Wednesday, June 04, 2003

The wheels of overproduction just keep on spinning. The US Labor Department announced today that nonfarm business productivity ticked up 1.9% annualized in 2003:I. At the same time, a much less reported figure -- real hourly compensation -- actually fell in 2003:I by 0.4% annualized. So we have more production in the national engine of the global economy and yet less wages to soak up the stuff.

In an influential 1997 article in the journal Foreign Affairs, Paul Krugman (when he was still obnoxious as hell) ridiculed the general glut argument with a single claim: that wages always rise with productivity and so there will always be income generated by production to consume the goods and services produced. Krugman offered no substantial evidence for this relationship save neo-classical economic religion and mantra (Nam-Myoho-Renge-Kyo will work just as well). Well, the General, being the contrarian he is, crunched some more numbers for you and found that since 1970, US productivity has risen 79% but real hourly compensation has risen just 40%. In fact, real hourly compensation has been completely stagnant since 2000, just as it was throughout the Clinton 'jobless recovery' years.

How do Americans then buy all this stuff? Credit and ultra-cheap imports. This is why interest rates and the value of the dollar are central to telling any story about the global economy today. Americans are being subsidized to the hilt by US banks and by the rest of the world to keep up their destructive consumption habits and thus keep the house of cards from falling. But this process is unsustainable, and the house of cards will have to come down, perhaps later rather than sooner. Production can outrun consumption only so long before General Glut has his unhappy revenge.

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