Henry C. K. Liu of the Asia Times: It's a Global Wage Crisis

H/t to Bigchin who sent me a link to an Asia Times column by Henry C. K. Liu:

"the Fed's new money has not been going to consumers in the form of full employment with rising wages to restore fallen demand, but instead is going only to debt-infested distressed institutions to allow them to deleverage from toxic debt. Thus deflation in the equity market (falling share prices) has been cushioned by newly issued money, while aggregate wage income continues to fall to further reduce aggregate demand.

Central bankers are savvy enough to know that ... [t]o bind money to wealth, ... [t]he solution then is to make the working poor pay for the pain of inflation by giving the rich a bigger share of the monetized wealth created via inflation, so that the loss of purchasing power from inflation is mostly borne by the low-wage working poor and not by the owners of capital

....[T]he basic problem of the global economy for the past three decades [has been l]ow wages even in boom times [that] have landed the world in its current sorry state of overcapacity masked by unsustainable demand created by a debt bubble that finally imploded in July 2007....

All the stimulus spending by all governments perpetuates this
dysfunctionality. There will be no recovery from this dysfunctional financial system. Only reform toward full employment with rising wages will save this severely impaired economy.

The entire article is well worth your reading. Liu's analysis summarizes the root of the global economic crisis in a nutshell. As I've written, there can be No Long-term Recovery without real Wage Growth. The massive injections by the Fed and the Treasury are stimulative, but they cannot determine where the liquidity ultimately winds up. For example, who knows whether TARP money has found its way via various back doors into commodity speculation -- thereby directly profiting banks/speculators while impoverishing the middle/working class taxpayers who forked over the money and will be expected to pay back the bondholders for the new national debt. I suspect the answer is more likely in the affirmative than not. Thus, the huge financial bailouts only further enrich entrenched financial wealth at the expense of the average worker -- even if the bailouts work.

Liu proposes that "the cost of wage increases be deductible from corporate income tax and make the savings from layoffs taxable as corporate income." Unfortunately, I suspect that corporate tax lawyers would be able to circumvent such restrictions fairly easily ("Oh, that income wasn't from layoffs, it was from, erm, extra unused office space"), but at this point, almost anything is worth a try.

It is both sad and outrageous that two years into this crisis, and still addressing the crisis of consumer income and demand is not even being considered. According to Satyajit Das, that is no accident:

Mancur Olson, the American economist, in his books (The Logic of Collective Action and The Rise and Decline of Nations), speculated that small distributional coalitions tend to form over time in developed nations and influence policies in their favor through intensive, well funded lobbying. The policies result in benefits for the coalitions and its members but large costs borne by the rest of population. Over time, the incentive structure means that more distributional coalitions accumulate burdening and ultimately paralysing the economic system causing inevitable and irretrievable economic decline.

Ultimately there must be a real political power realignment. Policy makers not just in the US, but around the globe need to learn that there will be no meaningful. lasting recovery unless there is real wage growth.



The level of big money/lobbying in Washington

makes the likelihood that things will really change extremely difficult. Look at how difficult it is just to raise the minimum wage.

More on small distributional coalitions

Ailing, Banks Still Field Strong Lobby at Capitol

As Congressional Democrats and the White House crow about multiple victories over the financial industry, including new rules for credit card issuers, banks are quietly savoring an even bigger victory of their own.

The defeat of the bankruptcy proposal is a testament to the enduring influence of banks, even as the industry struggles financially and suffers from its role in the economic crisis.

It also shows that in the coming legislative battles that will shape the future of the economy, the financial industry — through a powerful and well-financed lobbying force — may have a far stronger hand to play than might seem evident.

I had read "at" Liu in the past and found

his dense thoughts to be somewhat over my head. This essay is terse by comparison and very accessible to my tiny mind!
Thanks for the nod, NDd.

I think Olson is right and am reminded, tangentially thinking, of JK Galbraith's argument in "The Great Crash, 1929" in the sense that the "small distributional coalitions" represent the concentrated wealth of the wacko speculative investors JKG writes of, and lobbies for the legislation (especially de-regulatory laws) that allows that concentrated wealth to do stupid, destructive things.

No one seems to be interested in Galbraith's take on the Great Crash these days and yet I think it's scary when one compares his thesis with today. Everyone says this is a "debt" crisis brought on by too much credit, but the same amount of credit had been available at other times in history, the difference is the destructive way (speculation/leverage) in which the abundant credit was used by an investor class of concentrated wealth (and power), coupled to that other "common denominator" of all speculative bubbles: that notion that one can become rich without work.

One might even argue that "becoming rich without work" became the basis of our entire economy. Manufacturting declined and was replaced with money managers making easy (and obscene) profits by moving paper that was never worth what anyone said in the first place...

Sorry, I started to go off there... did that makes sense?


debt + deflation = lethal

A lot of credit/debt in an inflationary environment might lead to a nasty correction, but debt is almost always manageable during inflationary times.

When there is a lot of debt in a time where deflation is a real danger, that is when you can get the lethal debt/deflation trap that Irving Fisher used to describe the Great Depression, and given declining household wealth, including houses and financial assets, that's where we are again today.

It's probably not coincidental that both occurred when the working/middle classes were beat to a tar by the financiers.

Now see? That's a great point

that I'd never really focused on and wouldn't have without your important influence!... "debt" as it is effected by the 2 'flations. All debt is not equal.

Which brings me to another conundrum to consider. The Fed/Treasury combo would clearly like to see some inflation 'cause deflation is the most disastrous scenario and must be avoided and yet they speak of a strong dollar. Doesn't the dollar have to fall for inflation to kick in?

Fall, yes, but as to what?

Inflation is dollar falling against "stuff."
The dollar does not have to fall as to other currencies for inflation to occur.

In fact, if the US works through its imbalances before other areas, viz., Europe, do, then the dollar could rise against other currencies while still falling against "stuff."

Ignoring history - or diabolical design?

Excellent points, bigchin, excellent points.

Securitization first came about in the 1920s, thus immediately preceding the Great Depression.

Securitization returned in the '70s and '80s, with exponential growth in the past eight years with the concentrated growth in the securitization of consumer debt, commodities, and virtually every form of credit derivative (numbering in the high hundreds).

Thusly, all your points: mega-leverage/speculation/resultant collapse - show the connection between those who choose to ignore history, create super-concentration of wealth, and destroy the economy.

Or, are they choosing to in actuality repeat history?

And, regarding the purchase of congress.

Putting the question to music

you know where this is going

on Sunday. They are clearly working to be our personal house band.