A Blog by Jonathan Low


Aug 20, 2011

Stock Market Tip: Be Worried - Workers Are Consumers

The core business of business is sales. If you dont sell, you dont generate income, which means you can not survive.

And if your customers dont have enough money -whether they be individuals, households or businesses that sell to businesses that sell to those individuals or households - then your sales will grind to a halt. And when that happens, investors will stop putting money into your business or any other, which means that the stock market will decline. Yes, it is a circle. But at the moment it is not virtuous in either the social or economic sense. JL

Robert Reich comments in Business Insider:
Repeat after me: Workers are consumers. Consumers are workers.
We’re slouching toward a double dip, and Wall Street is imploding, because consumers – whose spending is 70 percent of the economy – have reached their limit.

It’s not just the jobless who can’t spend. It’s mainly people with jobs. Median wages continue to fall. Weekly wages in July for Americans with jobs were 1.3 percent lower than eight months before.

America’s median earners are now earning less (adjusted for inflation) than they earned ten years ago.

Every CEO of every company that continues to squeeze payrolls (Verizon, are you listening? Ford?) needs to understand they’re shooting themselves in the feet. Where do they expect demand for their products and services to come from?

They’re doing the reverse of what Henry Ford did back in 1914 – paying his workers three times what the typical factory employee earned at the time. The Wall Street Journal called his action “an economic crime” but Ford knew it was a cunning business move. With higher wages, his workers became his customers, snapping up Model-Ts and generating huge profits.

Many on Wall Street are scratching their heads, trying to understand why the stock market plummeting. After all, corporate earnings are still high.

But it’s becoming clear those earnings can’t be sustained. Corporate earnings are the highest they’ve been relative to worker wages and benefits since just before the Great Depression. And the richest 1 percent of Americans are getting a higher percent of total income since just before the Great Depression.

Get it? It was only a matter of time before the boom on Wall Street turned into a bust. Booms cannot continue without American workers participating in them.

Foreign consumers have helped sustain earnings, but that won’t continue, either. The European economy is sinking and China is pulling in the reins on growth.

What will happen to the Dow Jones Industrial Average when corporate earnings revert to their historic average relative to American wages? I’ve seen various estimates. None look good for investors.


Chad English said...

Yes, this is exactly right, and exactly why contracting spending is the wrong thing to do in a recession.

There is nobody in the 'worker, consumer, business, investor' economic loop that has the incentive to individually contribute to get the economic engine started again. It's a Prisoner's Dilemma. You need a critical mass of money flowing in the economy for people to jump back in.

That's the job of a democratic government, to provide the solution to Prisoner's Dilemmas. I'd argue it's the sole reason government should exist. (Laws and rights are also Prisoner's Dilemmas.)

They should be putting money into jobs, preferably via hiring private companies to do work that is an investment in improved productivity (infrastructure, R&D, etc.)

That means either borrowing the money and paying it down when things are good, or taxing more on the people who have the existing money and benefit most from the economy, the rich.

This is not rocket science but can be difficult for to grasp if people are thinking in terms of their home budgets instead of how an economy works.

Tabish Faraz said...

That's a brilliant share, Jon - Robert Reich's comments in BI. I'd add to the comments that besides consumers, workers of an organization are also its assets. You are spot on: It's a circle. Organizations better stop firing at least, if they want a prosperous future. I again find myself adding to Reich's comments that workers not only help in continuing the boom, but also help in recreating it. I just hope that today's tycoons and large corporations learn from Henry Ford soon.

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