inflation benefits any entity with a debt/equity ratio above 1.0. How many poor do you know who have less debt than equity?
bobcor, i think you are missing something. and that "something" is that despite inflation in various things that poor people buy, there has been zero inflation in their wages. the fact that this is the most pathetic postwar recovery in terms of real wage gains is well documented (CI has written about 200 pages on it). for poor people, taking on more debt, even at relatively low interest rates (which are not necessarily available to those relying on sub-prime loans in any case), is not a bright strategy when wage growth does not exist.
poor people have not been the beneficiaries of the plutocratic Republican landgrab. just check the YoY results of elitist stores like Saks or Neiman Marcus compared to WMT or Target.
here's a timely article from billmon on the subject:
Building a Bridge to the 19th Century
That well-known communist rag, the Wall Street Journal, took a long look yesterday at the underlying fundamentals of Bushonomics (like Reaganomics, but without the compassion). We'll skip the obligatory anecdotal lead, and go right to the nut graph:
With the U.S. economy expanding and the labor market improving, it isn't clear how well the Democrats' message of a divided America will resonate with voters this fall. But many economists believe the economic recovery has indeed taken two tracks...
Upper-income families, who pay the most in taxes and reaped the largest gains from the tax cuts President Bush championed, drove a surge of consumer spending a year ago that helped to rev up the recovery. Wealthier households also have been big beneficiaries of the stronger stock market, higher corporate profits, bigger dividend payments and the boom in housing.
Lower and middle-income households have benefited from some of these trends, but not nearly as much. For them paychecks and day-to-day living expenses have a much bigger effect. Many have been squeezed, with wages under pressure and with gasoline and food prices higher. The resulting two-tier recovery is showing up in vivid detail in the way Americans are spending their money.
The story goes on to describe the disparity between sales of high-end designer jewelry, luxury cars and lakeside hotel suites (booming) and the kind of stuff that most of us buy at Wal-Mart or Target (stagnant). And it quotes an economist from J.P. Morgan Chase - another notoriously left-leaning, Bush-hating institution - in support of its "Two Americas" thesis:
"To date, the [recovery's] primary beneficiaries have been upper-income households," concludes Dean Maki, a J.P. Morgan Chase (and former Federal Reserve) economist who has studied the ways that changes in wealth affect spending. In research he sent to clients this month, Mr. Maki said, "Two of the main factors supporting spending over the past year, tax cuts and increases in [stock] wealth, have sharply benefited upper income households relative to others."
Clearly, what we have here is a rampant outbreak of liberal class warfare - a vicious smear (no doubt inspired by Michael Moore) aimed at convincing the American people the Bush-Cheney administration cares more about fattening the already-obese bank accounts of the ultra-wealthy than it does about reversing the downward trend in the purchasing power of the vast American middle class.
(Not to mention the poor. But, since the Democrats show no particular inclination to wage class warfare on their behalf, we'll leave them out of this. Suffice it to say that if the middle class is being squeezed, the poor are being turned into pressed lunch meat.)
It's funny to see the Journal suddenly decide that the "Two Americas" merits front-page coverage - much less an implicit admission that the growing gap between rich and not rich is an economic problem in and of itself. Last year, when the paper noted the same trend, it was with a completely neutral sigh of relief that the "recovery" was finally on track.
If you've been reading Whiskey Bar, you know I've been banging that particular drum - including the falling real wages story - for a while now. The mainstream press, on the other hand, has been predictably reluctant to examine the implications - and in the case of the Washington Post's editorial page, downright obtuse about it.
But over the past week or so, inequality suddenly has emerged as the economic story de jour in the mainstream press - thanks, I think, to the convergence of politics (Kerry puts the "Two Americas" candidate on the ticket) and economics (Labor Department reports that real wages - i.e. adjusted for inflation - declined in June for the second month in a row.) According to the Economic Policy Institute, real hourly and real weekly wages have both fallen in six of the last seven months, and are now lower than they were in November 2001, at the tail end of the last recession. While it's not uncommon for real wages to decline in the early stages of a recovery (in part because hiring tends to lag the upturn in production), for workers to be this far behind this far along in an economic expansion is unprecedented, at least by modern post-World War II standards.
But of course, modern standards might not be the right measuring stick, given that the entire thrust of the last 20 years of economic history has been to push the U.S. economy back towards its pre-New Deal state, in which deflation - and the downward pressure it placed on wages - was a generally accepted economic fact of life.
In "Old Deal" America, there was no expectation that wage increases would stay a comfortable 2 or 3 percentage points ahead of inflation, year after year - just the hope that they would gradually increase, or at least not drop as much as prices did, thus allowing for a modest improvement in working class lving standards over time.
Even during the Roaring '20s - the biggest peacetime boom of the 20th century - cash wages rose just 14%, or an average 1.3% per year. Prices, however, fell almost 9% over the decade, turning that 14% increase in cash wages into a real pay rise of roughly 25%. By contrast, during the 1950s (the sweet spot of New Deal economics) real wages rose almost 30%, despite steady, if moderate, inflation.
The point, of course, is that wages can be changed either through increases or reductions in cash pay, increases or reduction in prices, or some combination of the two. And the nature of that mix can have economic and (even more so) political consequences that go beyond the change in real wages they produce.
As we've alreay seen, in Old Deal America, improvements in living standards were as likely to come through reductions in prices as increases in wages. But this deflationary bias was inherently stressful, both economically (falling prices are a mortal threat to profit margins) and psychologically (to keep profits from getting whacked, workers most accept frequent pay cuts, without any sure knowledge that the general decline in prices will make them whole.)
Old Deal America also didn't share the modern assumption that a rising tide would lift all boats. It tolerated - even demanded - extremes of economic inequality that would make Rush Limbaugh or Paul Gigot blush. And not just between income groups, but between black and white, southern and northern, rrban and rural.
That's one reason why labor relations in Old Deal America tended towards violence - massive strikes, company goons, army strikebreakers, scabs shipped en masse from the Deep South or the slums of Europe, etc. And why economic issues tended to stoke the kind of populist passions that these days are more commonly reserved for abortion and gay marriage.
New Deal America, on the other hand, was explicitly designed to be inflationary. Prices almost always rose, but wages usually rose even faster - to the point where "X plus inflation" because the standard framework for collective bargaining, government spending and consumer expectations. Rising prices fattened (or at least appeared to fatten) corporate profit margins, and rising cash wages gave workers a sense of well being, even though part of those gains were being silently eroded away by inflation.
By the '70s, of course, that system was beginning to break down, as wages fell further and further behind inflation, despite some fairly huge increases in nominal pay. Politics turned angry again - although, since the immediate struggle was between workers and the Consumer Price Index (rather than workers and capitalists) the conflict took a right-wing spin, got mixed up with the racial and cultural resentments left over from the various '60s revolutions, and produced the Reagan revolution.
The system, however, endured - despite Reaganomics and the brutal disinflationary squeeze of the early 1980s. Inflation may have been tamed, but it not eliminated, and quietly kept chipping away at real wages, which fell another 6% during the decade.
All told, real wages dropped more than 20% between 1972 and 1992. I've often wondered what the political fallout would have been if that same decline had been administered the old-fashioned way - through direct pay cuts by employers instead of the gradual, indirect erosion of inflation. Who knows? Instead of Ronald Reagan, we might have gotten an American Lenin.
Which brings us back to our current economic and political climate. Inflation is still the proxy for direct pay cuts - the average cash wage has actually risen 6% since the end of the last recession, and almost 2% over the past year. The CPI, however, swallowed those gains whole, and then some.
But the brave new world of globalization - and the disinflationary, if not deflationary pressures it has created - is making the old New Deal model of wage adjustment increasingly hard to maintain. As cash wage growth falls close to zero, even minor upticks in inflation (like the one we've seen over the past year) translate into painful, and highly visible, pay cuts. The veil - what economists call the "money illusion" - that once cloaked the wage-setting process has become very thin indeed.
In other words, the economic structure (which is to say, the social structure) of Old Deal America has been at least partially recreated. But that means workers and employers are once again confronting each other directly across the table. If wages need to be frozen, or cut, to keep them in line with the global competitive realities, or to meet Wall Street's relentless demands for earning growth - employers will have to do it. Inflation isn't going to do the job for them. Conversely, if workers want a raise, they're going to have to fight for it. The New Deal social convention of "X plus inflation" won't do it for them.
This is the economic reality we've been living with since at least the early '90s - although the bubble years temporarily obscured it and the post-9/11 years temporarily distracted everyone's attention. It's what the world the supply siders and the McKinley conservatives have been struggling to create (or I should say recreate) since the early days of the Reagan revolution.
The trade off for returning to the Old Deal, we've been told, will be greater economic efficiency and faster growth. But that still leaves the hoary Old Deal question of who benefits most from that trade off. It's a question that will become even more urgent if the promised faster growth isn't fast enough to satisfy that vast American middle class I mentioned earlier.
More to the point, growth - no matter how fast - may not deliver the kind of social and political peace it did during the New Deal era, not if the process of slicing the economic pie is going to be returned to the workplace - the original cockpit of the class struggle.
Bushonomics hasn't so much created the problem as aggravated it. The underlying trends were all well entrenched when Bush took office, and are driven more by the incremental changes since the '70s - declining union strength, increased global trade, disinflationary monetary policy, etc.
But by using fiscal policy (i.e. tax cuts) to further skew income distribution towards the tip of the economic pyramid - at a time when real wage growth has been particularly stagnant - Bush has given the process another shove forward. If nothing else, he's generated an economic expansion with some definite 19th century qualities to it - luxury above, relative austerity below.
It's possible the enormous rise in American living standards since the Old Deal days will ameliorate some of the social friction. The baseline of American prosperity may be high enough now in absolute terms that politics in the Restored Old Deal era will remain primarily a game of manipulating cultural "values" and tribal loyalties - instead of defending class interests or redistributing income.
Certainly, there's no indication that inequality and the disinflationary squeeze are about to generate a major partisan realignment - which may be a credit to the Republican skill at tribal manipulation, a lingering after-effect of 9/11, or just a sign the Democrats haven't given anyone much of an incentive to switch sides (other than Nader, I mean).
But I do think there's a slowly rising undercurrent of economic stress and popular resentment - certainly among Democrats and increasingly among independent voters. New Deal economics may be dead, but New Deal attitudes still linger. Even the Republicans seem to be picking up on it, although their main response so far has been to try to whip the tribal faithful into an even greater frenzy to compensate for Bush's economic vulnerabilities.
The populist backlash may not be as strong this year as the angry tide that washed out Daddy Bush (tribal loyalities have hardened tremendously since then, and the Democrats have become even less credible as the party of the little guy.) But it might be strong enough to push Bush Jr. out of the White House - particularly if the economic deceleration that began last month continues into the fall.
That, of course, would leave Kerry and the Democrats with the enormously difficult task of managing expectations for change - expectations which they may not be able to satisfy without challenging the return to Old Deal economics. On the other hand, such a challenge could lead, in effect, to a capital strike, another recession, or worse.
Clinton, with his almost infinite supply of luck, was able to finesse the issue, or sidestep it, thanks to the stock market bubble, the Fed's monetary forebearance and an almost accidental spike in real wages during his last term.
Even if he wins, I doubt Kerry will be so fortunate. The New Deal, unlike the old one, can't be recreated - not without a crisis, the kind that would do more harm than good. But managing the restored Old Deal may not be possible with the policy tools at hand. And building a newer deal, one that reconciles the benefits of globalization with the social problems it creates, doesn't seem to be on Kerry's agenda, or anybody else's.
Maybe it's just a bridge too far.
[view the original article for numerous hyperlinks]
billmon.org |
