Sunday, 24 July 2011


The continued chasm between rising corporate profits reality, and the continued decline of middle class and workers' incomes at a time that official unemployment is hovering around nine percent is a disturbing trend that reflects how the recession has ended for corporations but it continues for the broader social classes. Stagnant job growth and lower wages combined with lower living standards owing to higher indirect taxes and higher cost of living spell trouble for America's social structure. The picture is even worse for most of Europe, especially southern and eastern Europe.

Most income groups have not shown much growth since 1979, while the top 1% of the population experienced quadruple income rise.  this chart suggests most Americans have little idea of just how unequal income distribution is. click to Mother Jones for the rest of the harts and info.

Labor experts note that this is the worst labor market in the past four decades, as wages account for a mere 1% of economic growth from January 2010 to July 2011, whereas profits accounted for an astonishing 88% during the same 18-month period. By comparison, wages accounted for 50% during the recession of 1991-1992, while corporate profits for 28% of growth. What does this mean? Simply put, super concentration of capital is a prescription for the next inevitable recession.

This huge gap between profits and wages is also reflected across Europe and the pretext that mainstream economists provide to explain it is that corporations have moved to Asia and Latin America, thus they are not investing at home. Another explanation is that US corporations are sitting on an estimated $2 trillion of cash, at least half of which they have invested overseas and refuse to repatriate it unless the Obama administration gives them a tax break. 

While it is true that corporations are adding jobs in Asia and Latin America while cutting in US and EU, the goal is to reduce wages in their home base so they can realize even greater profits. Workers have no choice but to accept what is offered, while government is providing no protection for labor. Given the downward pressures on wages and the trend of paying down debt on the part of consumers, living standards will remain low for at least a decade.

The most intriguing aspect of the economy in Western economies is that government is redistributing income from the broader social classes and concentrating it in the top ten percent, instead of absorbing surplus capital sitting idle in the top ten percent of income earners to stimulate the economy. The madness of having the broader social classes (middle class and labor) pay for the huge public deficits, while allowing the top ten percent of the population to keep its wealth is the number one long term cause of the next recession.

Why are the U.S. and EU economies missing the engines that drive them out of a recession and back to growth? Is it the depressed housing market, the lack of banking capital available for business, low consumer spending, high government debt, low wages and high taxes on the middle and lower classes, international competition?

Government policy built around the credit economy and welfare capitalism will ultimately cripple the market economy as it will undercut the middle class and strong working class, thus the pluralistic/democratic society and its institutions. The market system has a limited horizon, unless there are fundamental changes designed to strengthen the middle class and labor. There is no indication that any major western government is on such a trend, and every indication that the world economy is headed for an inevitable cyclical recession.

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