Thursday, July 21, 2011

The deficit and wages.

The Democrats refuse to cut services like Social Security, Medicare and Medicaid in order to reduce the government deficit. They think that would be totally unfair. The Republicans refuse to raise taxes on corporations or very rich individuals because those are the persons or institutions, they say, that create new jobs. And new jobs is what the country needs.

Both parties ignore an important economic fact: if ordinary working people – call them “middle-class” if you want – have no money to spend the economy is going to suffer. That is a central fact about our current crisis that no one wants to talk about. Since the early 1970s wages and salaries have been pretty stagnant. If anything they went down a bit. Families dealt with that, first, by women leaving the home and going to work. But when that was not enough, people took the banks up on their offers of credit cards. By now many American families owe more money on their credit cards than they make in an entire year.

It was this grand deficit financing of consumption that kept the economy going until 2008. At some point that credit bubble collapsed and so did the economy.

Corporations and the very rich do not create jobs unless the extra workers produce goods that sell. But if these new workers and the old ones don't make enough money to buy whatever the corporation has to offer, the corporation is not going to hire more people. 
So if wages remain as low as they are, and if the Republicans get their way to clear up the federal deficit by taking money out of the pockets of people with little money or moderate income, and of the retired as well as of students, demand for all kinds of commodities will drop and so will employment.

Cutting taxes on corporations without stimulating consumer demand by paying higher wages or handing out decent retirement funds and medical aid, is not going to create new jobs except perhaps for more people to take care of the empty houses of the super-rich who have houses all over the world, or more crews to take care of the larger and larger yachts or private jets of the beneficiaries of further tax cuts. But that does not create many jobs.

Our political discourse is very much shaped by business and its interests. The damage done to the economy by low wages is therefore not something newspapers and television commentators often talk about. But without a general population that is reasonably comfortable and therefore has some spending money, the economy will not recuperate.