:: Stagflation recipe missing one key ingredient (higher wages)

UpInArms (1000+ posts)

Tue Jun-03-08 12:36 PM Response to Original message

22. Stagflation recipe missing one key ingredient (higher wages)

http://www.reuters.com/article/newsOne/idUSN02258477200... WASHINGTON (Reuters) - Dow Chemical Co (DOW.N: Quote, Profile, Research) hiked prices on products used in everything from diapers to antifreeze. American Airlines wants $15 to check your luggage. Then there's $4 gasoline and those rising grocery bills. But for all the worry over inflation, the U.S. economy is actually in little danger of returning to the 1970s stagflation era of rising prices along with stagnant growth. There is one key ingredient missing -- higher wages. "It is utter nonsense, in our view, to be talking incessantly about stagflation," Merrill Lynch economist David Rosenberg wrote in a note to clients, pointing to strong productivity gains and flat wages. Three decades ago, when inflation was soaring and the U.S. Federal Reserve had to drive up interest rates to get it back under control, powerful unions had the clout to push for higher pay to compensate for rising prices. That power is largely gone now. "Instead of running out and going on strike for higher pay, people are adjusting by driving less, riding their bikes, car-pooling, or using mass transit," Rosenberg said. ...more... See? you can just "adjust" yourself out of eating and breathing very soon!

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Prag (1000+ posts)

Tue Jun-03-08 01:49 PM Response to Reply #22

30. That is one of the...

most condescending ignorant quotes I've ever read. Some of these people just don't -get- it! People are 'adjusting' by not having health care, dying, starving, and it's only going to get worse as the future of America, our children, are 'adjusting' themselves out of a proper education. :|

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ozymandius (1000+ posts)

Tue Jun-03-08 01:56 PM Response to Reply #22

31. "pointing to strong productivity gains and flat wages"

Strong productivity gains typically translates to lower prices. If this were the case right now then Mr. Rosenberg's assertion would be correct. That being said - perhaps Mr. Rosenberg should review his 9th grade economics textbook regarding the difference between 'scarcity' and 'shortage'. Productivity means nothing if the transportation infrastructure by which that product gets to market is too expensive for the consumer to absorb the cost. I am thinking of fishing boats that have been tied to the dock for four days (in France), independent truckers on strike (almost everywhere). These are images of scarcity due to skyrocketing transportation costs. Rosenberg is a charlatan who is merely peddling his wares.

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Prag (1000+ posts)

Tue Jun-03-08 02:01 PM Response to Reply #31

32. I concur!

Well said, Ozy.

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happyslug (1000+ posts)

Tue Jun-03-08 02:15 PM Response to Reply #22

39. He i just reporting the results of the fact Unions are much weaker then in the 1970s

Unions, lead by the United Steel Workers (USW) and the United Auto Workers (UAW), forced their employers to put cost of living adjustments in their union contracts, thus as inflation went up, so did their pay. Other unions followed. Non-unionized employers to get employees also had to agree to similar terms, or face rapid turnover in employees looking for higher wages in face of higher prices. With just over 10% of the population unionized in the the 1970s (it was down from 1/3 of the workforce in the late 1940s), the unions still lead the push for higher wages, for people had to MATCH what the unions were getting to their members, or lose those employees to employers who did match the pay (Most workers went from non-union to another non-union job, but the base provided by the unionized employers forced all employers to match what the union was getting). n 1982, the Air Controllers went on Strike for better working conditions, Reagan fired them, and unions have NEVER recovered. It has been downhill ever since. The decline started with the passage of the Taft-Hartley Act in 1947, but accelerated when the GOP finally had control of not only the Presidency but Congress under Reagan. I know Reagan only had a GOP controlled Senate. The House of Representatives were still technically Democratic under Reagan. The problem was that that control was based on the support of a few very conservative Southern Democrats, who for all purposes should have been Republicans except for the Civil War. Thus under Reagan the GOP controlled both houses for all practical purposes and Unions were constantly under attack. My point is the writer is correct, do to the weakness of the Unions, stagflation will NOT reappear, for workers have NO way to increase their pay except by switching jobs, and no one is hiring right now. People forget that Unions are like Doctors and the Police, you do NOT need them when things are going good, you need when things go bad. In the 1970s Unions showed they worth by keeping Working Class wages up and equal to Inflation, today the Unions can NOT do that and thus wages have stagnated under Bush II (Wages did increase a bit under Bill Clinton, but with the GOP Controlling Congress they was NOT much he could do, but what he did do caused the massive voter turnout in 2000 and 2004 the prevented the GOP from having complete control of the Government). Thus do to the weakness of Unions Stagflation will NOT return, for there is NO push for higher wages from the working class and none will occur till the current generations finds that it needs Unions and give Unions the support Unions need to operate (And that will occur when more people find they can NOT make ends meet given their wages have NOT kept up with inflation for several years).

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Prag (1000+ posts)

Tue Jun-03-08 02:40 PM Response to Reply #39

41. Looks like a classic case of 'Stagflation' to me...

http://en.wikipedia.org/wiki/Stagflation "Economists have identified the two principal contributing causes of stagflation. First, stagflation can result when an economy is slowed by an unfavorable supply shock, such as an increase in the price of oil in an oil importing country, which tends to raise prices at the same time that it slows the economy by making production less profitable.<5> Second, both stagnation (recession) and inflation can result from inappropriate macroeconomic policies. For example, central banks can cause inflation by permitting excessive growth of the money supply, and the government can cause stagnation by excessive regulation of goods markets and labor markets." To claim otherwise is yet another denial of the current state of the U.S. Economy. Similar to the months and months of Recession Denial already experienced.

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happyslug (1000+ posts)

Tue Jun-03-08 06:30 PM Response to Reply #41

49. In the 1970, a good bit of the inflation was "PUSH" by higher wages

Not almost all "Pulled" by higher prices as is the present situation (In reality it was both push and pull). One of the side affects of the 1970s was that Unionized labor wages kept increasing, while middle management and professional income FELL in real terms (i.e Accountants, Doctors, Lawyers saw their income DROP, while Union workers income stayed about the same). In most periods of Inflation, Income, in real constant terms, DROP. That drop in income causes the inflation to drop while the economy goes into a recession. In the 1970s working class income held its own, which kept the pressure on inflation even as the economy slowed down (This was the heart of the stagflation of the 1970s, the Fed tried to reduce inflation by forcing a recession, but the unions kept their wages UP, instead of leaving them drop as normally happens when the Fed forces a Recession. Thus you ended up with Stagflation. No Gain in the Economy, but sky high inflation. Even under Reagan and his "War on Inflation" we ended up with 6+ percentage annual inflation (And his attack on PATCO was part of the plan to forces wages DOWN in real terms). Reagan also benefited from the Drop in the price of oil (The Oil Glut of the 1980s) AND the collapse of the US Steel Industry, which further weakened unions in the US (USW locals agreed to all types of cost reductions, even cuts in labor wages, to save some of their jobs, the USW did this as Government support for Unions came to an almost complete halt under Reagan and Bush). Now the above may the result of "Excessive Regulation of Labor markets" (and it was) so its comes under the rule you cite. Unions exist when the Government permits them to exist. Thus Unions and GOvernment Regulation of Labor Markets go hand in hand. My point was simple, the author of the piece we are discussing, made a point, one of the biggest pushes for Stagflation of the 1970s, Unions, no longer can do what the Unions did in the 1970s, thus wages for working class employees will drop in real terms and thus keep inflation in check. Thus it will be hard to have stagflation today. It is almost impossible for Unions to push up wages, or even to keep up wages as Unions did in the 1970s, in the current political Climate (Note: i do expect it to change over the next few years, the country as a whole is more left wing then it was in the 1980s and that is expected to last for at least another generation).

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Tansy_Gold (1000+ posts)

Tue Jun-03-08 07:40 PM Response to Reply #49

54. I could very well be wrong about this, as I am not an expert

on economics, but it seems to me that right now the cause of inflation is not rising wages at all, and therefore *lowering* wages -- which was allegedly Reagan's motivation in going after PATCO in the summer of 1981 -- will not have the desired effect. Inflation today, it seems to me, is the result of speculation driven by greed. 1. Union-waged and other good-paying manufacturing jobs were off-shored to increase profits to the investor class. Eventually this would reach a point where there were too few U.S. consumers who could afford the products, wouldn't it?? 2. Shift of economy from manufacturing to service left no leverage to raise wages. Service doesn't "make" money, it just moves it around, so there was no increase in value to improve the actual economy. Besides, as manufacturing jobs disappeared, there was a surplus of workers to constantly drive service wages down. I think the lack of any *successful* demand for increase in minimum wage for umpteen years is evidence that the pressure was on the downside rather than up. 3. Speculative pressure in areas like housing pulled money out of the working class and funnelled it to the investor class. This "wealth" went into the ponzi schemes of The Markets but did nothing for the real economy. 4. As the stock/bond/SIV market bubble began to deflate, investors begged for and got bailed out by the Fed. Given lots more "free" money to speculate with, the big investors/speculators continued to go after the big, easy money rather than do anything to fix the real economy that they themselves had broken. They turned to commodities. And unlike less tangible investments like stocks, which may have little connection to the day-to-day operations of the actual company, commodities are not only "real things," but they are both essential to the health and well-being of real human beings -- wheat, eggs, corn, oil, etc. -- AND they are finite in both supply and, if you will, shelf-life. Consumers have to buy them, and they have to buy them at the going price, no matter what it is. 5. As commodity prices skyrocketed, so did the price to the end consumer, those same workers in #1 and #2 who saw their real net incomes continually diminished. Therefore, if prices continue to rise and wages CAN'T go up with them, there will be a collapse, won't there? Isn't it the whole economy that's broken, not just one part of it? And isn't it broken more or less by intention? I dunno, because I'm just Tansy Gold

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ozymandius (1000+ posts)

Tue Jun-03-08 09:44 PM Response to Reply #49

56. Two things: wage inflation and price inflation.

Edited on Tue Jun-03-08 09:45 PM by ozymandius The very similar scenario happened about 1960 with a classic wage-price spiral. Wage inflation trended upwards without the heavy influence of the unions. Price inflation also trended upwards. The rub in all this was the unemployment rate was a little more than 6.5% in 1960. So here is a scenario, not so distant in the past, where you have a lack of union power asserting itself. You are very correct to say that unions and government regulation of labor markets go hand-in-hand. What happened under the Kennedy administration and then again under the Nixon administration illustrated this point to the letter. How these controls were implemented differed largely. During the early years of the Nixon administration, control over wages and prices were left to the unions and corporations to fight over. Governmental guideposts and benchmarks were no longer asserted in this power struggle as they were under Kennedy. That did not happen until Reagan, as you note, with union-busting intent. Now power has shifted handily toward corporate power. Large corporations have the power to control wages through three tools: available employment; and through the banks with their power to seed businesses by giving access to credit, thus creating jobs in the small-cap world. So I agree that stagflation such as that which we experienced in the 1970s would not happen today. And for the reasons you mention. (However unflatteringly, my assertion nearly throws this discussion into the realm of semantics.) Stagflation has occurred before the word 'stagflation' had been invented. How it has happened now is quite unique. In 1960 rising unemployment coupled with rising prices and rising wages. What is different now is how wages and consumer prices have decoupled. The former stagnating and the latter rising. Economic growth has also slowed. To me, that is how I would define 'stagflation'.

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Tansy_Gold (1000+ posts)

Tue Jun-03-08 10:49 PM Response to Reply #56

61. ITA, Ozy: Stagflation is (kinda) in the eye of the beholder

Nixon's imposition of wage and price controls proved ineffective as corporations found ways around them, as I recall. (IIRC, today's ubiquitous "rebates" were one of the children of price controls.) The fact that today's wages have little impact on prices -- because U.S. wages aren't making the things we buy in the same way as in the 60s, 70s, or even 90s -- alters the whole mix. Kevin Phillips points out in "American Theocracy" that Carter's policies in the 70s regarding energy use were extremely effective -- oil importation dropped, homes and appliances became more energy efficient, cars got better gas mileage -- and the economy still grew. At the same time, mortgage rates reached 17%! So while the details may be different, I think the end result -- serious economic pain for working people -- is what we have to look at, not the semantics.

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AnneD (1000+ posts)

Tue Jun-03-08 06:36 PM Response to Reply #22

51. I remember all that talk about....

pools of liquidity a while back....I think they finally sucked the excess liquidity from the middle class.