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All three pillars propping up workforce spending are cracking. Plan accordingly.
Karl Marx and Henry Ford both understood the key pillar of an industrial economy: the workforce has to earn enough to buy the output of the economy. If the workforce doesn't earn enough to have surplus earnings to spend on the enormous output of an industrial economy, then the producers cannot sell their goods / services at a profit, except to the few at the top as luxury goods--and that's not an industrial economy, it's a feudal economy of very limited scope.
Marx recognized that capitalism is a self-liquidating system as capital has the power to squeeze wages even as the output of an industrial economy steadily increases due to automation, technology, etc.
Marx recognized that capitalism is a self-liquidating system as capital has the power to squeeze wages even as the output of an industrial economy steadily increases due to automation, technology, etc.
Henry Ford understood that if his own workforce couldn't afford to buy the cars rolling off the assembly line, then his ambition to sell a car to every household was an unreachable chimera. (There were other factors, of course; the work was so brutal and mind-numbing that Ford had to pay more just to keep workers from quitting.)
If we say the three pillars holding up the economy , the conventional list is: 1) consumer spending (i.e. aggregate demand ); 2) productivity and 3) corporate profits. These are not actually pillars, they are outcomes of the core pillar, wage earners making enough to buy the economy's output.
As the statistics often cited here show, the purchasing power of wages has been declining for almost 50 years, since the mid-1970s. This means the workforce's surplus earnings have bought less and less of the economy's output.
There are three ways to fill the widening gap that's opened between what the workforce has to spend as surplus earnings and the vast output of the economy:
1. Government distributed money. The government distributes "free money" to the workforce via subsidies, tax cuts and credits, or direct cash disbursements.
2. Cheap abundant credit. The cost of credit is lowered to near-zero and credit is made available to virtually the entire workforce so workers can borrow money to buy goods and services they cannot afford to buy from surplus earnings. If auto loans are 1.9%, the interest is a trivial sum annually.
3. Asset bubbles. Boost the value of assets via monetary policies to generate unearned "wealth" that can be spent (by either borrowing against the newfound wealth or by selling assets). This expansion of "free money" also generates the "wealth effect," the feel-good high of feeling richer, which increases the confidence and desire to spend more money.
There are intrinsic, unbreachable limits to each of these solutions.
1. Government distributed money. The government distributes "free money" to the workforce via subsidies, tax cuts and credits, or direct cash disbursements.
2. Cheap abundant credit. The cost of credit is lowered to near-zero and credit is made available to virtually the entire workforce so workers can borrow money to buy goods and services they cannot afford to buy from surplus earnings. If auto loans are 1.9%, the interest is a trivial sum annually.
3. Asset bubbles. Boost the value of assets via monetary policies to generate unearned "wealth" that can be spent (by either borrowing against the newfound wealth or by selling assets). This expansion of "free money" also generates the "wealth effect," the feel-good high of feeling richer, which increases the confidence and desire to spend more money.
There are intrinsic, unbreachable limits to each of these solutions.
