Conspiracy of Silence: Wage Collapse Caused Crisis

If the lines had continued to track closely together as they did prior to the 1970s, thewould be more than $19 an hour.
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Every day, there is another example of the conspiracy of silence that pervades the traditional media's description of the current economic crisis. Sure, de-regulation, greed and pure stupidity has a lot to do with it. But, in truth, the underlying reason for the collapse has been a persistent war on the wages of American workers. Call it -- egads -- class warfare.

What is astonishing, and aggravating, is that much of the traditional media continues to point the finger at workers -- those wild-spending people who just bought all those yachts, fur coats and mansions in far-away countries. And, now, shame on them, those wild-spending workers are doing something awful -- they are saving money.

This morning brings another example, courtesy of The Wall Street Journal (subscription):

Rick and Noreen Capp recently reduced their credit-card debt, opened a savings account and stopped taking their two children to restaurants. Jessica and Alan Muir have started buying children's clothes at steep markdowns, splitting bulk-food purchases with other families and gathering their firewood instead of buying it for $200 a cord.

As layoffs and store closures grip Boise, these two local families hope their newfound frugality will see them through the economic downturn. But this same thriftiness, embraced by families across the U.S., is also a major reason the downturn may not soon end. Americans, fresh off a decadeslong buying spree, are finally saving more and spending less -- just as the economy needs their dollars the most.

Usually, frugality is good for individuals and for the economy. Savings serve as a reservoir of capital that can be used to finance investment, which helps raise a nation's standard of living. But in a recession, increased saving -- or its flip side, decreased spending -- can exacerbate the economy's woes. It's what economists call the "paradox of thrift."

U.S. household debt, which has been growing steadily since the Federal Reserve began tracking it in 1952, declined for the first time in the third quarter of 2008. In the same quarter, U.S. consumer spending growth declined for the first time in 17 years.

The article goes on to describe how people are now pulling back from spending and doing with less. But, nowhere in the piece do we read about the most important factor that lead to people piling up debt: the lack of wage growth.

I have been doing a presentation around the country about the short-term and long-term reasons for the economic crisis facing workers. Here is the slide (courtesy of the Economic Policy Institute and Change To Win) that I think is perhaps the most graphic, clear explanation of why we are where we are. It measures productivity versus wages:

Basically, the basic bargain was roughly this -- if you worked hard and became more productive, you would see that sweat of the brow in your wages. And from the post-war era until the 1970s, that deal basically held -- as you can see from the lines that are basically close together until the 1970s.

Then, the lines diverge -- dramatically. You can see it yourself. If the lines had continued to track closely together as they did prior to the 1970s, the minimum wage would be more than $19 an hour. The minimum wage!

So, in short: people had no money coming in in their paychecks so they were forced to pay for their lives through credit -- either plastic or drawing down equity from their homes. There are lots of reasons that this happened -- greed, the attack against unions, de-regulation, dumb trade deals.

But, the point is: we will never fix the economic crisis, whether through short-term economic stimulus and certainly not through tax cuts, until paychecks are re-inflated. Dramatically.

I outlined a whole set of solutions to bailout American workers but the main one is simple: raise wages. Dramatically. And end -- and I know some people cringe at the term -- the class warfare that has been underway for the past three decades.

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