The Main Street Economy

Economic reports over the past week have been largely dominated by the seemingly good news of record highs in the DOW Jones Industrial Index (DJIA,) accompanied by a decline in the filing for new unemployment benefit claims.

Core Logic, which specializes in monitoring and analyzing home pricing and real estate markets, reported this week that housing prices have improved by 9.7% over their averages this time last year, making it the biggest recorded increase since 2006. Thus potentially explaining both the records being posted in the DOW, as well as the general surge in the financial markets.

The typical players in this growth such as banks (Bank of America is up 2.4%), defense contractors like Boeing, and a collection of other industrial corporate giants, are showing surges and relatively strong growth.

But while some things look positive for Wall St., the news for Main St. remains grim. The Labor Participation Rate (LPR) is still not improving and is sitting at 63.5%, which indicates that although the unemployment rate is decreasing, job growth is not keeping pace with the population growth.

The LPR has not improved or grown since the recession occurred (fall of 2007) which means we are in the throes of a “job recession”.  The mainstream media focus heavily on economic indicators that don’t favor the average hard working American. It favors capital concerns(obsession with DJIA and UE insurance) over labor concerns (lack of coverage of wage growth and LPR).

There was a time from 1948 to the early 1970’s (The Keynesian Era) when productivity and wages were nearly growing in perfect unison together. But since the shift to neoliberal policies (more regressive tax codes, and reduction in union influence) that focus on capital growth occurred, wages have been reduced as a share of the GDP, and the labor is becoming a marginalized commodity.

The reason for this media obsession with corporations gaining more activity and financial strength is still based on the belief that if corporations have more profits they will start to hire more. This isn’t to say that corporate profits are bad, but the belief that profits lead to hiring is false. What leads to more hiring is more sales. What creates more sales is fewer unemployed people and higher wages for those that are employed. As we speak companies are increasing their profits though wage reduction and reducing how many people they employ.

When we take a look at corporate profits as a percentage of the economy and wages as a percentage of the economy, we see that the profits have drastically increased partly on the back of reduced wages and unemployment.

As evidence shows, the idea that profits lead to hiring and wage growth is not only false but has a negative correlation. And when there are large spikes in corporate profits, it is sometimes followed by a recession. As pointed out earlier, from 1948 to the mid 1970’s the US economy functioned completely the opposite of the way it functions today. The percentage of the economy that was once dominated by wages has reversed and is now dominated by corporate profits.

When will our media and politicians come back to the side of favoring labor?  The economy will never be able to sustain this type of growth since it is on the backs of bleeding labor of its share of money and economic growth.

(Edited by Nicholas Goroff, 2013)

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