numbers that we've gotten and what may be a real and troubling trend toward higher unemployment. He writes here:

You see, the unemployment rate just measures those out of work who are currently looking for a job. But in a bad job market many people get discouraged and stop looking and then they are no longer counted. So a lower rate may not necessarily mean that the country is at full employment or that every able bodied American who wants to work has a job. It could just mean they couldn?t find a job and gave up. It also could mean that while they have dropped out of the labor market they are doing menial chores or ?consulting,? i.e., picking up small, piece meal jobs that bring in some income but could hardly be considered real employment. And, of course, people who are consulting don?t have health benefits or pension plans. Consulting is sometimes genuinely lucrative and attractive to entrepreneurial types. But lots of times it?s merely a face saving term for folks just scrapping by after being laid off. But those folks don?t count as part of the unemployment rate.

So on paper the economy looks like it?s stronger than it is. Indeed, what we have is a paper pushers? good economy. Investors push around paper profits but our country doesn?t manufacture much. CEOs, corporations and large investors are doing fine; but since not much is produced here, workers are losing ground every day.

According to this piece in today?s Wall Street Journal (sorry, you gotta pay - they're capitalists), productivity is down significantly and that raises fears amongst both economist and the Federal Reserve about inflation. Here?s the Wall Street Journal quote from Mark Whitehouse:

I?ve been arguing for years that the old formula that higher productivity eventually produces higher wages is wrong. It used to be true that higher productivity led to higher profits, which employers passed on to their workers. The reason for this was that demand for the company's goods grew so they needed more workers to produce more widgets (or whatever it was they manufactured). But that?s not been true for a long time. Instead, higher productivity has been fueled by technology and automation and to a lesser, but significant extent, by outsourcing and off shoring. Because of those factors, even as productivity and profits climbed there was little demand for new workers to produce more goods and services.

Even higher productivity doesn?t eliminate the law of supply and demand. In the ?new economy? the demand for labor is lower because of efficiencies that make the production of goods cheaper and less labor intensive, so corporations don?t have to share their profits with workers. Bosses never pass on their profits in the form of wage hikes simply out of the goodness of their heart or out of a sense of noblesse oblige. If businesses don?t have to hire more staff to meet rising demand for their goods, the demand for labor doesn?t rise. And with automation and off shoring, the demand for workers won?t rise even as consumer demand for their goods does. So companies get to keep their profits and they don?t have to share or play nice with workers. That includes not having to provide decent health benefits or pensions to compete for employees.

The only time bosses give raises or offer decent benefits is when they have to do so to retain their workforce. If they don?t need that workforce, then wages will stagnate no matter how high corporate profits climb.

The Washington Post, bless their little free trader hearts, never got that part right. Their business writers spent most of the last seven years assuring readers that higher productivity would trickle down to workers and raise their salaries. Now, though, the Wall Street Journal, a far better business publication that actually understands economics, tells the truth with this explanation:

On the other hand, the educators who teach your kids, the cops who protect your life and limb, and the guy who sacks your groceries don?t have value in the marketplace, even though they contribute immeasurably more to your life.

So much for the wisdom of unfettered markets and other ideologies that don't match the reality on the ground.

Meanwhile, look for investors and business types to push the panic button and try to slow growth, especially wage growth in order to put a break on inflation. That?s just one more proof that the interests of the average wage earner are not the same as their boss?s interests. And one more sorry example that the good times passed the American worker by. All those years when the corporate profits were rolling in and CEOs were living extravagantly never trickled down. Only the economic downturns trickle down to workers. It is the bitter fruit of a free market economy indeed.

Comments

Couple of comments (loboforestal - 6/7/2007 11:54:39 PM)

The productivity numbers are down for Q1, but a quarterly drop could be within normal variance. If Q2 and Q3 clock in with low numbers, then it's a real problem.

If wage increases drive inflation (something I never bought into, it's more a monetary phenomena; i.e. if you increase the money supply, you have inflation), then the "inflation sign" has turned lower : The Associate press reports Labor costs rose at an annual rate of 1.8 percent. That was up from an initial estimate of 0.6 percent growth in unit labor costs but was still lower than the 8.9 percent surge reported in the final three months of last year.

The AP story is modestly optimistic: "Despite the weak start to the year, recent indicators have bolstered the view that the economy began to rebound in the spring, despite lingering problems in housing".

NY Times is much harder on the new numbers :
New Labor Department data for the first quarter showed yesterday that productivity gains were slower and labor costs rose three times faster than first calculated. While that was in part a statistical aberration because of stagnant growth during the winter, it was also seen as a sign that American businesses could be facing higher costs and lower profits down the road.

With mixed signals; it's unlikely the boys on Wall Street and down at the Fed will be pushing any panic buttons. A more likely shock would be another "Asian Flu"; the bubble in Chinese securities could burst.

from http://finance.yahoo...

That's right: it's quadrupled in two years.

Nice writing but (novamiddleman - 6/8/2007 6:25:24 AM)

This is a strong issue for me for the whole why I am a Republican bit

I guess my main question is what you would suggest be done to fix these "issues"

Is it the governments job to intervene and reduce unemployement or regulate wages? I strongly say no

The fact remains the individual always holds the power. I hate to be harsh but growth and opportunity are a direct results of hard work, educating yourself, and negotiating with some luck thrown in.

If your job/wages are a problem nobody is making you stay. Especially in the Washington DC area there are always jobs available in a wide variety of sectors at various education skill and salary levels.

The broken social contract (Hugo Estrada - 6/8/2007 9:43:47 AM)

Novamiddleman, we are living with a broken social contract. You can educated yourself, worked hard, and played by the rules, and still lose.

Luck as a lot to do with this. The company was bought. Your company decided to cut jobs to push the quarterly earnings up. You or a family member got sick. This is pretty much the end for many people. Or maybe your boss just didn't like you.

The government can do the following: stop subsidizing anti-social corporations via tax cuts, tax credits, direct subsidies or contracts. Provide universal health insurance, independent from any specific job. Provide longer unemployment benefits.

And not everyone in the country can move to Washington for jobs. Their doing so would quickly end the job slightly better job market in the area. :)

Exactly right. (Lowell - 6/8/2007 9:56:53 AM)

This concept that if we just work hard and play by the rules, we'll make it in America, is largely nonsense. Of course, I think it's admirable if people work hard and play by the rules, but that does NOT guarantee success. The reason? Because people do not exist in a vacuum - economic, political, social, etc. If you work your butt off in Chad, you're probably still going to be poor. If you work your butt off in America, but you're not highly educated (for whatever reason), you can get stuck in dead end jobs with no health insurance or other benefits. Then, if you get sick, you are THAT close to bankruptcy. In addition, I would point to the fact that many highly educated poeple in the tech sector have lost their jobs to low-paid workers in China and other countries with minimal labor, human rights and environmental standards. Same thing with factory workers. How are they supposed to fight that by "working hard?" Sure, education is part of it, but novamiddleman's entire line of reasoning is a wild oversimplification, and really heartless at its core that every individual is totally responsible for whatever situation they happen to find themselves in.

Interesting very interesting (novamiddleman - 6/8/2007 12:04:29 PM)

This is going to be an agree to disagree issue but I just wanted to highlight a couple things

Looking long and hard my view could be conisdered heartless but your view is stupid :-p

The old adage liberals have no brains conservatives have no hearts but anyway

The last line really scares me that you dont agree with it

"that every individual is totally responsible for whatever situation they happen to find themselves in."

I strongly believe this (people make choices and should face consequences for their actions). I believe that it is not the governments job to take care of people. This breeds dependency. There are some cases of extreme circumstances mainly the disabled.

With that being said I part from some of my Repbulican brethrern somewhat by supporting more intervention up until age 18 i.e. strong education for example. I also support the enviroment more than most of my party.

However once you hit 18 you are an adult and there need to be real consequences for prior actions. I would never let someone freeze or starve but this is a clear delineation between the democrats (who view government as helping people and growing bigger in peoples lives) and republicans (who want government to be smaller and not effect peoples lives)

We an learn from one another (Hugo Estrada - 6/8/2007 2:41:23 PM)

I sense that we are almost in agreement, but that we are talking pass each other. If you are kind enough to read this longish response, you will see how this is true.

I am sure that you agree that we are better off as a community than as in a lone islands world.

This conversation makes me think of "It's a wonderful life." I know that this is corny for some people, but I am not ashame to live corny stuff if it rings true to me. :)

Well, the point is that George Bailey was facing a terrible setback through no fault of his own. His whole life work was coming to an end.

George Bailey wants to killed himself because he believes that he lives in the lone island world. Clarence Odbody has to persuade him that this is not the case: he actually lives in a community where he has helped many people, and these in turn love George. At the end, as we all know, the community learns about George's misfortune and collects money to help him.

Although we comprehend how if George had never been born this would have hurt many people, the warm and touching part of the film is when the community helping George.

I like this story as a metaphor for society. I know that most of us would like to live in a place where everyone would help us if something goes wrong. And sometimes it happens, even if you are not directly responsible for it.

Now the trick is to do this is a way that keeps the human dignity of the people being helped, which is something that you are talking about when you say that it breeds dependency. You have a good point here. Our safety nets often demean the dignity of those who must of use their services.

We must figure out how we can help people to get out of ruts in a way that restores their dignity. And a certain amount of independence is needed for this. And this is an area where liberals can learn a lot from conservatives like you. :)

Long answer to some excellent point! (AnonymousIsAWoman - 6/8/2007 9:52:18 AM)

Loboforestal, the reason that inflation is seen as tied to wage increases is because wage increases cause upward pressure on consumer prices. In other words, companies pass on the additional business costs that come from paying their workers more by raising prices. To keep prices down and still make a profit, you have to cut costs and wages and benefits are considered a cost. They seem, in fact, to frequently be viewed as the major cause of lack of profitability and are often the first area that is looked at to revive sagging profits.

Novamiddleman, you asked what can be done to remedy the situation? First of all, I am not for government interference or a planned economy (though I do support a minimum wage - that's as far as I would go with government intervention). Socialism is a failed economic policy too.

But I simply challenge the notion that a so-called unfettered free market provides the most good for the most people. It has definite winners and losers, usually a larger number of losers and that can contribute to social ills and lack of political stability. High crime, violence, drug problems, and even toppled governments, in extreme cases in other countries, all occur when there are high unemployment rates, very low wages and high poverty. We know those conditions are not favorable to a stable and secure nation.

My solution is to keep a basically free market but there is no reason for there not to be laws that regulate safety and minimum wage. In the area of international trade, why can't the government negotiate with other nations, such as China, to level the playing field by getting them to open up their market more to us (nobody has as open a market as we do) as well as letting their currency float to its real market value, which it doesn't do now.

Also, we need legislation that makes it easier for workers to organize and join a union which can engage in collective bargaining on behalf of its members.

Paul Krugman, in the NYT, has made the point numerous times that it is no accident that workers have lost ground in wages, pensions and health benefits since unions have grown weaker. It was union membership in the fifties and sixties, the halycon days for labor, that drove the unheralded national prosperity that lifted ordinary working people into the middle class and provided opportunity for their children to get a quality education which got them into higher paying professions. Many of us are the beneficiaries of that progress.

By the way, if CEOs can bargain and sign contracts, which are drawn up by their attorneys, for high salaries and perks, why is it wrong for union members to negotiate contracts with the same companies?

I know you will answer that it's because you place your faith in the power of the individual. But for factory workers, one individual is a cog that is easily replaced. And it is easier said than done to say if they don't like it they can get another job. In many cases, one person can't. And doesn't have power. But no factory could run without all of its workers cooperating. It's like a team. Not every player will be the star quarterback. But ask that quarterback if he needs the rest of the team?

Maybe the star will always be more richly rewarded than his other teammates. But the rest of the team is also valuable to the overall success and should have some reward too. And not just starvation wages and no pension.

But collective bargaining and negotiation should go on in the private sector with little or no government interference except to protect the right of workers to engage in it.

No worker, no union, wants his or her company to fail because costs are too high. But no company should ignore the value of their workers either.