A new briefing paper by the Economic Policy Institute (EPI) documents that median incomes haven’t gone anywhere for quite some time.  Yet productivity has steadily increased.  Economic models say median incomes should increase along with productivity.  But they didn’t.

“From 2002 until 2007, productivity increased 11%, but the hourly compensation of the typical high school and college graduate worker actually fell.  In other words, the disconnect between pay and productivity in the years leading up to the current downturn encompassed a broad swath of the workforce, with neither the median high school graduate nor the median college graduate capturing the benefit of the economy’s productivity growth.”

Beezer here.  And keep in mind this chart ends in 2007.  Since then the trend has escalated because productivity has gone up during this recession, even as median income drops further due to massive layoffs.

Current thinking about this phenomenon, this disconnect between median labor wages and productivity growth, has brought the Great Depression back into the spotlight because it was preceeded by the same phenomenon.  Most modern economists, though not all, tend to blame poor monetary policy by the Federal Reserve as a major cause of the Great Depression.  Because they didn’t understand the effects of deflation, they didn’t realize that even lower interest rates were, in fact, too high in real terms.  Fortunately the Fed today has the benefit of studying the Great Depression, so they didn’t make that mistake.

But maybe that wasn’t the real problem.  Maybe the real problem is somehow connected to this wage/productivity disconnect.  Maybe it wasn’t just a coincidence.  Maybe the disconnect was a major cause of the Great Depression.  And if so, then it might also be a major cause of the current financial induced recession too.

Rutgers History PhD James Livingston may be on to something in this article published by the History  News Network.

“Look first at the new trends of the 1920s.  This was the first decade in which the new consumer durables—autos, radios, refrigerators, etc.—became the driving force of economic growth as such.  This was the first decade in which a measurable decline of net investment coincided with spectacular increases in nonfarm labor productivity and industrial output (roughly 60% for both).  This was the first decade in which a relative decline of trade unions gave capital the leverage it needed to enlarge its share of revenue and national income at the expense of labor. 

These three trends were the key ingredients in a recipe for disaster.  At the very moment that higher private-sector wages and thus increased consumer expenditures became the only available means to enforce the new pattern of economic growth, income shares shifted decisively away from wages, toward profits.  At the very moment that net investment became unnecessary to enforce increased productivity and output, income shares shifted decisively away from wages, toward profits. 

What could be done with the resulting surpluses piling up in corporate coffers?  If you can increase labor productivity and industrial output without making net additions to the capital stock, what do you do with your rising profits?  In other words, if you can’t invest those profits in goods production, where do you place them in the hope of a reasonable return?

The answer is simple—you place your growing surpluses in the most promising markets, in securities listed on the stock exchange, say, or in the Florida real estate boom, particularly in view of receding returns elsewhere.  You also establish time deposits in commercial banks and start issuing paper in the call loan market that feeds speculative trading in securities.

At any rate that is what corporate CEOs outside the financial sector did between 1926 and 1929.  They had no place else to put their increased profits—they could not, and they did not, invest these profits in expanded productive capacity, because merely maintaining and replacing the existing capital stock was enough to enlarge capacity, productivity, and output.

No wonder the stock market boomed, or rather no wonder a speculative bubble developed there.  It was the single most important receptacle of the surplus capital generated by a decisive shift of income shares away from wages, toward profits—and that surplus enforced rising demand for new issues of securities even after 1926, when, according to Moody’s Investors Service, almost 80 percent of the proceeds from such IPOs were spent unproductively (that is, they were not used to invest in plant and equipment or to hire labor).

The stock market crashed in October 1929 because the non-financial firms abruptly pulled their $7 billion out of the call loan market.  They had experienced the relative decline in demand for consumer durables, particularly autos, since 1926, and knew better than the banks that the outer limit of consumer demand had already been reached.  Demand for stocks, whether new issues or old, disappeared accordingly, and the banks were left holding the proverbial bag—the bag full of “distressed assets” called securities listed on the stock exchange.  That is why they failed so spectacularly in the early 1930s—again, not because of a “credit contraction” engineered by a clueless Fed, but because the assets they were banking on and loaning against were suddenly worthless.

The financial shock of the Crash froze credit, including the novel instrument of installment credit for consumers, and thus amplified the income effects of the shift to profits that dominated the 1920s.  Consumer durables, the new driving force of economic growth as such, suffered most in the first four years after the Crash.  By 1932, demand for and output of automobiles was half of the levels of 1929; industrial output and national income were similarly halved, while unemployment reached almost 20 percent.

And yet recovery was on the way, even though increased capital investment was not—even though by 1932 non-financial corporations could borrow from Herbert Hoover’s Reconstruction Finance Corporation at almost interest-free rates.  By 1937, industrial output and national income had regained the levels of 1929, and the volume of new auto sales exceeded that of 1929.  Meanwhile, however, net investment out of profits continued to decline, so that by 1939, the capital stock per worker was lower than in 1929. 

How did this unprecedented recovery happen?  In terms of classical, neoclassical, and supply-side theory, it couldn’t have happened—in these terms, investment out of profits must lead the way to growth by creating new jobs, thus increasing consumer expenditures and causing their feedback effects on profits and future investment.  But as H. W. Arndt explained long ago, “Whereas in the past cyclical recoveries had generally been initiated by a rising demand for capital goods in response to renewed business confidence and new investment opportunities, and had only consequentially led to increased consumers’ income and demand for consumption goods, the recovery of 1933-7 seems to have been based and fed on rising demand for consumers’ goods.”

That rising demand was a result of net contributions to consumers’ expenditures out of federal deficits, and of new collective bargaining agreements, not the eradication of unemployment.  In this sense, the shift of income shares away from profits, toward wages, which permitted recovery was determined by government spending and enforced by labor movements. 

So the “underlying cause” of the Great Depression was a distribution of income that, on the one hand, choked off growth in consumer durables—the industries that were the new sources of economic growth as such—and that, on the other hand, produced the tidal wave of surplus capital which produced the stock market bubble of the late-1920s.  By the same token, recovery from this economic disaster registered, and caused, a momentous structural change by making demand for consumer durables the leading edge of growth.”

Beezer again.  Does this sound familiar?  This income wage shift occurred prior to this meltdown too.    And instead of pouring the additional profits into productive investment (at least domestically, there was investment into foreign production) the additional profits searched for somewher else to park.   And what Wall Street provided was mortgage securities.  The resultant flow of immense cash savings into the housing market was a major dynamic in play pumping up the housing bubble.

So how do you climb out of this hole?  You reverse the income shift, for one thing.  And you use government tax and other policies to make domestic capital investment more attractive than investing overseas.  This should include tariffs if necessary in order to stop or reverse the income shift that’s already occurred.  It’s not just about protecting existing jobs and creating new ones, it’s also about producing wage gains–that’s the income shift that needs to be reversed.

From President Obama’s speech on Aug. 30th.

“And there’s currently a jobs bill before Congress that would do two big things for small business owners: cut more taxes and make available more loans.  It would help them get the credit they need, and eliminate capital gains taxes on key investments so they have more incentive to invest right now.  And it would accelerate $55 billion of tax relief to encourage American businesses, small and large, to expand their investments over the next 14 months.

Unfortunately, this bill has been languishing in the Senate for months, held up by a partisan minority that won’t even allow it to go to a vote.  That makes no sense.  This bill is fully paid for.  It won’t add to the deficit.  And there is no reason to block it besides pure partisan politics. 

Small business owners and the communities that rely on them, they don’t have time for political games.  They shouldn’t have to wait any longer.  In fact, just this morning, a story showed that small businesses have put hiring and expanding on hold while waiting for the Senate to act on this bill.  Simply put: holding this bill hostage is directly detrimental to our economic growth.

So I ask Senate Republicans to drop the blockade.  I know we’re entering election season.  But the people who sent us here expect us to work together to get things done and improve this economy.”

Republicans are only about power.  Nothing else.  Their actions throughout this recession have been focused not on helping the economy recover, but just the opposite.  They don’t want economic recovery.  They want suffering, because suffering increases dissatisfaction, and dissatisfaction normally hurts the majority party.

Despite this continuous Republican blockade against economic recovery, Obama has had some victories–although the Republicans needed to be heavily bribed in order to get the bills passed.

Here’s the list of the more significant bills that have managed to go into law and are aimed at speeding recovery.

Progress

• The President signed the American Recovery and Reinvestment Act, which has been responsible for about 3 million American jobs and brought the economy back from the brink of another depression.
• The President signed Wall Street Reform, the most sweeping reforms since the Great Depression, to hold Wall Street accountable, put an end to bailouts and “too big to fail,” and enforce the strongest consumer protections in history.
• The President signed the HIRE Act providing a payroll tax credit for companies that hire employees who have been looking for work for 60 days or more.  Millions of workers have been hired through this process already.
• The President launched the National Export Initiative with a goal of doubling exports and supporting several million new jobs over five years. 
• The President announced the “Making Home Affordable” home refinancing plan.
• The President launched a $15 billion plan to boost lending to small businesses.
• President Obama played a lead role in G-20 Summit that produced a $1.1 trillion deal to combat the global financial crisis.
• The President signed the Fraud Enforcement and Recovery Act which gives the federal government more tools to investigate and prosecute fraud, from lending to the financial system, and creates a bipartisan Financial Crisis Inquiry Commission to investigate the financial practices that brought us to this point.
• The President signed the Helping Families Save Their Homes Act, expanding on the Making Home Affordable Program to help millions of Americans avoid preventable foreclosures, providing $2.2 billion to help combat homelessness , and helping to stabilize the housing market for everybody.
• The President signed the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act to protect Americans from unfair and deceptive credit card practices.

Beezer here.  Not too shabby considering the Republican blockade.  Most of the original legislation had to be severely compromised in order to gain even a narrow margin of victory.  In some cases it took direct bribery of a few Republicans to gain passage.

It’s the cost of doing business with a ethically bankrupt Republican Party.

And it turns out it still is true.  We probably need a more sane immigration policy, but we also need immigrants.  The vast majority come to America looking for a chance to better their lives and the lives of their families.  They send money back to relatives who cannot move to America, thus helping a foreign economy.

They work hard and they are ruthlessly taken advantage of by many corporations–something we should stop.  They volunteer to serve in our military and willingly die to protect our freedoms.

In brief, they behave just as all the waves of immigrants before them.  The waves of immigrants who built America.

‘What effect does immigration have on U.S. job markets? “Data show that, on net, immigrants expand the U.S. economy’s productive capacity, stimulate investment, and promote specialization that in the long run boosts productivity. Consistent with previous research, there is no evidence that these effects take place at the expense of jobs for workers born in the United States” 

That’s the conclusion of a study by economist Giovanni Peri and published in the San Francisco Federal Reserve’s Economic Letter.

Beezer here.  So take a few minutes and read the commentary.  It will make you remember where your roots really are.  Thanks again to economist’s view for bringing this paper to our attention.

The simple fact is that Social Security won’t go broke.  So for those who may be frightened by all the talk of ‘fixing’ social security, here’s the truth.  From Bruce Webb over at the Angry Bear blog.  Of course Bruce has a big advantage over political conservatives.  He knows the math.

“A couple of further notes. If retirement benefits are projected to increase in real terms by close to 100% over the next 75 years, then a projected cut of 20-25% on Trust Fund exhaustion would STILL see those future workers with larger baskets of goods than similarly situated retirees (this is what we call ‘Rosser’s Equation’).

But this real term increase doesn’t come at the expense of younger workers still in the work force, at least not without some forced special pleading. The goal clearly shown in Fig 2 is to keep overall replacement values steady with each future generation just able to hold onto its share of the overall societal increase. This seems fair to me.

There are some that insist that if you ‘really’ look at the numbers you will see that Social Security was simply too generous to earlier generations. How you reconcile this with these graphs showing that each generation will be able to afford a bigger basket of goods than their predessessor would seem difficult. Because arguments from ROI (but I could have had EVEN MORE, and screw Grandma) seem pretty hard-hearted and selfish. But perhaps someone can make the moral case in comments.”

Beezer here.  So if even the math challenged can understand that Social Security isn’t going to go broke, what the heck is going on?  Webb has an idea.

“Nope in my opinion the fundamental motive for opposing Social Security is not driven by greed as such but instead an ideology that depends crucially on the perception that Big Government is always and everywhere a failure, and that the bigger the counter-example the higher the risk to that overall paradigm. If Social Security was just headed for the cliff, its enemies would just stand back and watch it go, arguably this is where they were at in 1993. It is only when they see the coach driver beginning to get the team under control and steer it away from the cliff that they have to jump in and try to spook the horses again.

Which is why people asking why the actions of Social Security opponents don’t seem to be particularly helpful in guiding the stage coach away from the cliff are asking the wrong question, looked at in that way their actions don’t make sense at all. On the other hand if you flip it around a lot of things become clear, there being more than one definition of ‘fixing’.”

Beezer again.  There it is, that damn ideology again.  No matter the evidence.  No matter the math.  No matter the real historical record.  Republicans have so bought into the myth that the government can do no good, only harm, that such a large success like Social Security cannot be let stand.  So spook the horses and drive the program off the cliff.  That’s the only ‘fix’ the Republicans have in mind.

Beware America.  You are being sold down the proverbial river of misplaced ideology.

And as a result, they are rendered speechless much of the time.

True story.  From a C-Span call in show during the health care reform debate.

The caller complained about ‘socialist’ medicine and all the perceived evils of socialism in general and socialism in medicine in particular.  The caller was asked how he got his medical treatment.  His answer?  The Veterans Administration, possible the most purely socialised medical system on the planet.

When asked why he didn’t avail himself of private insurance his answer was “I can’t afford it.”

Liberals listening to this exchange probably didn’t get their jaws off the ground for several minutes.  They were rendered speechless.  No wonder they often lose an argument:  They can’t talk!

And this from a post by economist Maxine Udall that appeared on economist’s view:

“…[T]he spectre of “socialized medicine” prevents us moving to single payer, where the incentives for prudent life cycle management of risk across all age and income groups would be better aligned. Why, when we already have what is in effect single payer for the elderly and the poor, do some believe that single payer is “socialized medicine” and why do they fear it so?

I gained some insight into this recently when an elderly relative started complaining about “Obamacare” and how it would lead to “socialized medicine.” Knowing the person had heart surgery courtesy of Medicare and was receiving ongoing monitoring and care, I said, “I didn’t realize you were so unhappy with Medicare.” To which I received the reply: “I’m not talking about Medicare, I’m talking about socialized medicine.”

“How is Medicare different from socialized medicine?” I asked.

“Medicare isn’t socialized,” came the reply. “I pay for it. I pay every month and when I’ve had surgery, I’ve had to pay some of it. Medicare is like any other insurance.”

“Well,” I said, “I know you’re paying a premium for Part B and I know there are copayments and deductibles, but Medicare is a government run health insurance program.”

To which the reply was: “But I’m talking about socialized medicine. You know that whenever the government gets involved in anything, it never does a good job.”

“I had no idea you were having problems with Medicare.” said I. “I always had the impression you were pretty satisfied with it. And with the VA, too. I know you’ve used the VA for some care recently. What problems have you had with Medicare or the VA?”

“Well, none with Medicare or the VA, but I’m not talking about Medicare. I’m talking about socialized medicine.”

“So you’re happy with Medicare?”

“Yes.”

“Would you mind if your [adult] children could buy into it? Your son is unemployed. Would it be OK if he could buy into Medicare?”

“Well, sure. As long as he has to pay like I do.”

You were all wondering how someone could say, “Keep your government hands off my Medicare?” Well, there you have it. Now that I’ve told you, I’m still not sure I understand it. It was one of the most frustrating and at the same time enlightening conversations I have had in a long time. The person with whom I was conversing is intelligent, educated, and not senile.

I’m just not sure how to use the above information. I was unable to persuade my elderly relative. I confess that since the conversation, I have despaired that the national conversation will ever be much better.”

Beezer.  And so it goes.  Our jaws are constantly resting on the floor from our astonishment.  Liberals need to get used to the American public’s propensity to stab itself repeatedly. 

The ‘It Sucks To Be You’ party (aka Republican Party) is expected to gain Congressional seats this November, primarily because of the continuing recession and stubbornly high unemployment.

Unless, of course, the unemployed and those who can’t get health insurance (those who it sucks to be) begin to realize the true nature of the Republican Party.  Recently the Democrats are seeing some relief from the poor polling results so maybe the population at large is starting to smell something fishy about all the serial Republican “no” votes to reform efforts.

Unemployed?  It sucks to be you.  Got a chronic health problem?  It sucks to be you.  Can’t afford to go to college?  It sucks to be you.  Home underwater?  It sucks to be you.  Clam fisherman on the Gulf?  It sucks to be you.  Hotel owner or employee on the Florida gulf coast?  It sucks to be you.  Sick from salmonella poisoning?  It sucks to be you.  Going to rely on Social Security?  It sucks to be you.  Depend on Medicare for your medicine?  It sucks to be you.

This is a pretty long list.  Possibly a majority of voters.  Maybe when they realize that it sucks to be them, they’ll fight back.

Beezer can’t take credit for this line of reasoning.  It came from a friend who is an elected official in Virginia.