That's Why It's Called Capitalism

There were two must-read articles in the last two days. In Friday's Washington Post, Steven Pearlstein's "The New Division of Labor: Adding profits, subtracting workers"; and in Friday's New York Times Bob Herbert's "A Sin and A Shame". This Great Recession was not a natural consequence of economic cycles but a man-made disaster caused by deregulation,over-leveraging of debt and retooling corporations toward a more efficient use of labor to maximize profits. Recently, the Brookings Institute conducted a series of studies, which demonstrates that without a profound change in our economy, current levels of unemployment will continue for the foreseeable future.



This past week , Princeton's Alan Blinder, a former vice chairman of the FED, and Mark Zandi, chief economist at Moody's Analytics and a former adviser to John McCain's presidential campaign, released a paper showing how the government saved the country from another Great Depression. Using a standard econometric model, they backed out everything the government did to staunch the bleeding of the crisis and stimulate the economy. From zero interest lending. the TARP program, bailing out the auto industry, tax cuts and infrastructure payments and providing the states with money, they concluded the economy would now be 8 percent smaller, with 8 million fewer jobs and a federal deficit this year of $2 trillion, not $1.4 trillion. This tracks with earlier testimony of FED chief Bernanke that without these measures, the unemployment rate would be closer to 30%.

This week President Obama did a victory lap in Motor City, where he visited the auto industry. The use of $86 billion in government funds to bail out Chrysler and General Motors has paid off handsomely. For the first time since 2004,all three major American car companies are operating at a profit and they have repaid up to $8 billion in loans. The auto industry has added 55,000 jobs this year and exports are up 57%. And the industry is rapidly moving to the production of energy efficient vehicles. President Obama deserved his victory lap since the Auto bailout was opposed by virtually every single Republican.

So why can't there be more such programs? Baby-boomer progressives always ask why President Obama with clear majorities can not embark on more aggressive job-creating programs like FDR. Besides the obvious obstructionism of the Republicans in the Senate, we have to realize that the media and the Beltway are immune to the effects of the recession. D.C. lawyers, K Street lobbyists, policy think tanks and employees of the government and Congressional staff inhabit a world immune to the world of the economy.

A recent scandal involving an NGO I once led revealed that salaries of this govermment-funded entity range from 3 to 5 times that of the average American family. If you walk that across the whole Beltway, you are looking at married couples earning a combined income of $200 to $400,000 per year, with retirement plans and medical insurance. The only hit they have taken so far is with 501-Ks. For them, there is no urgency to the economy and no real perceived long-term downside to the economy in their hermetically sealed world. This accounts for the lack of etnhusiasm for letting the Bush tax cuts for the wealthy die, because they would be affected.

Today's Washington is not the sleepy parochial Southern town, which saw the flood of New Dealers hoping to serve the public good. In fact, I would argue the denizens of the Beltway have no sense of the public good.


Then we move to another untouched part of our economy--American corporations. Steven Pearlstein notes the irony of the four giant banners hanging outside the U.S. Chamber of Commerce , which spells J-O-B-S. The private businesses the Chamber purports to represent eliminated 8 million jobs in 2008 and 2009 and have managed to add a scant 600,000 since then. While the jobs haven't returned, corporate profits have been soaring. Today, they are at $1.2 trillion annually, which are now larger than they were at the height of the financial bubble. While Chamber President Tom Donohue says that corporations are holding on to $2 trillion in cash reserves because they are uncertain in this investment climate, the reality is that corporations used the recession to find out ways to produce more with less workers. What used to be the case, funds would go to research and development and investing in new equipment and plants has now changed to spending in faster-growing markets abroad and paying down your debt. As we all know, corporations are not in the business to create jobs, but profits. And there are doing that at a record pace. Why stop and why support any further govermment programs to strengthen job creation?

Bob Herbert's piece follows the logic of Pearlstein by emphasizing how shabbily American corporations have treated workers. His point is that there was absolutely no need for so many men and women to be forced out of their jobs in the Great Recession. Herbert cites the studies of Andrew Sum, an economic professor and director of the Center for Labor Market Studies at Northeastern University in Boston, which shows that the carnage in the workplace was way out of porportion to the economic hit that corporations were taking. Professor Sum says that even though the country emerged from the recession early in the summer of 2009, this period of economic recovery "has seen the most lopsided gains in corporate profits relative to real wages and salaries in our history." Citing a figure of $1.84 trillion cash on hand, a 27 percent increase since 2007, Sum notes that as a percent of total company assets, this cash has reached a level not seen in the past half-century.

Andrew Sum backed up to the start of the recession in December 2007 and found that the real aggregate output in the United States as measured by the gross domestic product, fell about 2.5 percent but employers cut their payrolls by 6 percent. The consequence was that by the end of the fourth quarter in 2008, corporate profits exploded and by the time we reach the first quarter of 2010 by $572 billion, But wage and salries will have gone down by $122 billion.

Both Pearlstein and Herbert essentially agree that there can't be a robust recovery as long as corporations are intent on keeping idle workers sidelines and squeezing the pay out of those who remain on the job. Pearlstein thinks the Chamber should change the banners outside their building to T-H-A-N-K-S to President Obama. Herbert ends his piece by noting that ALCOA, which laid off 37,000 workers, will not rehire despite huge profits. "Until we begin to value our workers," he writes," and understand the critical importance of employment to a thriving economy, we will continue to see our standards of living decline."

With America' economic might shrinking relative to the world and the competition sharp for cutting edge technologies, you would think that such a large country would have a national industrial policy. But the sacred commitment to the free market prevents this from happening. This is clear just by the example of the inability to develop a coherent energy policy, when that is essential to future national security. The Obama Administration will steer us out of the Great Recession but not on to safe shores. The question is really how can we transform our economy away from its consumer base to production with the minimum of unrest and upheaval.