The Real Reason Wages Have Stagnated: Our Economy Is Optimized For Financialization

Authored by Charles Hugh Smith via OfTwoMinds blog,

Labor"s share of the national income is in freefall as a direct result of the optimization of financialization.

The Achilles Heel of our socio-economic system is the secular stagnation of earned income, i.e. wages and salaries. Stagnating wages undermine every aspect of our economy: consumption, credit, taxation and perhaps most importantly, the unspoken social contract that the benefits of productivity and increasing wealth will be distributed widely, if not fairly.

This chart shows that labor"s declining share of the national income is not a recent problem, but a 45-year trend: despite occasional counter-trend blips, labor (that is, earnings from labor/ employment) has seen its share of the economy plummet regardless of the political or economic environment.

Given the gravity of the consequences of this trend, mainstream economists have been struggling to explain it, as a means of eventually reversing it. The explanations include automation, globalization/ offshoring, the high cost of housing, a decline of corporate competition (i.e. the dominance of cartels and quasi-monopolies), a failure of our educational complex to keep pace, stagnating gains in productivity, and so on.

Each of these dynamics may well exacerbate the trend, but they all dodge the dominant driver of wage stagnation and rise income-wealth inequality: our economy is optimized for financialization, not labor/earned income.

What does our economy is optimized for financialization mean? It means that capital and profits flow to the scarcities created by asymmetric access to information, leverage and cheap credit--the engines of financialization.

Optimization is a complex overlay of dynamically linked systems: the central bank optimizes the flow of cheap credit to the banking/financial sector, the central state tacitly approves the consolidation of cartels and quasi-monopolies, and gives monstrous tax breaks to corporations even as it jacks up taxes and fees on wage earners and small business.

Financialization funnels the economy"s rewards to those with access to opaque financial processes and information flows, cheap central bank credit and private banking leverage. Together, these enable financiers and corporations to get the borrowed capital needed to acquire and consolidate the productive assets of the economy, and commoditize those productive assets, i.e. turn them into financial instruments that can be bought and sold on the global marketplace.

These commoditized assets include home mortgages, student loans, and specialized labor forces which are "sold" with their employers or arbitraged globally. Once an asset is commoditized, the profits flow to those who process the transactions of packaging and marketing these assets globally.

Take auto loans as an example: the big money isn"t made from collecting the interest on the auto loans; the big money is made by processing and assembling the loans into tranches that can be sold to investors globally.

One way of understanding financialization is to ask: what"s the quickest, easiest way to make $10 million in our economy? Is it building a business based on the labor of employees over a decade or two?

You"re joking, right? The easiest way to make $10 million is to be part of the investment banking team overseeing a $10 billion corporate buyout or merger deal, or investing seed money in a tech company that subsequently goes public.

How about the easiest and quickest way to make $100 million? The answer is the same: working a vein of financial wealth based on commoditized instruments, leverage and credit.

Labor"s share of the national income is in freefall as a direct result of the optimization of financialization. The money flows to those with the capital, credit and expertise to optimize financialized skims. As for selling one"s labor in an economy optimized for capital and the asymmetries of finance--there"s no premium for labor in such an economy, other than technical/managerial skills required by finance to exploit markets.

This is the driver of the rising income-wealth inequality this chart reveals:

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Drugs & Demographics - National Tragedy, But Where From?

Authored by Jeffrey Snider via Alhambra Investment Partners,

In 1928, the fertility rate of American females (aged 15 to 44) was 93.8 per 100,000. By 1931, the first year of full Great Depression and collapse, the rate had declined to 84.6. It would bottom out, unsurprisingly, around 1933 and 1935 and the end of the contraction part of the depression. But what made that economic event “great” wasn’t just that one forward piece. It was instead the fact that it lingered on and on for more than a full decade.

As such, fertility rates in America would remain subdued until the later years of WWII. It was one reason economist Alvin Hansen conjured his (incorrect) secular stagnation thesis. Without the demographic tailwind, he surmised, growth would be exceedingly difficult as a baseline matter.

But what if it was the other way around? What if growth came first and then came the babies, as they did following WWII and the restoration of economic function after sixteen years of pent up demand and persisting unwanted pessimism (plus more than a little stabilization to the global monetary system).

Fertility rates during the Baby Boomer years, defined as 1946 through 1964, were an impressive and wholly unexpected 113.4.

There are always grave social and political consequences to prolonged stagnation or depression. It goes way beyond mere statistics of output and labor utilization. The US came out of the Great Depression in many ways nothing like how it went into it. People accepted a very different form of political arrangement (New Deal, to put it simply) because the old way clearly didn’t work – even if nobody could agree what it was, exactly, that constituted the old way.

We have, of course, experienced already these social symptoms during our lost decade. The economy starting in August 2007 shrank, and never recovered. For Americans, the cost in terms of labor has been huge, some 15 or 16 million who don’t fit in the official definitions for the labor force, not because of their choice but because they linger in the slack the mainstream narrative wants to omit. Economists attempt to ignore them for their huge blot on the official record.

As a society, of course, we increasingly cannot overlook what has become perhaps the first major social disruption of the Lost Decade; the opioid crisis. As Alvin Hansen in the thirties, economists today have it backward, trying to fit the drug problem as the cause instead of the effect. They desperately want to do so because that would legitimize the unemployment rate which doesn’t include those 15 or 16 million, and therefore would explain the Lost Decade as a non-economic or non-monetary factor.

Today, President Trump announced that he was declaring it a National Emergency. By “it” I don’t mean the economy, unfortunately, but rather the symptom drug epidemic. I can’t help but wonder if this is the wrong approach:

I don’t mean to make light of the situation because this is serious business and a national tragedy. But we are looking, as we so often do, in the wrong place for blame and therefore solution. The answer to such despair that might engender so much escapism is the satisfying hope that only economic opportunity can afford.

I firmly believe that someday there will be such growth again. I also believe that there is lingering at the contours of all this another Baby Boom should (when) it happen(s). It’s been so long that I feel it practically inevitable, an entire generation of Americans, bordering on two, who have come of age under some level of atrocious economic conditions (not quite 1930’s, but not that far off, either, as time progresses). How might they respond to what we all once took for granted?

The variables are how long it might be before we see it happen, and in what form the transformation takes. I think we all would prefer to skip repeating the first half of the 1940’s to get on with what followed (including the monetary stabilization piece). Time, however, isn’t a charitable factor when stretched out for so long. The clock, for good and bad, is ticking. There is nothing secular about that long ago stagnation, just as there isn’t about this one.