Friday, February 16, 2007

The Economy Is Not Strong Until Wages Are

It's always amusing that good news makes the stock market fall, and vice versa. With the U.S. economy becoming scary territory for investors, it's now the currency market taking a dive.

The Dollar dropped to six-week lows against the Euro on Wednesday after Federal Reserve Chairman Ben Bernanke said inflation pressures were starting to ease, boosting chances of a US interest rate cut later this year.

He told the Senate Banking Committee that inflation was starting to diminish, even though it will take time to confirm the downtrend. Bernanke's remarks surprised investors who expected him to confirm recent comments from other Fed officials about the upside risks to the inflation outlook. US interest rate futures rose on Bernanke's remarks, increasing the implied chance the Central Bank will cut its benchmark interest rate from the actual 5.25% later this year.

Interestingly, prospects for a lending rate rise are seen by the U.S. stockmarket as unpromising because of our perception that prosperity results from lots of investments, and investors are attracted by lower rates. I personally view the decline of earning power, and thereby expenditure, as ominous.

As I mentioned in a recent post, 'productivity' is the result of workers producing more, (doing more work), for less. Barney Frank brought this out in recent committee questioning, and yesterday he challenged the concept that inflation is the big, bad wolf financial circles try to make of it.

Rep. Frank has used his chairmanship in a lot of excellent ways. Yesterday, he did get Bernanke to admit that wage increases were not necessarily a source of inflation. It is really promising that Frank has the wit and the strength to override the assumptions of the conservative financial heads in government who want to keep wages low - not because it can be proven to strengthen the U.S. financially but because it is a reward that their base likes.

FRANK:(D)o you believe that there is room for wages to go up, at least -- not at least -- to the level of productivity increases without that having an inflationary impact?

BERNANKE: Yes, I do, and I do expect nominal wages to rise.
(FRANK):When you refuse to raise the minimum wage, so inflation erodes it, when you have an active policy of breaking labor unions, when you have a tax policy that favors people at the high end, you are reinforcing those tendencies.

And so, what we have is a national policy which takes advantage of factors that are keeping real wages depressed and keeping productivity way ahead of wages so that all of the increase -- as Alan Greenspan said two years ago, and apparently is still the case, virtually all of the increased wealth in this society that comes from increased productivity goes to the owners of capital.

With powers of comprehension of this depth in power in the country, we may turn around this economy which rests on the backs of the workers, and regain the prosperity that they produce.

Healthy economies do not require the abuse of the public. The Chairman of the Financial Services Committee is aware of the desirability of that approach.

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Blogger shrimplate said...

Some of us boomers are old enough to remember the days when real wages were much higher for many working-class families.

The culture-warriors are very fond of recollecting the patriarchal old days of the 50's and early 60's, but I suspect what they really enjoyed about those times was earning power.

American society was arguably more secure and "better" when large swathes of the working and middle classes had a bit of coin.

6:34 AM  
Blogger Ruth said...

I see as shortsighted the business community's deprivation of the public of spending power. Who do they expect to buy their products, the third world that's earning a few dollars a week?

It's like watching the proverbial monkey with his hand stuck in the cookie jar because he won't let go of the cookie.

12:24 PM  

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