Yves Smith: Stagnant and low wages must be addressed for real economic growth - December 26, 2010
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Yves Smith has written the popular and trenchant financial blog "Naked Capitalism" since 2006.
Yves has spent more than 25 years in the financial services industry and currently heads Aurora Advisors, a New York-based management consulting firm specializing in corporate finance advisory and financial services. Prior experience includes Goldman Sachs (in corporate finance), McKinsey & Co., and Sumitomo Bank (as head of mergers and acquisitions). Yves has written for publications in the United States and Australia, including The New York Times, The Christian Science Monitor, Slate, The Conference Board Review, Institutional Investor, The Daily Deal and the Australian Financial Review. Yves is a graduate of Harvard College and Harvard Business School.
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in New York City. Joining us again now is Yves Smith. She's the founder of NakedCapitalism.com, and she's the author of ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism. Thanks for joining us. YVES SMITH, AUTHOR: Paul, thanks so much.JAY: So in Washington this debate between austerity versus stimulus, although right now everybody seems to be on the cut-the-deficit bandwagon, there's a--some people are saying we need more stimulus. Talk about this back-and-forth, this debate. What's your view of it?SMITH: Well, on the one hand, right now the evidence is really clear that more stimulus is warranted, even though stimulus has managed to become a bad word in America. And to sort of back up a little bit, that's because stimulus has been abused. And we have people who are called Keynesians that Keynes would have been unhappy with a lot of their prescriptions, and that Keynes actually did believe in running more or less a balanced budget over time. He actually believed in having surpluses when the economy was robust and in stimulating when the economy was weak. Now, interestingly, we've gotten ourselves in a position where stimulus has been applied even in times when the economy was nominally strong, which would suggest the economy maybe wasn't really in such good shape in good times after all. You know, now people are talking about issues like structural unemployment, which is really a code word for maybe we should accept high unemployment all the time, instead of saying what's really wrong with America's competitive model and have we backed ourselves in a bit of a corner.JAY: So let's talk about the limits, what some people have called the limits of Keynesianism--or maybe it's the limits of the people who are now espousing Keynesianism. There is a point where you--if--let's say you do have stimulus--and right now it seems completely off the table, given where politics in Washington is right now, in terms of more stimulus programs. But say even you do have more stimulus. Then what? In the sense that the underlying problem of the lack of demand, how does that change? Because once the stimulus dollars are spent, even if it generates a certain amount of economic activity, what's that underlying reason why there needed to be so much stimulus in the first place?SMITH: Well, we've gotten into an economic model that--some people date it to the 1970s, other people date it to the 1980s--where, historically, policymakers were concerned with average worker wages. That was the--you know, jobs and average worker wages, and politicians knew that that was what would get them reelected. And what happened in the period of the stagflation of the '70s is that people began groping for different economic models. And that was what led what's called the Chicago school, also called neoclassical economics, to really come to the fore, because they'd been in the wilderness and people were really looking for, you know, any new ideas. But what happened is we then went to a model where everything that--anything that came out of, quote, "free markets", even though free markets is--conveniently means something different, depending what context it's in. But we have this kind of nebulous, flexible, free markets concept. But the idea is that anything that happens out of market activity is deemed to be virtuous, so if we go to less regulation, which--corporate interests took this free markets mantra and used it to justify deregulation--if we as a result of deregulated activity suddenly have a big trade deficit, well, we shouldn't worry: that's really the result of free markets, and somehow it will correct itselves. Well, in the old economic model, sustained trade deficit would have been recognized as, gee, US demand is supporting foreign workers, there is something wrong with this picture, and there would have been a big debate around it. Now, who knows what the remedies would've been, but that problem would not have [been] allowed to go very far. And yet it's a fact that we've allowed that problem to persist and get larger, which is why, then, we've had so much debt accumulation in this economy: when you run a really big trade deficit, that basically--basically it's almost like going to the bank, going and getting credit from your local grocery store. You wind up importing capital, and that's usually in the form of borrowing. In theory, they could also buy all our real estate, the foreigners, but they have tended instead to buy US debt. And what happened over this, again, period starting roughly in the early 1980s is you see consumers loading up on debt. You see it in the '80s bumping up a little bit. And then we had a recession at the end of the '80s, and so it drops, but it still is up on a trendline basis. Then in the 1990s it goes up a little more. Nineteen ninety-nine, it shoots to the moon. You suddenly see this rapid acceleration in consumer debt. Consumer debt is not economically productive. You know, it's one thing if you're a business, or even if you're the government--you know, the government's bad name to the contrary, in fact, for example, government investment in technology spending has been found to have a 30 to 40 percent return on investment. You know, well-targeted government investment can even be profitable. But consumer spending is consumer spending. I mean, buying more house does not make the economy more productive, and yet that's basically what happened is, to substitute for the fact that average workers were not getting more money, everybody had a higher standard of living by this, you know, basically 30-year pattern of loading up on more debt.JAY: So if the underlying problem is lack of real wages, and as we--I think it's mostly accepted, productivity has certainly gone up in the last 15, 20 years. Some people, I think, have said it's doubled, I think, over the last couple of decades, where wages have remained mostly stagnant. Then the issue of stimulus, while it's better than deep depression, doesn't deal with that underlying problem.SMITH: That's right. The effective stimulus is not getting enough to the right people. And it's very--that shift you're mentioning is also very dramatic. Basically, in the last decade, decade and a half, you've seen a huge split between the wage share of GDP growth and the profit share. It used to be, historically, in every expansion, you would see most of the growth in GDP going to wages, either in the form of wage increases or just hiring more people. Typically, for every dollar of GDP growth, you would see between $0.58 and--it was usually--I think $0.60 or $0.65 was the peak--the average was in around $0.62 of every dollar of GDP growth would go to worker wages in some form. In the last upturn that we had, the one prior to the crisis, the wage share was only $0.27. It was off-the-charts low.JAY: So what are some structural changes that could be made? If what's good for the overall economy, the overall society, is that wages go up, how does that get achieved?SMITH: One way would be, for example, we've got a tremendous amount of tax subsidies for activities that are really very questionable. One that has been fought (and the battle has been lost, which is very disappointing) is that, for example, the people who run private equity funds and hedge funds, by any standards, what they do is labor income. You know, these guys--but these guys can--the way they can structure their funds is so that all the money they make from their work is taxed at capital gains rates. Why should guys who are rich and that attach themselves to capital but are making that money via working get the benefits of a capital gains rate? That's just an offense to common sense. Similarly, you know, we have the fact that we had the Bush tax cuts, which also gave--you know, for example, Warren Buffett complained about the Bush tax cuts. He said, my tax rate is now lower than my secretary's. There's something wrong with this picture. You had other breaks for capital as opposed to labor, and look what we got out of it. We got--you know, the economic results of the Bush tax cut were that we got--I mean, not that you can pin it solely on the Bush tax cuts, but certainly it was associated with a set of economic policies that produced a bubble and a bust, that, again, was not economically positive.JAY: And doesn't unemployment insurance itself help to raise wages? I was talking to a guy who's a foreman in a grinder manufacturing place in Massachusetts. They have, like, 3,000 employees. And they had 100 jobs going, they were trying to hire 100 more people, and they could only fill about 50 of them.SMITH: Right.JAY: And I said, well, how come? He said, well, a lot of people we had previously laid off are now on unemployment insurance, and they don't want to come back, 'cause they can sit at home on unemployment insurance. And I said, well, how much are the jobs paying? I think it was, like, about $11 or $11 and change. It was only about--like, if--maybe $2.50 to $3.00 more than the unemployment insurance. So you figure that, well, the person now has to pay for gas, has to get to work, back, take the bus, all the other costs. I said to him, well, then, why don't you raise the wage? And then there won't be such--if there's a bigger spread between unemployment insurance and your wage, you'll be able to hire people.SMITH: Right. One--well, but that points to a somewhat different issue. I mean, you're right, but there has been--there have been a--.JAY: [inaudible] isn't that a good thing that it would force [inaudible] SMITH: Well, exactly, and that's one way of addressing it. I mean, the fact is--but this is one thing that's also happened in this economy, that people have gotten the idea that, gee, the economy is so weak, therefore we should be able to pay people even lower wages. And when--in fact, if people have skills, people with skills are basically going to say, no, I'm not going to be exploited. You know. And a lot of people in their jobs have a sense of sort of where their job fits into the total profits of the company, you know, in terms of if I do this much work and the final product cost is X and I know they're not selling the product for any less and I know they're still selling a lot of product, why should it come out of my hide?JAY: Well, they've [inaudible] created public opinion against people wanting higher wages.SMITH: Yes.JAY: Like, you're being greedy, so you're causing the economic crisis, 'cause you want higher wages.SMITH: As opposed to it's the managements, which have now--I mean, it's become accepted in this country that labor has no bargaining power. And you see it even in big corporations. I mean, everybody I know who still has a job at a large company, they're now doing what--1.5 to 2 jobs, what would have been 1.5 to 2 jobs 10 years ago.JAY: And they're getting major manufacturers buying into this GM model of two-tier wages, where the new workers are going to start at half the wage or even less than half the wage of what had been achieved by older workers. Some people are saying the only real way to deal with both the wage side and the unemployment side, because more people working does force wages up, is some kind of direct government jobs program, where they simply--the government goes and hires people for infrastructure projects and such. What's your view of that?SMITH: I mean, that's one possibility. I think there's a lot of resistance in the country because we spent 20 years breeding for not very competent government. You know, the people who are very talented tend to go into government only to get their ticket punched and then get a more lucrative private sector job. There are countries all around the world that do a very competent job of running good public sector projects. And in fact, the US, you know, we built the Hoover Dam. We electrified the Tennessee Valley. You know, those were extremely productive projects. And with the US having very bad infrastructure right now, you know, again, by a global standard, there are plenty of opportunities for well-targeted expenditure. It will be very profitable to the economy. Another way for the government to go about it would be to fund more basic research. I mean, for example, people in the US somehow have blocked out of their mind the fact that we have a very successful pharmaceuticals industry is because we have a National Institutes of Health that funds a tremendous amount of basic research into medicine and health. And similarly, in Australia they have a group called the Commonwealth Scientific and Industrial Research Organisation, and they've picked ten industry sectors that they regard as a priority. And they have what basically amounts to a big government think tank to both do some basic research but also what amounts to applied research to help get ideas that will make their industries more competitive. You know, we like to pretend in America that we don't do industrial policy, which is crazy. I mean, we have a very heavily subsidized defense industry. As I mentioned, we have subsidized health care. We have--.JAY: Agriculture.SMITH: Agriculture. You know. But we can't talk about doing industrial policy intelligently. Instead, we pretend it doesn't exist and do it badly.JAY: And everything's mostly now about the short-term buck.SMITH: Correct.JAY: Thanks for joining us.SMITH: Thank you.JAY: Thank you for joining us on The Real News Network. Talking about short-term bucks, we have a donate button here and a donate button there, and we need some short-term bucks if we're going to keep doing this work. Thank you.
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