Tuesday, June 12, 2012

A Single Chart Illustrates the Entire Problem with the U. S. Economy – Manufacturing Productivity vs Real Wages Shows Alarming Trend

Here is What Has Happened – and Why

For most people the social science of economics is difficult.  Economics uses a lot of math, a lot of graphs and a lot of arcane, ridiculously sounding terms, like ‘Consumption Function’.  But a recent story in the Wall Street Journal and the accompanying chart explains everything.  Here is the gist of things.

The celebrated revival of U.S. manufacturing employment has been accompanied by a less-lauded fact: Wages for many manufacturing workers aren't keeping up with inflation.

The wage lag is a key factor contributing to the rebounding competitiveness of U.S. industry. A recent uptick in factory employment and the return of some production to U.S. shores from abroad both added jobs that probably otherwise wouldn't exist. But sluggish wages also are squeezing workers' incomes and spending. That, in turn, hurts retailers who target middle-income earners and restrains the vigor of the economic recovery.

And here is the devastating chart that goes with the verbiage.

So what does all this mean?  In simple terms it is this, the productivity of the American worker has risen substantially, but almost none of this increase in productivity has been returned to American workers in the form of higher real wages.  When something like this happens economics would predict the following results.

  1. The increase in productivity would tend to increase the profitability of the manufacturing sector.

  1. The lack of increase in real wages would also mean that corporate profits would increase substantially.

  1. The lack of increase in worker income would also mean a lack of increase in demand for goods and services.

  1. The lack of increased demand for goods and services would reduce business investment, have a negative effect on employment and generally cause the economy to experience very low growth.

In summary what the data suggests is that the U. S. economy would be producing huge profits for companies and low income growth and low employment growth and ultimately low economic growth.  This is exactly what is happening.

Supply side economics or what is known as the Fictional Component of Economics would say all these huge corporate profits will result in re-investment in the economy, and that if corporations just had more money from lower taxes there would be even more investment and job growth.  Such idiocy neglects the fact that (1) business invests only when there is demand for the products and (2) corporations are awash with cash and (3) interest rates are at record lows so companies can borrow money to invest at extremely favorable terms.

What is happening with all those profits?  They are sitting on the balance sheet of companies, or are being used to buy back stock.  Why aren’t they being used for investment?  Because there is no increase in total demand for goods and services because consumers do not have the growth in income, as shown in the chart.  The huge growth in productivity without sharing at least some of that benefit with workers will defeat an economy.  That is why the U. S. is losing.

What will Republican policy do?  Easy answer, they will make things worse. 


  1. It all seems so simple. So how can the WSJ find so many credentialed economists to write the exact opposite in its OpEd Page?

  2. It is simple, isn't it. If your customers don't have any money they won't buy your products.