More Pay is the Only Way


Wages, wages, wages. It all gets down to wages.

A strong, resilient economy, that can withstand the periodic buffeting of cyclical downturns, must be built on a rock-solid foundation of wages that keep pace with production. If wages stagnate, as they have for the last 30 years, the only way a consumer-driven economy can grow is through the expansion of personal debt, which isn’t so hot in the long run.

Consider this: the US economy is 72 per cent consumer spending. That means the Gross Domestic Product (GDP) cannot grow if salaries don’t keep up with the price of living. Low Income Families (LOF)–that is, any couple making less than $80,000–represent 50 per cent of all consumer spending. These LOF’s spend everything they earn just to maintain their present standard of living. So, how can these families help to grow the economy if they’re already spending every last farthing they earn?

They can’t! Which is why wages have to go up, up, up. The cost to short-term profits is small potatoes compared to the turmoil created by a deep recession, which is what the world is facing right now due to misguided economic policies. The present crisis could have been averted if there was a better balance between management and labor. But the unions are weak and have little political power, so salaries have languished while Wall Street has turned the government into a revolving door for industry reps. and corporate stooges who apply their anti-labor doctrine with ruthless zeal. As a result,  real wealth has been replaced by chopped up bits of mortgage paper, stitched together by Ivy League MBAs, and sold to investors as priceless gemstones.

This is the system that Bernanke seeks to resurrect with his multi-trillion dollar transfusion; a system that shifts a larger and larger amount of the nation’s wealth to a smaller and smaller group of elites.

When Alan Greenspan appeared before Congress two months ago, he admitted that he had discovered a “flaw” in his theory of how markets operate. The former Fed chief was referring to his belief that financial institutions could regulate themselves and that investment bankers and hedge fund managers could be trusted to uphold the “honor system”. Whether one believes Greenspan or not is immaterial. What really matters is that the foul-breathed former Chairman skirted the larger issue of whether the economy can long endure simply by expanding credit rather than raising workers wages. The servile congress people  never challenged Greenspan on the central issue nor did they ask him to defend the discredited, trickle-down Randian economic theories which guided his policy-making.

Millions of homeowners are now facing eviction, consumers are tapped out, and the job market is in a shambles. When equity bubbles implode, it’s never pretty and Greenspan’s zeppelin has been particularly nasty. Assets are sold at fire sale prices and there’s a frantic rush to the safety of cold hard cash. The sense of fear is palpable. It may seem like a bad time to talk about a raise in pay but, in fact, the opposite is true. Nothing focuses the mind like crisis, and the impending meltdown promises to be a whopper.  That creates the opportunity for change; real structural change.

The point is, that bubbles can be avoided if demand is predicated on regular wage increases rather than debt. It’s that simple. The ferocity of the “boom and bust” cycle can be mitigated by just providing workers with a decent salary. That way they can buy the things they produce without going into debt. It also means that demand doesn’t have to be fabricated with perilous amounts of credit and leveraging. Of course, this approach is starkly different from that of the Fed. Bernanke just announced his plan to slash interest rates to .25 percent while purchasing $800 billion of securities backed by mortgages, credit card debt and student loans. The message could not be clearer. The Fed is saying, “We will lend you as much as you want but, as far as a raise; forgeddaboutit.” This illustrates how bubblemaking is really an expression of class bias that cannot be eradicated with reason alone. it takes real political power.

From Bernanke and Greenspan’s perspective, any small gain by workers is regarded as “anti-free market” and tantamount to communism. The corporate mandarins would like to preserve the current antagonistic, labor-debasing system and keep workers one paycheck away from the homeless shelter. But it’s not good for the economy and it’s not good for the country. It just perpetuates the chasm between rich and poor, suggesting of a species irreconcilably divided into slave owner and chattel. The only way to overcome these differences is by narrowing the wealth gap and rewarding hard work with fair pay.

John Bellamy Foster and Fred Magdoff explain how establishment economists and their corporate patrons developed their ideas of how to use equity bubbles to grow the economy and shift wealth from workers to elites. In their Monthly Review article “Financial Implosion and Stagnation”:

“It was the reality of economic stagnation beginning in the 1970s, as heterodox economists Riccardo Bellofiore and Joseph Halevi have recently emphasized, that led to the emergence of “the new financialized capitalist regime,” a kind of “paradoxical financial Keynesianism” whereby demand in the economy was stimulated primarily “thanks to asset-bubbles.” Moreover, it was the leading role of the United States in generating such bubbles—despite (and also because of) the weakening of capital accumulation proper—together with the dollar’s reserve currency status, that made U.S. monopoly-finance capital the “catalyst of world effective demand.”

Greenspan figured out how to strengthen the grip of the banking sector by creating asset bubbles. That was his contribution during the Clinton years. The leveraging of complex financial products and the surge in real estate prices gave the impression of prosperity, but it was all smoke and mirrors. The “wealth effect”  vanished as soon as the interest payments on mortgages could no longer be paid. That’s when Maestro’s bubble blew up and Greenspan retired to write his memoirs.

So far, world stock indexes have lost over $30 trillion and there will probably be another bloody leg-down in 2009. As the underlying economy contracts, there’s no need for a lumbering, oversized financial system. Institutions will have to be shut down and their assets will have to be sold at auction. That means prices will continue to fall, business activity will falter, and GDP will shrivel. The mismatch between output and falling demand presages a painful correction. When credit gets scarce, speculative investment can’t sufficiently lubricate the system, and a stampede for the exits begins. These are the real costs of asset bubbles; a quick descent into deflationary hell. Economist Henry Liu made these observations in his article “China and the Global financial Crisis”:


“US neoliberal trade globalization, having promised a primrose garden of economic growth, has instead led the global economy into a jungle of poison reed, resulting in the worst financial disaster in a century, setting the whole world ablaze with a financial firestorm. This unhappy fate was finally acknowledged as having been policy-induced by Alan Greenspan, the former Chairman of the US Federal Reserve who was largely responsible for the monetary indulgence that had caused this hundred-year financial perfect storm. Greenspan confessed before Congress that his trust on transnational finance institutions for self-regulation as a survival instinct had been misplaced, leading him to a flawed policy in support of anarchical financial deregulation and permissive risk management.

Still, Greenspan left unmentioned his equally misplaced faith in central bank ability to mitigate the adverse effect of burst bubbles by creating larger sequential bubbles with more liquidity. The Federal Reserve under Greenspan repeatedly created money faster than the global economy could profitably absorb, creating serial bubbles denominated in fiat dollars. Greenspan insisted that it was not possible, nor desirable, to identify an economic bubble in the making as he was inflating it with easy money, lest economic growth should be prematurely cut short. It was a perfect example of the rule that intoxication begins when a drinker becomes unable to know its time to stop drinking.

On a more fundamental level, politically independent central banking under Greenspan, instead of being a market-stabilizing force, has become part of the destabilizing causes of recurring economic bubbles.” (Henry C.K. Liu China and the Global Financial Crisis”, Asia Times.)


The Fed and its Wall Street colleagues have reworked the economy in a way that diverts energy from productive activity to myriad credit-enhancing scams that create an inherently unstable financial system. Even now, with manufacturing in tatters, consumer spending at its nadir and factories hemorrhaging jobs at a Depression-era pace; Bernanke is still trying to keep the teetering banking giants propped up and out of Chapter 11. It’s a fool’s errand. The economy needs to fixed from the bottom-up not the top-down; that’s just throwing money down a rathole.

If the Fed was serious about fulfilling its mandate, it would be looking for ways to create a living wage for all workers so that opportunity is more than just an empty slogan. Better still, Bernanke should abandon his credit-generating enterprise altogether and support the movement to strengthen unions so that wages can keep pace with production. That’s the best bailout plan yet.

MIKE WHITNEY can be reached at




MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at