Daily Archives: October 15, 2012


The Two Faces Of The Global Economy

Supposing there were a central being whose concern was running a good world economy.

This being might rightly notice that “If I can cut (labor) costs without destroying the customers, I could make more profit.”

This is the issue being discussed in my previous posts, Low Wages And High Unemployment Are Paralyzing The Global Economy and The Labor Market Is Not Self-Regulating; Governments Must Support Worker’s Fight For Higher Wages.

It occurred to me that the reason why people might be so resistant to the ideas in these posts is because they are focused on the other, equally valid face of the global economy.

The central being posited above might also rightly notice that “If I can raise the buying power of the customers without increasing my (labor) costs to profit killing levels, I could make more profit.”

There is a range in the middle between extremely low wages and no customers and extremely high wages and no profits where the economy can do well.  Adjustments to keep the economy in this range should always be sought.

However, when you reach or pass the extremes of low wages, no customers or high wages, no profits, then you have to recognize which boundary you are at to apply the proper remedy.  If you apply the proper remedy for the wrong boundary, this leads to further disaster.

To convince people to let you apply the proper remedy for the boundary you are at right now, you have to assure them that you know there is the other extreme and you are not proposing to go there.

Rather than construct your rules and enforcing mechanisms to address only the boundary problem you now face, it would be best if you could come up with rules that recognize the full spectrum of conditions that do occur and adjust themselves accordingly.  This is a very difficult task.  However, if you do not  have a clear picture of what are your goals, then you might not see what is wrong with the changes you propose that only address the current problem.


The Labor Market Is Not Self-Regulating; Governments Must Support Worker’s Fight For Higher Wages

The Labor Market Is Not Self-Regulating; Governments Must Support Worker’s Fight For Higher Wages is part 2 of the 2 part interview that The Real News Network has with Heiner Flassbeck, Director of the Division on Globalization and Development Strategies of the United Nations Conference on Trade and Development (UNCTAD). Part 1 is in my previous post Low Wages And High Unemployment Are Paralyzing The Global Economy.


Quoting from Flassbeck’s remarks:

One should remember there is an interesting story in a new book that came out called The Assumptions Economists Make. The author shows that in 1948 there was a kind of Detroit consensus in the automobile industry which said that the workers should systematically get the productivity increase plus an inflation compensation. So the compensation should rise with inflation plus productivity. This was a good formula.

If you revise it a bit and say it should be a productivity trend, a four or five years’ productivity trend, should be extrapolated one year or two years, that should be reflected in nominal wages plus the inflation target of the economy, then you get a perfect formula to stabilize a growing economy and to get back into a growing economy. We have to relearn this lesson.

In these two interviews Paul Jay, the interviewer, interjects some of the arguments against what Flassbeck is arguing. This gives Flassbeck the opportunity to acknowledge the other side of the argument and to explain why it is wrong.

I am not nearly as sanguine as Flassbeck is that the situation can be turned around politiclly stating with the upcoming election for President and U.S. Senator from Massachusetts. Romney is so good at explaining the false economic doctrine and Obama is so weak on explaining the correct doctrine, that the electorate has a chance of falling for the wrong medicine, If even some economists are still plugging the old, failed doctrine, how can we get the public to be smarter than they are.

The only hope is that the the economists are blinded to reality because of what they perceive as their own short term financial interests, whereas the public has a chance to have their eyes opened by the current financial disaster for them.


Low Wages And High Unemployment Are Paralyzing The Global Economy

The Real News Network has the video Low Wages And High Unemployment Are Paralyzing The Global Economy is the first part of a two part interview with Heiner Flassbeck Director of the Division on Globalization and Development Strategies of the United Nations Conference on Trade and Development (UNCTAD). Part 2 is in my subsequent post The Labor Market Is Not Self-Regulating; Governments Must Support Worker’s Fight For Higher Wages.


Quoting from Flassabeck’s remarks:

Let me explain that briefly. Take the United States. In the United States, which has also very low—everybody talks about high degree of inequality in the United States. But at the same time, unemployment has jumped. But it has jumped not due to high wages before, but it has jumped due to the financial crisis. But now you have high unemployment that puts pressure on wages, because the power is in the market, in the labor market, such that wage earners have nothing to negotiate for, and so they put pressure on wages. If wages fall, incomes fall for the average American household, and if incomes fall, consumption will fall. If consumption falls, investment falls, and the economy will not get out of recovery but deeper into recession.

So this is obviously a big problem with the market economies, because every good economist would say, well, if you have unemployment, then there should be pressure on wages, but if wages have never risen before and there’s nevertheless unemployment, then you’re in trouble somehow. And that is why the president and others will have big, big difficulties to get out of the slump. And that is why monetary policy does so desperate things as they’re doing now.


This is all so logical and easy to understand, but it flies in the face of what people think they know about economics.

In my list of favorite quotes, I have the following:

Mark Twain
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”