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Wages need to go up to fix this...

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March 09, 2009 – Comments (10)

Mish has a post which gives why there should be some deflation happening here and this is the kind of thing that I was seeing coming.

It is going to be very hard to fix this with the downward wage pressure and lack of jobs...

How does the social support get paid for in this type of mess?

10 Comments – Post Your Own

#1) On March 09, 2009 at 1:59 PM, rookie02 (61.14) wrote:

Unfortunately it doesn't. As children for those who are lucky enough to get an allowance, we are taught not to buy things with next weeks allowance so to speak.

 Todays minds of government finance seem to have lost some basic economic guidelines. Don't spend what you dont have, dont borrow what you cannot repay, and don't lend what you dont plan on getting back. It seems that the government is borrowing money (printing) from itself to lend to businesses that do not have a sound plan of repayment. There is no real solid income to replenish what is being lent (printed).

There has to be some unseen variable that comes into play in order to fix this. A new market, a new product, some new source of income for the government. I am by no means a hippy or a drug advocate, but looking at some of the numbers in California's recent proposal to legalize marijuana is very promising. Look at prohibition vs. the great depression.

The well is dry and no rain in sight. There are no more outs. We are in serious trouble here and the bread and circus can only hold out for so long.

 

-Rook

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#2) On March 10, 2009 at 10:05 AM, drgroup (69.31) wrote:

"Wages need to go up to fix this..."

From what I know about wages going up, there has to be a labor shortage. The opposite exist here. Further, employers wills tap into the vast resevoir of the unemployed when necessity dictates and pay these new hires much less than they have in the past, thus keeping wages as low as possible.

To have wages increase, there needs to be almost 100% employment. The unfortunate families that are forced to survive in the tent cities will have to chase their American dream on the heels of those who are still employed/underemployed by those employers who are themselves trying to stay one step infront of the tent city existence.

G-d bless these people...

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#3) On March 10, 2009 at 10:14 AM, dwot (54.27) wrote:

Exactly drgroup, big mess...

Falling tax base and disposible income, a recipe for a worse then cliff diving economy...

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#4) On March 10, 2009 at 11:51 AM, fransgeraedts (99.91) wrote:

Dear Dwot,

 

I agree that wages need to go up. Of course they cannot go up right this moment... but they could and should go up if and when the economy recovers. It is the only way people of middle income and below can repair some of the damage, repay debts and begin to consume again.

If we want to get the economy growing again at a fair clip ..it will only be possible if people get paid more for the same work.

That is a good thing by the way...grin...economic sense and justice coming into line once again...

There are several ways to achieve wage growth. The most important one is to raise the minimumwage. Modernising the unions would also be a good thing. And then of course job-creation that leads to labor shortage.

Its very important to understand that the myth about losing jobs to China (etc) because of a rise in wages..is just that ..a myth. Wages in China are of course much cheaper then in the US..true...but that means that jobs that could go to China already have...or ..will go there regardless a raise in the wages in the US.

In reality whats at stake is wether or not the small group of people that derive their income directly or indirectly from profits, can be "persuaded" to do with less, because the large group of people who derive their income from wages need and deserve to get more.

Of course that shift from profit-led to wage-led growth should have been brought about 10 years ago. It would have prevented the crisis we are in now.

 

fransgeraedts

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#5) On March 10, 2009 at 10:54 PM, MikeMark (29.52) wrote:

fransgeraedts

Raising the minimum wage and "modernizing the unions" (whatever that means) don't accomplish anything. You've got to recognize that part of what's happening here is a global wage competition. Minimum wage needs to be repealed entirely. That way people who want to work at even low wages would have work. Minimum wage is a form of government price control, causing disruption in the wage market. Unions with a strong government voice are also a wage market disruptor. 

If you mean that unions should be dissolved, then I agree. That would modernize them. Unions are a major drag on the economy. They create a large minority that has a lobby voice in government that the majority has no champion against.

The biggest problem that we have is that the government is no longer listening to the common people.  It has been listening to the minority voice to the point where the missing man, the one who isn't part of the minority, is ignored. The good of the few has been elevated to a pinnacle, while the good of the many has been ignored. Before recovery can truly begin, this must end. I don't advocate abuse of the minority, I advocate true equality. Special interests of union minorities create problems like bailouts of auto manufacturers who aren't producing products that people will buy. Unions create undeserved wage increases, thereby reducing job availability for everyone. Unions create workers who have no desire or need to work economically or efficiently.

There is no such thing as wage-led growth. Where in the world did that idea come from? Communist theory? Socialist theory? The prevailing university education that I once thought was good? Economic growth comes from efficiencies created by entrepreneurs  who extend capital in a risk endeavor and make a profit from it! Part of the capital goes to pay wages. Without profit there are less wages! What you are mistakenly talking about would have brought about the decline faster.

Don't take my word for what I'm saying here. Go find out more. It's important at this time to get educated in economics. It's important at any time. Get a picture of the entire economic playing field. Look at and think deeply about the period from 1900 - 1950 and all of the 1800s. Go back as far as you can. Read Genesis ch 47:13-26 in the Bible. Read "Economics in One Lesson", "Tomorrow's Gold" and "Economics for Real People". Really understand the whole economic playing field from a historical perspective.

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#6) On March 11, 2009 at 1:16 AM, MikeMark (29.52) wrote:

How does the social support get paid for in this type of mess? 

dwot,

The short answer is of course, it won't.

To me, this just points out the problem with government guided social support. It's basically farcical. In the US, social security is bankrupt and on the current course won't be able to support its obligations by sometime before 2030. Really, in my mind it isn't able to support obligations now. That's because we've appropriated (stolen) the money for other uses. Government tends to do that, while individuals responsible for their own retirement are far more careful, and economical. Yes, you do get some who don't properly plan, but better some than all by force of government.

Take yourself as an example. You have been concerned about your retirement, so you took control. You saved and invested. You prepared for what you saw on the horizon. Your worries in that area are reduced. As a group of freely acting individuals we are far stronger than as a group of economic slaves. This applies as long as there is a good system of law that the majority of the free people uphold.

I've had trouble believing that social security would be of any use to me.  That has to do with my upbringing. We tend to be entrepreneurs.  I've always resented such a large bite out of my available capital for what? So that I have money to live off of when I'm older? Let me create that for myself. I can do far better with my money than spending it on another bridge built to nowhere. Thank you, I'd rather have freedom than social serfdom.

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#7) On March 11, 2009 at 1:33 AM, BGriffinFlorida (26.42) wrote:

fransgeraedts:

You are arguing in circles.....>>> ........'wages need to go up''..........'they cannot go up right this moment'....'but they could and should go up if and when the economy recovers'........'to get the economy growing....will only be possible if people are paid more''<<<</strong>

....so in order for the economy to recover ....we need wages to go up, ....which can't happen now, ......but can happen when the economy recovers, ......and the economy can't recover ......until wages go up, ....and wages can't go up .....until the economy recovers.....?!?    Be careful, you might swallow your brain.

I bet your rationalization in support of unions is just as compelling.

 

>>>....In reality whats at stake is wether or not the small group of people that derive their income directly or indirectly from profits, can be "persuaded" to do with less...<<<</strong>

NEWS FLASH!  The group of people that 'directly or indirectly' derives income from profits, is not really a small group, depending on whether you are considering post-tax profits or pre-tax profits, it is either the largest group, or the only (thereby largest) group, respectively.  Where exactly did you think those wages were coming from? How about the taxes?

Your arguments sound eerily similar to 'from each according to his abilities, to each according to his needs'.   My guess is that you probably also see greed as evil, rejecting it as a universal human quality.

 Instead of communism, I would be far more supportive of something that has not already be proven disasterous.

 

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#8) On March 11, 2009 at 3:14 PM, fransgeraedts (99.91) wrote:

Dear Griffin and MikeM

 

i had a personal silent bet going wether my comment would get comments like yours  .. i won that bet.

No, i am not a communist...grin ... nor a socialist..grin.. i am a card carrying fan of capitalism and free markets.

Basically from the seventies forward all economic policy has been geared to get profits to increase -both in an absolute and a relative sense. That policy was needed! and very succesfull! It made an investmentboom possible. A boom  that capitalised the heart of Asia and the former communist Eastern Europe. A boom that created new technologies and a new economy: the information economy.

So far so good?

However, somewhere in the nineties we simply began to produce to much capital. Both the new capitalist countries and the information economy did no longer need capital infusions from the outside. They began to generate all the capital they needed from within. Not so long after that they even began to produce  more capital then they needed.

When there is a surplus of capital investmentopportunities rise in price. Asset-inflation begins. When investmentopportunities become more expensive, they yield less. Investors react to that by taking more risk. Inevitably that cycle ends when to much risk leads to the bursting of a bubble.

We have done that five times now since 98. First Dot.Com and the Nasdaq, then housing, then creditrisk, then commodities, then the S&P 500.

So far, not so good?

Wage-led growth? How about from 1945 to 1970?

Just as we can increase profits by reducing taxes and wages, we can reverse the process by raising taxes (on corporations and capital gains) and wages. Did you know that profits around 2000 as a percentage of the economy and as a percentage of invested capital where the highest since we measure those?

If we raise wages, people will buy more. Profitmargins will decrease but turnover will rise. Henry Ford also a devout communist as you know ..grin... understood that very well.  

Modernising the unions will not be easy. Basically they have been systematically destroyed in the US. It is a tragedy that they only were able to cling on in some of the old industries. Management and unions have kept each other close there --in a deadly embrace.  

Oh griffin...it helps if you read carefully. There is no circle. The economy will come out of this slump by way of government investment in "infrastructure" and the reversal of corporate policies that will necessitate. Low interest rates and the massive dose of liquidity already in the system will act as accelerants. But the consumer will not take on new debt, even in the upswing. So if we want the economy to keep growing at a reasonable clip...and that is only possible if consumption grows.. then we will need to raise wages..a few years down the road. If we dont? Look at japan...

fransgeraedts 

 

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#9) On March 11, 2009 at 3:56 PM, MikeMark (29.52) wrote:

fransgeraedts

1945 to 1970: a surge in profit provided by reduction in government spending and a reduction in taxes. Viola: wages increased! Wow, it's worth another try isn't it?

Ford is just my perfect example. Henry was a great entrepreneur who recognized a need, risked his capital, made an outstanding profit, created a huge market and provided wages for people he hired to help. Wages from the capital, aka profit.

Japan: Yes, let's look at Japan. Still trying to find a way out of the lost Decade (or will it become two?). Answer me why we are following the same failed path as Japan? Not because anyone has learned the lesson of Japan. Japan tried massive stimulus, with the same result we are currently having.

Speaking of lessons, have you read  "Economics in One Lesson"? It's online and has a very interesting 30 years later look. 

-mikemark

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#10) On March 12, 2009 at 1:06 AM, fransgeraedts (99.91) wrote:

dear Mike,

have you ever asked yourselve how standards of living have been raised? Have you ever compared (real) wages in 1900, 1925, 1945, 1970, etc? You should. It would show you that of course over time wages have risen. But it would also show you that the rate of the rise varies.

Somehow you seem to be under the impression that i want to do away with profits, or a profitoriented economy, or the role of entrepeneurs. Nothing is further from my mind. I am simply suggesting that it is once again time to raise wages, both absolute and relative.

And ..no...wages are not paid out of profits.

fransgeraedts

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