It’s The Wages Stupid

Such is the breadth and depth of the Romneyfication of our economy that otherwise sensible people make silly faux pas or repeat false thinking without a hint of knowledge of their error.

Take Sebastian Mallaby for instance. I was pleased with his two recent articles on banking. He offered us all a strident argument for the break up of the biggest. His logic was impeccable. His conclusions irrefutable. Of course this glowing reference of mine might be due to my prior identical argument. So, he rose in my estimation. Only to trip up.

In his article in today’s Financial Times he goes to great lengths to criticize the Fed’s rather anemic approach at present. Despite the manifest failure of its previous efforts to bring down unemployment, and despite the recent gathering of darker clouds portending a weakening of the economy, the Fed is stuck in a dithering pattern. This is largely because there are one or two strict advocates of depression austerity on the board who manage manfully to scupper progress most of the time. I think, also, that Ben Bernanke, being a stout Republican, is loath to do too much to help Obama.

So Mallaby hits away at this ineptitude. Good so far.

But.

Buried towards the end of his article we find this gem:

“Banks, having sold Treasuries, must choose to reinvest the proceeds in riskier assets rather than just adding to their huge cash piles. Corporations, facing lower borrowing costs, must resolve that this is the moment to invest. Consumers, seeing rising stock and bond markets, must summon the confidence to spend. If the Fed won‰Ûªt take the risk of going beyond what it has tried already, private actors won‰Ûªt take risks either. Monetary policy is like faith healing. The patient must believe.”

So. The path to success and to our final breakout from this lingering depression of ours is to engender confidence. That, apparently will solve everything.

No it won’t.

While I agree that confidence play a large role in shaping economic activity via the formulation of expectations and the encouragement of ‘animal spirits’, I am not sure that they are the critical element at play dragging us all down at present.

Ponder, for instance, on the way in which consumers are supposed to get back on track. According to Mallaby they need to see the stock and bond markets in glowing health. That will, apparently, cause them to cast aside their cares and go out on a shopping spree. Only a true child of the Romney era could ever think this. Us less educated types think that the lack of spending power may be a tad more important. And for the large majority of non-Romney people spending power flows from wages not stock or bond appreciation. It is the lack of wage growth for decades now that has caused the seizure of our economic motor, not the failure of stock prices to continue into orbit.

Now, I will grant that the middle class is too obsessed over house prices and that the crash in such prices has a lot to do with the enervation of our willingness to spend. But the reason we are so obsessed is precisely because homes are the largest assets most families own. Not stocks. Where the average family owns stock it is usually tied up in some form of retirement account and is managed by someone else. So whilst the financial media reports every little blip in stock prices, and I am sure many people take notice of them, when pinch comes to shove and a decision to buy something looming, it is cash in the bank that counts more than anything. And, as I have pointed out, that cash is most likely derived from wages.

This is, I am afraid, where the entire Romney generation gets off track. So enthralled are they by shareholder value, rational expectations, efficient markets, and market magic in general, that they entirely miss the point. They have done well. They do, in fact, have stock portfolios. They are concerned over stock prices. They worry about the things that Romney worries about. They have similar educations and world outlooks. They represent the failures of the Reagan/Bush delusion that free markets fix everything. And that for free markets to get on with this fixing of everything all we need is to inject a burst of confidence.

Rubbish.

Cash helps too. In fact it dominates all else.

During the last three or four decades our economy has shifted its weight behind profit and away from wages. It has been Romneyfied. Business firms have defended profit at all costs. They have Romneyfied the economy by gutting, deconstructing, outsourcing, offshoring, breaking contracts,and generally trampling on the workers who, in their role as consumers, those very firms rely upon for sales. It is no surprise therefore for the game to come to an end someday. When workers as consumers have no more cash, or when they have to reduce debt from flat wages, they spend less. Demand falls. Or its growth is meager. All the confidence in the world will not generate a spurt in spending if people have nothing extra to spend.

So it would be nice for confidence to grow. But it would be nicer were wages to grow first. But that means profits would have to fall relatively. And that doesn’t fit the Romneyfied narrative. So we don’t hear people like Mallaby talk about it.

Shame. Those banking articles were quite good.