Wednesday, December 3, 2008

Solution to the Economic Crisis Requires Raising Wages and Redistributing Income

Any Long Term Solution to the Economic Crisis Requires Raising Wages and Redistributing Income

Dr Mark Naison
Fordham University

The roots of the current economic crisis in the United States are strikingly similar to those which provoked the Great Depression of the 1930's. In each instance, the economic collapse followed a long period of economic expansion in which profits far outpaced wages, leading to massive speculation in unregulated financial products and the stimulation of consumer demand by having wage earners to take on large amounts of personal debt. When the speculative bubble collapsed, as it did in 1929 and 2008, weakening or destroying major financial institutions, consumer demand could not keep the economy afloat once credit was no longer available. In 1929, this produced a three year economic contraction that led to a third of the nation's labor force being unemployed and the steel and auto industry operating at less than 30 percent of its capacity. In 2008, we are not at that point--- yet, But we are seeing a profliferation of store closings and bankruptcies among major American retailers, a wave of home foreclosures, and the impending collapse of the American automobile industry. With all of these leading to further job losses, and further drops in consumer demand, it is hard to see where the power to reverse the economic2 0free fall will come from

The current strategy, of both the Bush Administration and the incoming Obama administration, seems to be to inject funds into the collapsing banking system to make sure credit is available, and develop a stimulus package that will put income into consumers hands through a combination of job creation and transfer payments ( food stamps, unemployment insurance). All this is probably necessary to prevent the economy from shrinking at the rate it did in the early Depression

But because consumer credit will never again be so freely available through the major instruments used to promote it in the last 20 years- primarily credit card debt and second mortgages on homes- it is hard to see how American consumers can again become the engine of economic growth unless working class and middle class incomes start growing at the rates they did between 1945 and 1970. Some of this income growth can be encourage by lowering tax rates on middle class incomes and developing a program of national health insurance, but any long term solution requires a national wage policy to address income inequality and improve the bargaining power of American workers.

Even Lawrence Summers, President Obama's new economic advisor, recognizes that economic inequality is one of the major causes of the nation20's economic collapse Acdording to today's NY Times, Summers is now arguing that the lack of middle class income growth is "the definining issue of our time" and using the following parable to illustrate his point

" To undo the rise in income inequality since the late ’70s," Summers argues, " every household in the top 1 percent of the distribution, which makes $1.7 million on average, would need to write a check for $800,000. This money could then be pooled and used to send out a $10,000 check to every household in the bottom 80 percent of the distribution, those making less than $120,000. Only then would the country be as economically equal as it was three decades ago."

Since no such voluntary program in income distribution is ever going to take place, how do we assure that working class and middle class incomes rise sufficiently to be a source of consumer demand as well as provide a decent standard of living to most Americans

I have two policy suggestions which would encourage such an outcome:

First. that the federal government impose an income standard on any bank, insurance company or manufacturer that receives a federal subsidy requiring that its highest paid executives make no more than 10 times the salary of that company's lowest paid worker. Two highly successful companies, Ben and Jerry's and Costco, operate with such a standard, and there is no reason that it could not prevail throughout American industry. This would give company managers a strong personal incentive to raise wages throughout their enterprises and would prevent huge portions of corporate income from being directed into executive compensation

Secondly, the Congress and the incoming administration should revise labor law to make it much easier to organize unions, encouraging unionization drives in the lowest wage sections of the American economy, especially retail trades, food processing, agriculture and the hotel and restaurant industry ( including fast foods) Strong unions will assure that workers get a fair share of corporate profits and that low wage workers can become consumers without incurring huge amounts of debt.

Only policies such as these can create an economy where consumer demand rests on a firm enough foundation to promote economic growth without uncontrolled debt and speculation.

Promoting economic equality is not onlya strategy for national unity in times of hardship, it is the only way out of the mess we are in

Mark Naison
November 26, 2008