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Monday, February 20, 2012

Structural Difficulties with Recovery

Barry, My Liege:

Our recovery has started. That's all good.

But, how far will it go? That's the question.

Justice Louis Brandeis said it best: “We can either have democracy in this country or we can have great wealth concentrated in the hands of a few, but we can’t have both.” –Louis Brandeis, U.S. Supreme Court Justice (1856-1941)

In addition to a biting commentary, here's how that relates to our recovery - as a society we have chosen to have great concentrations of wealth in the hands of a few.

Aside from the obvious corruption that produces, there is an even bigger problem.

The big problem is simply this: Americans don't have any money to spend.

And, if average Americans don't buy anything, then the economy will not recover. It takes demand from consumers to fuel corporate profits - no consumer demand means no profits and further job losses.

Putting aside the rhetoric, there is real evidence that the Amercian economy is losing purchasing power from average citizens.

According to the St. Louis Federal Reserve Bank, the share of total GDP acounted for by wages and salaries - that is where consumer demand comes from - was around 51% between the late 1940's and about 1969 when it peaked at 53.5%.

Since that peak, it has declined steadily until it stands at a low 44% of GDP today.

Here is a graph: http://theeconomiccollapseblog.com/wp-content/uploads/2012/02/Wages-And-Salaries-As-A-Percentage-Of-GDP.png

Although that does not seem a large percentage, it represents a huge drop in consumer purchasing power. At a GDP of about $13 trillion, that 9% drop is a little more than a trillion dollar drop in aggregate demand.

What that means is that any recovery is likely to be shallow until more purchasing power is restored to average Americans.

Now we see why the Brandeis quote is important. It is critical because restoring purchasing power to Americans means raising our wages and salaries.

And, our concentrations of wealth in the hands of a few likely will block any increase in wages and salaries because such an increase will reduce their personal fortunes.

My Liege, there is only one peaceful exit from this situation and into a better future.

That way is to enact legislation which will raise wages and salaries and reduce the concentrations of wealth.

My prediction is that our circumstances will need to become even worse before we can align enough political power to support such changes.

I would that it were not so, My Liege.

Your faithful servant.

1 comment:

  1. C. R.:

    Yup! Building customers (working people with good pay checks) is the only way to re vitalize US.

    ReplyDelete