A Blank Spot on the Map

Monday, June 20, 2011

The Neoliberal Economy in a Nutshell

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.


At 6:13 AM, June 24, 2011, Anonymous LowcountryJoe said...

"For the sake of precision, the wage gap may be defined as worker productivity divided by the average real compensation of employees."

How productive is the worker, really, when much of the production is done by an automated process which a human being happens to monitor? The true productivity occurred because of the owner who invested the capital in the machine which does the work; therefore, the returns on this productivity should go to the one who implemented it with the expenditure. The guy or gal who maintains it, gets paid a market wage.

"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."

Real wages are up over this so-called stagnant period. Ever catch the posts by Don which outline what's in the 1975 Sears catalog? Ever check out the 'basket of goods' in the CPI and seen how it's changed in its composition over time? And I dig this reference to "natural way"; gee, would the Lefty who wrote this could actually be implying market forces?

The rest of this pathetic bit of writing doesn't make much sense -- not enough to dive into because it's so poorly thought out. I do want to point out that Ravi Batra made no reference to opaque financial instruments in the housing market downturn and never once talked about the dangers of environmental degradation at the hands of pig-headed polluting mankind: these omissions alone must disappoint you greatly.

At 2:05 PM, June 24, 2011, Blogger muirgeo said...

OK. So the claim made , which I believe, is that stagnant wages will result in economic ineffieciency and increasing poverty. To keep it simple, if you'll agree, lets start theoretical then proceed to the real world. If I can't convince you of the theoretical argument or you can debunk it then we need not waste our time discussing real worlld data and evidence.

Do you believe the argument that IF workers wages ARE stagnant than demand will also become stagnant?

At 4:00 PM, June 25, 2011, Anonymous LowcountryJoe said...

Wages, economic activity, or anything, is never EVER stagnant.

You use works and string them together; great. But I really doubt that you really know what in the hell the mean or could articulate them in such a way that they could be understood even if -- IF -- you did know what they mean.

Let's skip the debate. I'd ask you to properly define the terms that you're using beforehand: and this would take multiple comments to get any kind of coherent answers from you. And this would be before we could get anywhere with your theories and mine.

At 12:32 AM, June 26, 2011, Blogger muirgeo said...

"Wages, economic activity, or anything, is never EVER stagnant." LCJ

Now you are starting off being argumentative. I said lets look at this theoretically. And asked you IF wages were stagnant or if they are dropping...

Can you not start with this theoretical basis. Besides we DO have data on wages and they CAN be stagnant.

You went on to say you want to skip the debate? Are you bailing out already. I asked a very straight forward question and you can't even discuss that.

At 2:21 PM, June 26, 2011, Anonymous Anonymous said...

Can you define poverty? Before you use relative terms, realize that the lowest paid player in the NFL is living in relative poverty.

At 10:08 PM, June 26, 2011, Blogger muirgeo said...

I would for data purposes us the US governments and the WHO definitions.

For pragmatic purposes I would describe it as not having enough income to access the standard things that allow one to cloth , feed, house, obtain health care and educate one self.

At 3:39 AM, June 27, 2011, Anonymous LowcountryJoe said...

"I said lets look at this theoretically. And asked you IF wages were stagnant or if they are dropping..."

See what I mean? Now you seem to think that you actually wrote the words "or dropping" in your earlier comment or even implied that anywhere. You're a mess!

At 9:40 AM, June 27, 2011, Blogger muirgeo said...


Hey I asked you a simple questions:

"Do you believe the argument that IF workers wages ARE stagnant than demand will also become stagnant?"

And you came back with non-sense making the whole thing about definitions:

You said:

"Wages, economic activity, or anything, is never EVER stagnant."

What? First you can't even come to the initial theoretical argument. Second... your statement is wrong. Wages CAN be stagnant... and in fact they have been.

You are the one that has gone off on an irrational tangent on the meaning of stagnant.

You make the claim that wages can never be stagnant. I think what you mean is that they are always changing.

So I'll play your game. If wages are not increasing over time is it possible for demand to increase?


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