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Saturday, August 8, 2009

Wages Must Rise

Wages Must Rise
Wages must rise. Public employment is a solution.
The wealthiest 1% of U.S. households own more wealth than the lower 91% of households. They earn each year almost as much as the lower 60% of households. This is why our economy does not work well.
(Sources: Federal Reserve report, Survey of Consumer Finances, Currents and Undercurrents, 2006; and Tax Policy Center, Brookings and Urban Institutes, quoted in State of Working America, 2006/2007, page 79, by Mishel, Bernstein, Allegretto)

Any economy is limited by the wage rate for most workers.
When workers as a group cannot afford to purchase what they produce as a group because their wages are depressed as a group, then the economy must constrict. This is an inviolable law, just like supply and demand. That is why wages must be kept high. As anyone can see, capitalism tends to suppress wages; inherently capitalism’s competitive nature constantly forces a reduction in production costs, but in doing so this inescapable depressing force deprives the economy of purchasers. The economy then plummets to the level of available income and savings. This should be recognized as an inviolable law of economics. Marriner Eccles, the Chairman of the Federal Reserve during the Great Depression, cited this shrinkage of aggregate demand as the cause of the economic depression. Economist Ravi Batra says that wages are demand and productivity is supply, and they must be in balance.

In 2009 we have 35.6% of the workforce, or 55 million workers in a workforce of 155 million, who either have no job (9.4%), not enough job (involuntary part-time workers and discouraged workers --- 10%) or they are working for below poverty wages (16.2%). (See for BLS statistics to confirm.) One out of three of workers are not buying much. As a result we have one in nine buying food with food stamps, one in six without health care, and over one in four children living in poverty. Among developed nations we have the highest inequality and the highest child poverty rate. We need to raise wages, but it requires a concerted strategy.

In 1939, ten very long years after the commencement of the Great Depression, the rate of unemployment still stood at 19%. Four years later, in 1943, ‘44, ‘45, it was below 2%. How this was done should be question number one for the general public. Simply put, public jobs were created. This transferred idle wealth into paychecks of working people. The same principle will work today, but we do not need a world war to prod us into a good policy. Wealth was idle because no one had money to buy additional products (called aggregate demand); very many people were very poor while very few people were very wealthy. Wealth was transferred, and massive public employment changed business expectations as more buyers entered the marketplace through this transfer of wealth. This activated the latent energy in America.

When government hires workers, it transfers idle money into paychecks of formerly non-working people. The most recent stimulus of $787 billion dollars promises to save -- or create -- 3.5 million jobs. Yet there are 15 million workers without jobs. Creating new jobs helps in two ways, it shrinks the job market which forces private employers to pay higher wages, and it transfers wealth to non-purchasing unemployed workers. Those newly employed government workers begin purchasing, and eventually enough traction creates demand in the private market so that employers hire again. (Economist E. James Welsh has a good essay about this phenomenon, available at, April 9, 2009.) Furthermore, we can increase the Earned Income Tax Credit, we can provide subsidies for food, child care, housing, health care, and education. And we can make it simpler for workers to form unions. All these create added demand in the economy, at the cost of future loan repayments or higher taxes to the top one percent who own more than 91% of the U.S. households combined.

One demerit of public job creation is that productivity rates fall, but that is not a permanent effect. Another is that interest rates rise because of government borrowing, and this brakes private investment because their expansion credit costs rise. This also is temporary.

From 1942 to 1960 -- Roosevelt, Truman and Eisenhower -- the maximum marginal income tax was 91% on incomes over $3.4 million. You may call this “confiscatory” but keep in mind it saved the overall economy. Over the past decades only a few boats have risen with the rising tide, in the 50s and 60s all boats were rising. Another benefit would be that the insanity of billion dollar hedge fund operators being taxed at lower rates than their secretaries would be put to an end. Today, a reinstated high marginal income tax would finance economic recovery quickly.

I recommend Jack Rasmus's solutions. He is an economics professor, see, or see Dean Baker, or my own blog, Jeff Madrick, the editor of Challenge Magazine and author of Why Economies Grow says much the same thing. John Mauldin’s Investors’ Insights has contributors from many sides, especially the skeptical side. Also Ravi Batra agrees with raising wages. He says that productivity equals supply and wages equal demand and the two must balance for growth and widespread prosperity. It's pretty obvious. But since 1980 that logic has been reversed.

In 2008 the annual GDP was $14.3 trillion and the number of active workers equaled 141 million. That means that almost $100,000 of value was produced by each worker in 2008, on average. Yet half the workers earned less than $40,000 a year, the median income for individual workers was below $40,000. (This from U.S. Census, 2007) The bottom half earned about 15% of the total national income, the top half earned 85%. The top one percent of households in 2006 earned 18.3% of the national income, while the bottom 60% earned only 20.3%. (See State of Working America, 2006/2007, page 79) The figures for wealth are even more egregious. The top one percent of households owns more wealth than the combined wealth of the lower 91% of households. Half the households own 2.5% of the national wealth, the other half own 97.5% of the national wealth. (See Currents and Undercurrents, 2006, Arthur Kennickel, U.S. Department of Treasury, Federal Reserve, Survey of Consumer Finances) Time for readjustment through higher wages?

We suffer from chronic low wages and a slavery mentality. In theory (only) Capitalism could actually seize up and die if corrections are not made. We have lots of room to increase wages in a systematic way. Only the richest, 3% at the top, would feel any loss, and their gain will be to live in a much happier world, a saner world, a safer world, and a world more just and productive.

I feel like ranting a little, so here goes:
Food stamps feed 11% of the population, one in nine Americans, in June of 2009, the number has nearly doubled from 17 million in 2000 to 33 million in 2009. (See for an interesting news article on food stamps) You must have less than $2000 in assets to receive them, but 70% of food stamp recipients (that’s 23 million Americans) have “no countable resources”. Half the recipients are children. (Our child poverty rate is double the average for developed nations.) That’s almost 20% of the nation’s children. $95 a month is the median benefit, when the typical (median) American household spends $184 a month per person on food. In November, 2008, approximately 67% of those eligible were receiving the food stamp benefit. If all who are eligible applied, over 40 million would qualify, more than one in every eight Americans. The economic multiplier for every dollar of food stamps is about $2 of added economic activity. The same applies for creating public jobs.

The article features a retired postal worker, Adell Davis age 63, who declined the $20 a month food stamp benefit when she moved into subsidized senior housing. She lives on a $672 Social Security check, and has about $200 a month left over after paying her bills. “I thought someone else could use it better than me,” she says. She never eats bacon and eggs nor fresh fruit and vegetables. Davis probably would qualify for work as a public school auxiliary classroom assistant, or many other valid work activities that public jobs could create. If we would let the banks go bankrupt, and transfer the $700 billion we kicked in to keep them solvent, and the $23 trillion in guarantees, we could easily employ the unemployed and create economic security for all citizens. No, instead we shovel taxpayer money to failed business men so they can continue their get-rich-at-all-cost schemes--- even collective bankruptcy --- before we employ those who cannot find full-time, decent paying work, the 55 million Americans whom I mentioned in the first paragraphs of this essay. We shovel $1.1 trillion a year in the military, double all other nations combined (See Chalmers Johnson, "Going Bankrupt" ZMagazine, and, January 24, 2008), even though there is no significant threat to our security, the most significant being the global economic depression that we created ourselves through non-regulation of the financial sector and low wages to 80% of the workforce over the past 30 years.

We should try to raise wages. In the U.N. Human Development Index we rank 15th now, despite the fact that our economy generates $41,890 per capita, more money per capita than all but one other nation. The median personal income (for 141 million workers) is less (about $40,000 per worker) than the per capita income for over 300 million citizens. Go figure.
How can anyone be poor in such a wealthy nation?

Ben Leet, see

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