by Jerome a Paris
Fri Jan 4th, 2008 at 10:30:21 AM EST
The payroll numbers are out, and they are really bad:
U.S. employment posted its smallest increase in over four years last month as the housing downturn continued to take its toll last month, while the jobless rate hit a two-year high, indicating a weak finish for the U.S. economy in 2007.
Nonfarm payrolls rose 18,000 in December, the job market's worst performance since a decline of 42,000 in August 2003, the Labor Department said Friday. (...) The unemployment rate rose to 5.0%, the highest level since November 2005, from 4.7% the previous month.
the government added 31,000 jobs
Of course, I'm quoting the Wall Street Journal, so this almost good news from the perspective of their readers, as it increases the perspective of a Fed rate cut, the only thing that seems to matter to Wall St (cheap credit being the rising tide that lifts all boats).
But, but, but here's the new conumdrum for Ben "helicopter" Bernanke:
Fed's Inflation Fears Might Trump Calls for Another Big Rate Cut
Slowing factory activity, weakening job growth and a credit crunch have investors expecting aggressive interest-rate cuts from the Federal Reserve.
But this week's surge in the prices of oil and gold underlines why the Fed may not have the freedom to ease monetary policy as much as it did in 2001, when the economy slumped, or as much as many on Wall Street want.
The most obvious inflationary threat is from oil. It has risen to almost $100 a barrel now from $61 at the end of 2006. That has sent the 12-month overall inflation rate up sharply, to 4.3% in November. By contrast, oil hovered just at just less than $30 for most of 2001 before sinking after the Sept. 11 terrorist attacks, and inflation ended the year at 1.6%.
4.3% - hmmm, where did I see that number already? Oh, yes, in the Labout statistics article:
Average hourly earnings increased $0.07, or 0.4%, to $17.71. That was up 4.3% from a year earlier, indicating some pressure on wage costs from relatively tight labor markets.
Okay, this is worth going into some detail:
I know that people accuse me of caricature when I make that last point, but it's written on an almost daily basis in articles on the economy - and the same rules are applied in Europe. I have a wonderful example from this morning's Financial Times, about the German economy, which is enjoying an economic boom of sorts, with sharply falling unemployment, and yet the lessons are the exact same: wages increases are bad
German unemployment falls to six-year low
German unemployment fell to a six-year low last month, more than double the fall economists had predicted, underlying the strength of Europe’s largest economy
The data is the latest evidence that the German economy has proven resilient despite strong economic headwinds, defying the global financial market turbulences and credit squeeze, the sharp rise in the euro, rising raw materials and energy prices, and the marked US slowdown.
Economists believe German manufacturers – the country was again crowned the world’s largest exporter of goods by the World Trade Organisation in 2007 – will eat into their profit margins this year rather than concede market share due to the stronger euro.
A more serious cause for concern is the gradual introduction of minimum wages in specific sectors, which began late last year and should continue this year, and the generally higher wage settlements amid mounting trade union activism.
The worst possible outcome would be a reversal of the decline in unit labour costs that gave German companies a powerful competitive boost over the past five years. Given the political climate, with a government that is backtracking on the structural reforms of the past ahead of important regional elections, hefty wage rises will be all the more toxic for the economy
The German economy is going strong, in economist's eyes, despite wage increases (and, something that the article notably fails to point out, despite substantial tax hikes at the beginning of 2007, which have allowed the German government budget to show a surplus and to fund new social spending). And more wage increases is seen as the biggest danger for the economy, because that would force corporations to eat into their profit margins.
It cannot be written more explicitly: wage increases prevent the capture of income by corporations and their shareholders and are therefore bad. The fact that increasing wages allow for stronger consumption, fuelling demand for corporations' products and services, and generally improve their business prospects, is completely ignored - nah, denied - by conventional economic wisdom.
According to that "wisdom", consumption needs to be fuelled by debt. Debt makes workers more beholden to the system, less outspoken, and less likely to rock the boat. Debt creates business for the financial world, especially now that it can be repackaged and resold and let all the insiders get fat fees in the process. And debt makes wage stagnation more tolerable, as SUVs and flatscreen TVs (or, for some, McMansions) can still be bought. And thus looting of the middle class (by the diversion of income from wages to corporate profits and capital income) can continue apace.
But, as Robert Reich, Clinton Secretary of Labor (and author of Supercapitalism, an interesting book on corporations) wrote in an oped yesterday: The era of easy money is over
The fact is, middle-class families have exhausted the coping mechanisms they have used for more than three decades to get by on median wages that are barely higher than they were in 1970, adjusted for inflation. Male wages today are in fact lower than they were then; the income of a young man in his 30s is now 12 per cent below that of a man his age three decades ago. Yet for years America’s middle class has lived beyond its pay cheque. Middle-class lifestyles have flourished even though median wages have barely budged. That is ending and Americans are beginning to feel the consequences.
The first coping mechanism was moving more women into paid work.
(...) a second coping mechanism. The typical American now works two weeks more each year than he or she did 30 years ago. (...)
As the tide of economic necessity continued to rise, we turned to the third coping mechanism. We began to borrow, big time.
In other words, all the looting that could be done has now been done, and there is little more wealth to capture from an exhausted middle-class. However, the tools to divert wealth to a small minority are still in place, and, as the pie begins to shrink (and shrink it must, given how far house prices have to fall, and how much oil prices are driven by Iranian, Saudi or Russian demand growth rather than the stagnant US or European markets), it is only likely that the pressure to capture ever more, to satisfy the endless greed of the richest, and prevent them from seeing declining incomes too.
These tools and diversions will no go away on their own. It MUST be the task of the next president to take them out, and that can happen only if this is part of the programme, and endorsed by a popular mandate.
And focus on the horse race will only divert attention, again, from these real issues.
Quoting Reich again:
The anxiety gripping the American middle class is not simply a product of the current economic slowdown. The underlying problem began around 1970. Any presidential candidate seeking to address it will have to think bigger than bailing out lenders and borrowers, or stimulating the economy with tax cuts and spending increases.
Most Americans are still not prospering in the high-tech, global economy that emerged three decades ago. Almost all the benefits of economic growth since then have gone to a relatively small number of people at the top. The candidate who acknowledges this and finds ways truly to spread prosperity will have a good chance of winning over America’s large, and increasingly anxious, middle class.