For those who watch the stock market, the following is nothing new. To the rest of us, it may explain why wages are stagnant in this age of plenty.
Among the biggest costs of any business are wages and benefits. We all understand that. What we may not know is how closely wages, employment rates and inflation are tied. And how that affects federal monetary policies.
Needless to say, there are many variations on the theme but here's how it works in its simplest form.
If Boss X gives a dollar an hour raise to full-time Employee Y, that's $40 a week more Boss X has to charge customer Z to come out even. Customer Z now pays an inflated price of $1.10 for a widget instead of $1.
Increase that by 10 million workers and it shows up nationally as inflation, i.e., the higher cost of wages causes prices to rise, or inflate.
Inflation freaks out the Federal Reserve. If things get too inflated, the Fed raises the prime rate, the interest it charges banks to borrow money. This cools off the economy by making loans cost more.
For instance, if Boss X has to pay hundreds of dollars extra a month to take out a loan for expansion, but can't tack the cost onto the price tag without losing sales, she'll probably wait until the rates go down.
If a slowdown of loan applications occurs in large enough numbers, there is deflation. Fewer loans mean fewer dollars in circulation, indicating a weakened economy.
When this happens, the Feds steps in and lowers interest rates to stimulate the economy. Under Bush, rates got down to 2.5%. But they can also heat up dangerously. During Carter, interest rose to 20% for second mortgage loans. Now rates hover around a healthy 7%. Inflation is at 2.5% to 3.5% a year.
It's this balancing act of keeping inflation low that makes Federal Reserve head Alan Greenspan so respected. He managed to put the brakes on the runaway inflation of the '80s and stabilize the economy to slow, steady growth.
This is excellent for business, as it can better determine costs to make a reasonable profit. So far, so good.
Let's examine downsizing. It really got going during the recession of '89-92. To save the company, many a business were forced to drastically cut costs. They reduced profits paid out to everyone who were not upper management or stockholders.
In other words, in too many companies, especially those targeted for takeovers, those cuts were of workers and in inventory and repairs. A quick consideration of our infrastructure shows the resulting rot.
This cost-trimming did serve to stimulate stock sales by making company profit potential good. Lean and mean soon became a buy signal.
When Bill Clinton was elected, the recession turned around. To sustain the recovering economy, Greenspan forced it to grow slowly. A good move.
The general assumption was that the frozen wages of those making under $60,000 would begin to rise, slowly but steadily, along with the higher profits.
They did, but much less than expected. The minimum wage increase pushed up from the bottom to some degree. Some at the better companies were given profit-sharing options and various perks. But the vast majority of the working poor have received minimal benefit.
It wasn't long before faster stock growth and greater dividend returns were demanded by the speculator in the stock market. Profits that had been generated by moving offshore, closing factories, firing workers or freezing wages, had to be sustained to keep the money ball rolling. That meant keeping wages and repairs to a minimum.
These profits so favored upper management and stock holders that within 15 years the country went from a middle-class economy to one where 2% of the population holds as much wealth as the other 98% combined. In other words, the 2% is rich from wage hikes they denied workers.
Crawling upon the backs of its workers like the good Machiavellians they are, big businesses are rolling in dough and CEOx get millions in bonuses.
Historically, this is a very dangerous situation. The Tower of Babylon could topple at any moment, its foundation eroded to the point of not being able to maintain the structure.
One safe method to shore up the foundation would be to shift some of the weight, i.e., profits, to the foundation. In other words, share the wealth. Increase wages and benefits of those making under $60,000 a year.
Problem is, it means those on top would have to give up some of their own profits. An unlikely scenario.
No, the money machines are not about to give up their golden egg, or parachute either, without a fight. Only the employees will better themselves.
Back to Greenspan and the Fed. As stated, if inflation creeps up too fast, the Fed puts on the brakes. A large part of any inflation rate is tied to wages and unemployment. With wages low, frozen or non-existent, companies can rake in higher profits (i.e., unawarded wages) without raising prices.
When business hires, the employment rate lowers. If fewer workers are available, companies are forced to pay better wages to hold their employees.
The forced wage increase shows as inflation. Higher wages were supposed to have kicked in at 6.2% unemployment. That rate is now 4-5%. Wages, however, have barely risen.
The loser is the middle and lower working class. What raise they do get is often tied to cost of living, not to better wages. So the vast majority of Americans, as has been stated so often, are basically standing still.
John Sununu made an insightful quip on Crossfire. The liberal monitor said something like, "I'd like to make all that money, too, but..." John interrupted, "Now you sound like a Republican. We take as much as we can get. To the winner goes the spoils. To the loser goes the punishment."
Isn't it time we stop punishing the loser? And how can hard-working families doing the best they can be considered losers, anyway?