For most of the last century, the basic bargain
at the heart of the American economy was that employers paid their
workers enough to buy what American employers were selling.
That basic bargain created a virtuous cycle of higher living standards, more jobs, and better wages.
Back in 1914, Henry Ford announced he was paying workers on his Model
T assembly line $5 a day – three times what the typical factory
employee earned at the time.
The
Wall Street Journal termed his action “an economic crime.”
But Ford knew it was a cunning business move. The higher wage turned
Ford’s auto workers into customers who could afford to buy Model T’s. In
two years Ford’s profits more than doubled.
That was then. Now, Ford Motor Company is paying its new hires half what it paid new employees a few years ago.
The basic bargain is over – not only at Ford but all over the American economy.
New data from the Commerce Department shows employee pay is now down
to the smallest share of the economy since the government began
collecting wage and salary data in 1929.
Meanwhile, corporate profits now constitute the largest share of the economy since 1929.
1929, by the way, was the year of the Great Crash that ushered in the Great Depression.
In the years leading up to the Great Crash, most employers forgot
Henry Ford’s example. The wages of most American workers remained
stagnant. The gains of economic growth went mainly into corporate
profits and into the pockets of the very rich. American families
maintained their standard of living by going deeper into debt. In 1929
the debt bubble popped.
Sound familiar? It should. The same thing happened in the years leading up to the crash of 2008.
The latest data on corporate profits and wages show we haven’t
learned the essential lesson of the two big economic crashes of the last
seventy-five years: When the economy becomes too lopsided –
disproportionately benefitting corporate owners and top executives
rather than average workers – it tips over.
In other words, we’re in trouble because the basic bargain has been broken.
Yet incredibly, some politicians think the best way to restart the
nation’s job engine is to make corporations even more profitable and the
rich even richer – reducing corporate taxes; cutting back on
regulations protecting public health, worker safety, the environment,
and small investors; and slashing taxes on the very rich.
These same politicians think average workers should have even less
money in their pockets. They don’t want to extend the payroll tax cut or
unemployment benefits. And they want to make it harder for workers to
form unions.
These politicians have reality upside down.
Corporations don’t need more money. They have so much money right now
they don’t even know what to do with all of it. They’re even buying
back their own shares of stock. This is a bonanza for CEOs whose pay is
tied to stock prices and it increases the wealth of other shareholders.
But it doesn’t create a single new job and it doesn’t raise the wages of
a single employee.
Nor do the wealthiest Americans need more money. The top 1 percent is
already taking in more than 20 percent of total income — the highest
since the 1920s.
American businesses, including small-business owners, have no
incentive to create new jobs because consumers (whose spending accounts
for about 70 percent of the American economy) aren’t spending enough.
Consumers’ after-tax incomes dropped in the second and third quarters of
the year, the first back-to-back drops since 2009.
The recent small pickup in consumer spending has come out of their
savings. Obviously this can’t continue, and corporations know it.
Consumer savings are already at their lowest level in four years.
Get it? Corporate profits are up right now largely because pay is
down and companies aren’t hiring. But this is a losing game even for
corporations over the long term. Without enough American consumers,
their profitable days are numbered.
After all, there’s a limit to how much profit they can get out of
cutting American payrolls or even selling abroad. European consumers are
in no mood to buy. And most Asian economies, including China, are
slowing.
We’re in a vicious cycle. The only way out of it is to put more money
into the pockets of average Americans. That means extending the payroll
tax cut. And extending unemployment benefits.
Don’t stop there. Create a WPA to get the long-term unemployed back
to work. And a Civilian Conservation Corp to create jobs for young
people.
Hire teachers for classrooms now overcrowded, and pay them enough to
attract people who are talented as well as dedicated. Rebuild our
pot-holed highways. Create a world-class infrastructure.
Pay for this by hiking taxes on millionaires.
A basic bargain was once at the heart of the American economy. It
recognized that average workers are also consumers and that their
paychecks keep the economy going.
We can’t have a healthy economy until that bargain is restored.
Robert Reich is Chancellor's Professor of Public Policy at the University of California at Berkeley. He writes a blog at www.robertreich.org. His most recent book is Aftershock.
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