Guest post: Mark Provost Why the Rich Love High Unemployment
Guest post by Mark Provost
Why the Rich Love High Unemployment
via Truthout
Christina Romer, former member of President Obama’s Council of Economic Advisors, accuses the administration of “shamefully ignoring” the unemployed. Paul Krugman echoes her concerns, observing that Washington has lost interest in “the forgotten millions.” America’s unemployed have been ignored and forgotten, but they are far from superfluous. Over the last two years, out-of-work Americans have played a critical role in helping the richest one percent recover trillions in financial wealth.
Obama’s advisers often congratulate themselves for avoiding another Great Depression – an assertion not amenable to serious analysis or debate. A better way to evaluate their claims is to compare the US economy to other rich countries over the last few years.
On the basis of sustaining economic growth, the United States is doing better than nearly all advanced economies. From the first quarter of 2008 to the end of 2010, US gross domestic product (GDP) growthoutperformed every G-7 country except Canada.
But when it comes to jobs, US policymakers fall short of their rosy self-evaluations. Despite the second-highest economic growth, Paul Wiseman of the Associated Press (AP)reports:“the U.S. job market remains the group’s weakest. U.S. employment bottomed and started growing again a year ago, but there are still 5.4 percent fewer American jobs than in December 2007. That’s a much sharper drop than in any other G-7 country.” According to an important study by Andrew Sum and Joseph McLaughlin, the US boasted one of the lowest unemployment rates in the rich world before the housing crash – now, it’s the highest.[1]
The gap between economic growth and job creation reflects three separate but mutually reinforcing factors: US corporate governance, Obama’s economic policies and the deregulation of US labor markets.
Old economic models assume that companies merely react to external changes in demand – lacking independent agency or power. While executives must adapt to falling demand, they retain a fair amount of discretion in how they will respond and who will bear the brunt of the pain. Corporate culture and organization vary from country to country.
In the boardrooms of corporate America, profits aren’t everything – they are the only thing. A JPMorgan researchreportconcludes that the current corporate profit recovery is more dependent on falling unit-labor costs than during any previous expansion. At some level, corporate executives are aware that they are lowering workers’ living standards, but their decisions are neither coordinated nor intentionally harmful. Call it the “paradox of profitability.” Executives are acting in their own and their shareholders’ best interest: maximizing profit margins in the face of weak demand by extensive layoffs and pay cuts. But what has been good for every company’s income statement has been a disaster for working families and their communities.
Obama’s lopsided recovery also reflects lopsided government intervention. Apart from all the talk about jobs, the Obama administration never supported a concrete employment plan. The stimulus provided relief, but it was too small and did not focus on job creation.
The administration’s problem is not a question of economics, but a matter of values and priorities. In the first Great Depression, President Roosevelt created an alphabet soup of institutions – the Works Progress Administration (WPA), the Tennessee Valley Authority (TVA) and the Civilian Conservation Corps (CCC) – to directly relieve the unemployment problem, a crisis the private sector was unable and unwilling to solve. In the current crisis, banks were handed bottomless bowls of alphabet soup – the Troubled Asset Relief Program (TARP), the Public-Private Investment Program (PPIP) and the Term Asset-Backed Securities Loan Facility (TALF) – while politicians dithered over extending inadequate unemployment benefits.
The unemployment crisis has its origins in the housing crash, but the prior deregulation of the labor market made the fallout more severe. Like other changes to economic policy in recent decades, the deregulation of the labor market tilts the balance of power in favor of business and against workers. Unlike financial system reform, the deregulation of the labor market is not on President Obama’s agenda and has escaped much commentary.
Labor-market deregulation boils down to three things: weak unions, weak worker protection laws and weak overall employment. In addition to protecting wages and benefits, unions also protect jobs. Union contracts prevent management from indiscriminately firing workers and shifting the burden onto remaining employees. After decades of imposed decline, the United States currently has thefourth-lowest private sector union membershipin the Organization for Economic Cooperation and Development (OECD).
America’s low rate of union membership partly explains why unemployment rose so fast and, – thanks to hectic productivity growth – hiring has been so slow.
Proponents of labor-market flexibility argue that it’s easier for the private sector to create jobs when the transactional costs associated with hiring and firing are reduced. Perhaps fortunately, legal protections for American workers cannot get any lower: US labor laws make it the easiest place in the word to fire or replace employees,according to the OECD.
Another consequence of labor-market flexibility has been the shift from full-time jobs to temporary positions. In 2010,26 percent of all news jobs were temporary– compared with less than 11 percent in the early 1990’s recovery and just 7.1 percent in the early 2000’s.
The American model of high productivity and low pay has friends in high places. Former Obama adviser and General Motors (GM) car czarSteven Rattner arguesthat America’s unemployment crisis is a sign of strength:
Perversely, the nagging high jobless rate reflects two of the most promising attributes of the American economy: its flexibility and its productivity. Eliminating jobs – with all the wrenching human costs – raises productivity and, thereby, competitiveness.
Unusually, US productivity grew right through the recession; normally, companies can’t reduce costs fast enough to keep productivity from falling.
That kind of efficiency is perhaps our most precious economic asset. However tempting it may be, we need to resist tinkering with the labor market. Policy proposals aimed too directly at raising employment may well collaterally end up dragging on productivity.
Rattner comes dangerously close to articulating a full-unemployment policy. He suggests unemployed workers don’t merit the same massive government intervention that served GM and the banks so well. When Wall Street was on the ropes, both administrations sensibly argued, “doing nothing is not an option.” For the long-term unemployed, doing nothing appears to be Washington’s preferred policy.
The unemployment crisis has been a godsend for America’s superrich, who own the vast majority of financial assets – stocks, bonds, currency and commodities.
Persistent unemployment and weak unions have changed the American workforce into a buyers’ market – job seekers and workers are now “price takers” rather than “price makers.” Obama’s recovery shares with Reagan’s early years the distinction of being the only two post-war expansions where wage concessions have been the rule rather than the exception. The year 2009 marked the slowest wage growth on record, followed by the second slowest in 2010.[2]
America’s labor market depression propels asset price appreciation. In the last two years, US corporate profits and share prices rose at the fastest pace in history – and the fastest in the G-7. Considering the source of profits, the soaring stock market appears less a beacon of prosperity than a reliable proxy for America’s new misery index. Mark Whitehouse of The Wall Street JournaldescribesObama’s hamster wheel recovery:
From mid-2009 through the end of 2010, output per hour at U.S. nonfarm businesses rose 5.2% as companies found ways to squeeze more from their existing workers. But the lion’s share of that gain went to shareholders in the form of record profits, rather than to workers in the form of raises. Hourly wages, adjusted for inflation, rose only 0.3%, according to the Labor Department. In other words, companies shared only 6% of productivity gains with their workers. That compares to 58% since records began in 1947.
Workers’ wages and salaries represent roughly two-thirds of production costs and drive inflation. High inflation is a bondholders’ worst enemy because bonds are fixed-income securities. For example, if a bond yields a fixed five percent and inflation is running at four percent, the bond’s real return is reduced to one percent. High unemployment constrains labor costs and, thus, also functions as an anchor on inflation and inflation expectations – protecting bondholders’ real return and principal. Thanks to the absence of real wage growth and inflation over the last two years, bond funds have attracted record inflows andinvestors have profited immensely.
The Federal Reserve has played the leading role in sustaining the recovery, but monetary policies work indirectly and disproportionately favor the wealthy. Low interest rates have helped banks recapitalize, allowed businesses and households to refinance debt and provided Wall Street with a tsunami of liquidity – but its impact on employment and wage growth has been negligible.
CNBC’s Jim Cramerprovides insightinto the counterintuitive link between a rotten economy and soaring asset prices: “We are and have been in the longest ‘bad news is good news’ moment that I have ever come across in my 31 years of trading. That means the bad news keeps producing the low interest rates that make stocks, particularly stocks with decent dividend protection, more attractive than their fixed income alternatives.” In other words, the longer Ben Bernanke’s policies fail to lower unemployment, the longer Wall Street enjoys a free ride.
Out-of-work Americans deserve more than unemployment checks – they deserve dividends. The rich would never have recovered without them.
1. “The Massive Shedding of Jobs in America.” Andrew Sum and Joseph McLaughlin. Challenge, 2010, vol. 53, issue 6, pages 62-76.
2. David Wessel, Wall Street Journal, January 30, 2010.“Wage and Benefit Growth Hits Historic Low”; Chris Farrell, Bloomberg Businessweek, February 5, 2010.” US Wage Growth: The Downward Spiral.”
First read this over at Truthout then saw it on Naked Capitalism. Glad to see it is reaching a wider audience. Much needed commentary.
Mark,
Nice discussion of some of the problem, but I didn’t see any solutions in the bunch.
From what I read the bulk of the jobs saved by the Obama intervention was state government jobs, not private sector ones (except for the bank bailouts, Wall Street, and GM). The FDR era programs directly hired and worked people to build public works. Everything from the TVA to parks, road, damns, and bridges (all that shovel ready stuff). Can you really see Obama (heck any US Pres) standing up and saying that everyone getting a welfare check is going to work 40 hours a week doing manual labor like they did in the 30s? And live in government dorms like the workers did in the TVA and CCC projects. Can you really see this happening?
Next I’m not sure what unions are going to do to solve the problem of a business having 15 employees and only 10 employees worth of work. Business either get rid of 5 or go under and effectively get rid of all. Unions are not going to help you against the current global wage arbitrage in unskilled labor.(and with H1B visa’s now skilled labor). Unions are not going to help you when you have 10-15 million illegal’s working off the books for cash. Try getting a construction job in Texas – you must speak Spanish fluently and your competing against illegal alien labor. Unions get the best deals for their members in a tight labor market. We don’t have one, especially for unskilled labor.
(As an aside, what’s the difference between a undergraduate Harvard Philosophy grad and a just graduated high school senior? The high school senior won’t mess up your order at the drive through worrying about his $100,000 in debt!!!)
Also, I’m not sure how well the banks are recapitalized. Read CR or econospeak etc (on the right) and you will get the feeling that a lot of banks are holding underwater mortgages that are not ‘marked to market’ and basically fudging their balance sheets. But otherwise I agree – the money went to the banks.
Lastly “Out-of-work Americans deserve more than unemployment checks – they deserve dividends. The rich would never have recovered without them. “
I have no understanding what you mean here other than the rich made money off intelligent investing. Dividends from where? Are you asking for higher unemployment benefits?
Islam will change
“At some level, corporate executives are aware that they are lowering workers’ living standards, but their decisions are neither coordinated nor intentionally harmful.”
That sentence is self-contradictory.
“Obama’s lopsided recovery also reflects lopsided government intervention. Apart from all the talk about jobs, the Obama administration never supported a concrete employment plan. The stimulus provided relief, but it was too small and did not focus on job creation.”
Right. From what I have heard, the Obama stimulus was not designed for recovery, but to avoid disaster. As for not having a plan for employment, IIUC, Humphrey-Hawkins mandated such a plan, didn’t it?
I cannot make any sense from this:
“Can you really see Obama (heck any US Pres) standing up and saying that everyone getting a welfare check is going to work 40 hours a week doing manual labor like they did in the 30s?”
Why not ask if the 16% of the working age US population that is unemployed or under employed would do what you said about recipients of “welfare checks”?
When you answer that I will pick some more.
“A better way to evaluate their claims is to compare the US economy to other rich countries over the last few years.”
Why would that be? In fact, the author’s own argument belies this claim. He identifies 3 factors that would determine different labor market performance between the US and other wealthy countries. Only one of them is within the Obama administration’s control in the short term, and that only with the help of Congress. Since two of the three factors which Provost identifies as determining labor market performance are not within the administration’s short-term control, then how does labor market performance give us a “better way to evaluate their claims”” (Better than what, by the way? It’s not clear from what Provost is writing that there is another means of evaluation that is the worse way.)
“But when it comes to jobs, US policymakers fall short of their rosy self-evaluations.”
What rosy self-evaluation? Did the Obama administration actually promise a particular level of job growth from the trough? I suspect somewhere along the way, they did. Do we know that growth has fallen short of that sort of projection? (And don’t try that nonsense about Romer’s initial estimate of the peak in the jobless rate being wrong, so stimulus doesn’t work. Her estimate was wrong BEFORE the stimulus package began to work.)
This seems just another one of those tricky little writing exercises designed to imply more than it can honestly claim. A lot of the factoids offered along the way are probably true – falling unit labor costs seem very likely to be a major source of profit growth when other input costs are rising faster than the price of final goods – but only seem to support the premise of the article. If the premise is that Obama administration policies are to blame for weak employment growth – which is how the article began, after all – then why does the inability of Fed policy to help labor much belong in the article at all? Even the Fed is not to blame for the skew of benefits toward investors and financial firms rather than workers, so how can the White House be to blame for the effects of monetary policy?
I understand that there is sympathy for the premise of the article. I understand the article is written to have emptional appeal. It is, however, one of those pieces that sounds better than it is. The argument tucked inside the prose is sloppy.
ilsm,
That’s a good question. No one has asked them. I’m not sure FDR asked them either. He just said if you want to eat you need to work and then found public work projects to keep them busy. I’m not sure that would help the underemployed since they would still be under-employed doing this work.
BUt my point is can you imagine a large scale CCC type program where 10s of thousands of unemployed are sent out to do hard manual labor 40 hours a week and living in dorms/barreck style accomadations like they did in the 30s? Can you see Obama starting a program that would effectively put the unemployed into work conditions currently done by migrant farmer hands? That’s what FDR did.
I hope I clarified that some.
Islam will change
No.
Apologies for the sloppy prose. There are two arguments in the article.
First, high unemployment has been great for corporate America and the rich.
The second concerns the origins of America’s unemployment crisis.
I identify three factors which are often neglectedin popular narratives: US corporate executives obsession with short term profit targets, Obama’s policies, and labor market deregulation.
The stimulus was not designed to save or create jobs, although that was the effect.
Obama’s advisors opted for a ‘growth-centric’ stimulus instead of a massive ‘job-centric’ stimulus and that is what they got–comparatively decent growth and an unemployment disaster.
The Obama administration will not intervene in the labor market because that interferes with their primary goal—boosting business confidence, which has unfortunately become a national religion and keystone of US economic policy. Maybe I should have been more explicit in the article?
The use of the word ‘rich’ is troubling. If by rich we mean most corporations/businesses, then they do want to grow their business, and profits. If they grow enough then they will add jobs to create or meet that demand. At the same time, most business wants to be profitable. I work for a financial company (not one in any way involved in the housing or derivatives industry), and our management always keeps costs down, is very careful about controlling wages and adding people. This helped us because we have a very strong balance sheet, cash on that sheet, no debt, and run lean from an HR [perspective. These actions probably saved a lot of jobs, and left room for bonuses to all. We are trying hard to grow our business, and if we do that means more employees get added, and teh jobs can be very good. But if business stagnates, well you know the answer.
So I am leery of broad brushstrokes as presented here.
Now the quality, pay, and benefits of those jobs does get pretty complicated, and many businesses suck as employers – and many don’t. But I’d be careful what policies the Government implements from the perspective of unintended consequences. Below are two examples of WELL MEANING polices possibly putting jobs and capital at risk.
http://www.economist.com/node/18712862?story_id=18712862
http://www.economist.com/node/18713700
I do agree the Obama Stimulus was not well implemented.
Fact is we are going to be in a bad labor market for some years to come, because there are structural problems in three areas: 1) How states structured their budgets around an inflated housing market 2) Businesses in some major industries were badly managed (Finance, Auto, Construction) 3) Global competition and policy failures to make the US a premier destination to locate.
So to me, high unemployment means business is bad, and that is bad for busniess. Does warren Buffet have to worry? No he can retire this minute. Does Bill Gates? Nope. But I have a hard time believeing they are psyched by high unemployment. They both seem to be focused on growing their business by selling more stuff.
ilsm,
Yep I can’t imagine it either…
“What rosy self-evaluation? Did the Obama administration actually promise a particular level of job growth from the trough? I suspect somewhere along the way, they did. Do we know that growth has fallen short of that sort of projection?”
—“Well I’m here to tell you some time in the next couple of months we’re going to be creating between 250,000 jobs a month and 500,000 jobs a month.” —Vice President Biden, in April of 2010
Mark:
Hsssssssssss
Lets change this:
“America’s labor market depression propels asset price appreciation. In the last two years, US corporate profits and share prices rose at the fastest pace in history – and the fastest in the G-7. Considering the source of profits, the soaring stock market appears less a beacon of prosperity than a reliable proxy for America’s new misery index.”
to this:
“America’s labor market depression propels asset price appreciation. In the last two years and decade, US Financial corporate profits and share prices rose at the fastest pace in history – and the fastest in the G-7. Considering the source of profits, the soaring stock market appears less a beacon of prosperity than a reliable proxy for America’s new misery index.”
This:
“Workers’ wages and salaries represent roughly two-thirds of production costs and drive inflation.” is simply not true. Direct Labor in the cost of manufacturing a product is less than 10%. Even in the services industry, the cost of direct labor does not approach what you claim.
The unemployment rate was never a true indicator of unemployment once Particpation Rate began to decrease . . . and yes not even in 2007. Labor never returned to it heights after 2001 and manufacturing was decreasing rapidly sine th nineties as service took the main focus.
There you go again making this claim that “direct” labor cost account for under 10% of cost.
Note you are saying direct. That means if an auto producer buys the transmission for a new car from a parts supplier rather than building it itself the labor used in building that transmission does not count.
It is a stupid, stupid, stupid way to look at the world that has no basis in reality or in economic analysis.
Spencer:
“There you go again . . . ”
You sound like Reagan and we all know how wonderful he was for the economy and labor.
Why is it manufacturing people recognize the discussion and economists do not? Could it be, we do and economists do not? Whack your Labor dead horse if you must; but, it indeed has been minimized to where it is pretty much brought to a minimum in manufacturing.
So if I buy a steering wheel and a 7-bank of capacitive touch switches to add to that transmission and the molded steering wheel has 5% Direct Labor Cost (because one person runs 4 presses and the cycle time is measured in seconds), the transmission is 10% (because the operator splits his time between cells of CNC and another is watching the robot assemble multiples), and with the time to assemble 7-bank set of capacitive bank of switches its total direct labor is measured as 4% (because the parts are molded by similar machines but faster, the mosfets come from process manufactured wafers, and the bank of switches is assembled by an automat assembly and EOLT. So is the Direct Labor cost percentages cumulative? Not likely; but, the costs are and in in the end Labor will still be the smallest component of manufacturing with materials and overhead being 1 and 2 in cost. Of course you could believe Delphi’s Miller who claimed $75/hour for union labor . . . which was complete Bull Shit and even at that it still would be less than what this article implies..
The rule still applies to the completed auto. Material is #1, Overhead is #2, and Direct Labor is the smallest component. If you spent much time in manufacturing, you might recognize the argument the same as Drucker did, Ingersoll Engineers did, and others who have looked at the costs. Tell me how the transmission is built Spencer. I would like to know. Having consulted in the Catapiller plant for Transmission building, I can discuss how it comes together. Before you call me stupid, tell me how it is built Spencer . . . You and many of the people here do not have a clue and have never stepped away from academia. I respect your knowledge; but, your comments and the one in this article
“Workers’ wages and salaries represent roughly two-thirds of production costs and drive inflation.”
is strictly baloney. No one has believed this since the sixties an to state it now is just a demonstration of a lack of knowledge of manufacturing. If you wish to support that, go ahead . . .
That’s a good question. No one has asked them. I’m not sure FDR asked them either. He just said if you want to eat you need to work and then found public work projects to keep them busy. I’m not sure that would help the underemployed since they would still be under-employed doing this work.
FDR said that to 67 year old women?
Oh yeah, you are just lying.
Well, it looks like run75441 has killed the thread. The dignified *bleep* throwing monkeys leave the arena, heads held high. They will return to throw more *bleep* later today.