In response to the graph depicting productivity vs. real hourly compensation that Josh Marshall produces in a post about what Democrats need to do to bounce back from the last election, I’d like to offer the graph above.
There are lots of reasons that real hourly compensation has stagnated over the last 40 years and I’m sure that every reader can name two or three. But the graph above illustrates a big one.
In the early 1970’s wages stagnate but productivity rises. This productivity is investment productivity, and there is a simple reason why it rises. There is a simple reason why imports begin to rise, and why manufacturers begin to be pushed offshore.
When currency replaces money, currency will be produced as fast as possible. When the currency is free floating, it will accelerate that growth. Credit creation becomes the driving force in the economy, and imports facilitate credit creation.
(With a few exceptions, dollars are worthless anywhere but the US. China can purchase US goods, US securities, US real estate, US companies, deposit dollars in US banks, or they can stuff them in a mattress.)
Rockefeller, Vanderbilt, Carnegie, and the other pre-Fed fortunes were built with hard money. They also built real things. Today’s PEs build paper companies, and they need to go to the golf course to find their balls.
Productivity is an indication of currency creation not actual value. Manufacturing has decreased. Imports have increased. Borrowing has increased. Debt manufacturing has replaced goods manufacturing, but like corn, it is a raw material and an end product. As such, it is being consumed twice as fast.
Investors are using currency to create credit, and they are using currency to pay workers to manufacture debt. Workers who make real things are superfluous, but they need to be paid with money. The reason for importing illegal workers is to pay them as little real money as possible. Until they become debtors, they are worthless. (This is the real reason the business Republicans want amnesty.)
There is no solution that will allow credit creation to replace the manufacture of goods. (goods include movies, books, video games, software)
I actually think there’s more than a single reason, e.g. the financing of the Viet Nam War with debt rather than taxation, Nixon’s wage and price controls among them.
Wow.
The chart supports Keynes’/Kalecki’s insights on the relevance of effective demand in employment and wage pressures. We’re exporting that demand in exchanged for imported products.
Very interesting, Dave.
Note, too, that the deviation from historic norms coincides with the enactment of Medicare/Medicaid.
Actually that’s a good observation. Although I haven’t looked at that aspect in any detail, in theory any increase in spending (all else being equal) should result in a greater trade deficit. It also coincides with deficit spending for the Vietnam War which precipitated failure of the Bretton-Woods system.