Tuesday, June 17, 2014

If we are the 100%, then who will be the scapegoat?

On the heals of yesterday's post, I came across this unfortunate post by the usually great Bill McBride, at www.calculatedrisk.com.  In it, he pulls out the old canard that corporations like high unemployment because it pulls down wages.  To concoct this story, you begin with (1) the truism that prices move inversely to excess supply, so that, similar to any good or service, wages tend to stagnate when unemployment is high.  Then, you add (2) the truism that, as with any buyer, a corporation would prefer lower prices over higher prices.  Sprinkle liberally with assumptions of sociopathic levels of self-interest, and a wink-wink about how we all KNOW how THEY are, and Voila, you have (3) corporations love it when you are hurting.

He even manages to point to the very Paul Krugman quote that I originally linked to critically on this topic, at the end of this post.  Of course, he likes Krugman's comments.

Here is a quote McBride has from Kash Mansori:
[T]his opens up an interesting line of reasoning, one that is certainly not new but which this data reminds us of. If a bad labor market means that workers get a smaller share of the productivity they bring to their employers, then the owners of companies will have a strong preference for a weak labor market. Firms don't like recessions, of course -- it's hard to make money when your sales are falling. But companies do enjoy the way that a very slow recovery in the job market can allow them to keep wages down, and thus keep a larger share of the output of their workers for themselves. 
Let's see.  How about this:
If recessions mean that firms don't have enough demand for their products, then consumers will have a strong preference for a weak economy. Consumers don't like recessions, of course -- it's hard to make money when you lose your job. But consumers do enjoy the way that a very slow recovery in GDP can allow them to keep prices down, and thus keep a larger share of the output for themselves.
How about this:
If a supply shock means that consumers have a shortage of products and services to choose from, then workers will have a strong preference for natural disasters. Workers don't like natural disasters, of course -- it's hard to make money when your town is in disarray. But workers do enjoy the way that natural disasters create demand for labor at high wages, and thus they keep a larger share of the output for themselves.

Of course, that last version is sometimes stated favorably!  In fact, replace "natural disasters" with "immigrant roundups" and many people consider it the explicit basis of public policy!

So, I just stated the same argument with the characters changed.  Oddly these three paragraphs garner very different reactions:

1) Exactly!  We need to counteract this terrible preference that corporations have!

2) That's stupid.  Of course consumers don't want the economy to be sour.

3) Exactly!  The destruction is terrible, but at least it will put people to work!

I would like to put a vote in that our reaction to version #2 is the correct reaction to all the versions.

By the way, here are US Total Compensation and US Domestic Corporate Profits, Indexed to the previous peak of profits in 2006 3Q.  First, a close-up since 2006, then a graph all the way back to 1947.

And let's be clear about what these three gentlemen above are declaring: that corporations (the BLUE line) secretly like extended economic dislocations because it gives them an advantage in bidding down labor compensation (the RED line).  Without further comment, here are the graphs of Wall Street's "Dirty Little Secret":

Well, OK, I will make one further comment, because I realized that this is another example in a running theme here at IW that interpretation trumps everything.  Here is the article at "A Wealth of Common Sense" that triggered Bill's rumination.  The article discusses how times of economic distress are good times to invest with risk.  But, there is nothing in that article about corporations gaining at the expense of labor.  The closing paragraph is:
Yet it’s still true that expectations matter with forward looking markets. This is why the best time to invest is when assets are beaten down in price with low future expectations as opposed to those times of sky high expectations and large price increases.
This was an article about sentiment and contrarian mentality.  If anything, the article runs along with the point I have been making - we're all in this together - capital recovers when labor recovers.  Yet for Bill McBride, the article reinforced the exact opposite viewpoint - that corporations recover at your expense.

You know those little toys you can get where you can only read a secret code if you place a little red plastic lens over it that filters out some of the colors?  In complex matters, most of the time we don't need the little plastic lenses - and I'm talking about all of us here, even though it's going to take someone else to point my filters out to me.  That's the thing about filters.


  1. I don't think that businesses explicitly want high unemployment, but an awful lot of businesses back policies that lead to unemployment and weak wage growth. It's the old red-state blue-state paradox. Why are businesses and people in anti-business blue states better off economically than businesses and people in pro-business red states? A lot of things that sound good to businessmen in the short run tend to have negative mid-range and long-range effects. If you are having trouble selling cars to recent college graduates, maybe you shouldn't have pushed for lower taxes and less aid to public colleges?

  2. *eyeroll*.

    Of course businessmen like high unemployment because it makes it easy for them to lower wages and abuse workers. Adam Smith knew this! Karl Marx knew this! Most businessmen will say this EXPLICITLY! They start panicking when there's a so-called "labor shortage" (== low unemployment) and demanding that we import foreign labor!

    Jesus, get a clue, Kevin. Yes, advocating unemployment hurts the businessmen in the long term, but *they are not long term thinkers*.

  3. Actually, this point which you're missing is THE crucial analytical point.

    If CEOs worked for policies which benefitted the 99%, the CEOs would also benefit.

    But instead CEOs (mostly) work to impoverish the 99%. This hurts the CEOs in absolute terms.

    Why do they do it?

    One likely theory is that it benefits the CEOs' *relative* position -- the difference between rich and poor becomes larger, even though everyone is poorer than they would be otherwise. Psych studies show that a lot of people seem to rate their situation in terms of relative position only, not absolute position.

    Better to rule in hell than to be a middle manager in heaven? Better to be a big fish in a small pond than a medium-sized fish in a big pond? Attitudes like that seem to predominate among the CEO class.