Economics in a Nutshell
Ravi Batra ; The New Golden Age
The Rising Wage Gap
Four main causes of poverty in the United States
1) The rising price of oil
2) Low minimum wage
3) Regressive taxation
4) Globalization
Wage productivity gap All four relate to government policy and reflect official corruption because they all impoverish the general public while making the rich richer. Furthermore, they add to the global economic imbalances and threaten to unleash global chaos in the near future.
Official corruption threatens economic stability around the world because it raises what may be called the wage gap which simply is a measure of the difference between labor productivity and the real wage. For the sake of precision, the wage gap may be defined as worker productivity divided by the average real compensation of employees. An economy functions smoothly and efficiently only if this gap remains constant and small. It morphs into a myriad of imbalances if the gap grows as it has since 1980. An economy is efficient if it maintains full employment with out resorting to excessive debt. Excessive debt itself is linked to the rising wage gap. Anything that lowers domestic labor demand tends to raise the wage gap because when labor demand declines the real wage falls relative to worker productivity. The rising price of oil, low minimum wage, regressive taxation and globalization all tend to trim domestic demand for workers. So they all increase the wage gap over time.
How is all this relevant to our economy? Wages are the main source of demand and productivity is the main source of supply. Overtime, business investment and new technology lead to a rise in productivity and hence supply. If real wages keep up with productivity consumer demand matches the growth in supply so that the demand supply balance is maintained in a natural way. Here the economy tends to function smoothly and efficiently. However, if real wages trail productivity growth and the wage gap rises, supply grows faster than demand. Many distortions then arise and if they are allowed to fester the end result is growing poverty and possibly economic collapse.
The first distortion is that debt must rise exponentially to increased demand. Because this is then the only way to close the demand-supply gap arising from the growing wage gap. The borrowing may be incurred by consumers and the government but not by cash rich corporations. The quantum leap in budget deficits in the US economy since the early 1980’s is purely the result of this phenomenon. This is the first distortion because the demand-supply balance is maintained artificially by ever increasing debt creation and cannot be sustained forever.
The second distortion occurs from a quantum jump in corporate profits. Once the demand-supply balance is maintained through increased debt then profits must rise sharply because with wages growing sluggishly the fruit of increased productivity accrues mainly to the owners of capital. So CEO incomes jump. The profit leap is a distortion because it cannot be maintain without mushrooming debt. The artificial rise in profits triggers an artificial jump in share prices and leads to a stock market bubble which must burst one day because it is all supported by an exponential rise in borrowing.
The moment debt growth slows profits begin to fall and this can lead to a crash. As occurred in1929.
One distortion feeds another. As the market crashes the government must do something to contain its aftershocks. For instance, it slashes interest rates to lure more people into borrowing. If it does not a depression may result as in the 1930’s. But if it does, there will be a housing bubble because exceptionally low interest rates generate big declines in monthly mortgage payments and thus raise the demand for homes. So the government avoids a depression but only at the cost of future stability. This is why we now face a housing bubble around the world in the aftermath of the global stock market crash of 2000.
With the continued rise in the wage gap the rich keep getting richer at a record pace. But the stock market crash puts them in a quandary. What to do with all that money? With the share market losing its allure the rich look elsewhere. They maybe ultra rich but they want even more. So their cash ends up in exotic assets such as hedge funds, especially those that discover new avenues of speculation like investing in oil or mortgage backed securities.
These are all distortions that have results from the rising wage gap in the United States.
