Thursday, February 10, 2005

How long until the "hand-off" from wealth-effect consumption to income-based consumption? How long?

One has to give Pope Alan the props he is due for insulating the US economy from the 1997-98 East Asian financial crisis as well as setting the US up as the consuming salvation of global capitalism in that period of crisis. By loosening US monetary policy 75 basis points in six weeks, Alan supported the equity bubble and laid the foundation for wealth-effect consumption throughout the late 1990s. The idea, of course, was that wealth-effect consumption would be strictly temporary. Once we were over this rough patch, things would get back to "normal". Americans would consume in line with their income, East Asia would get back on its feet as a source of global demand as well as global supply, and we would all roll merrily along.

Of course, things didn't work out that way. The popping of the asset bubble in 2000 simply ushered in another round of monetary loosening from Pope Alan and his College of Governors, and as day follows night, another wealth-effect round of consumption began, this time founded upon housing rather than equities. But again, this was all supposed to be temporary. Once we were over this rough patch, things would get back to "normal". Americans would consume in line with their income, the world economy would become a source of robust demand as well as supply, and we would all roll merrily along.

Of course, things didn't work out that way. Again. By 2004 Greenspan was eagerly urging the property bubble along by pushing homeowners who had refinanced 30-year FRMs at 5.2% to jump into short-term ARMs at under 4.0%. But surely the US job market would resurrect, even though mired in the longest "jobless recovery" since the Great Depression.

Alas, it never did. At the end of January 2005 the US economy was still 760,000 private sector jobs short of where it was in January 2001, officially giving George W. the honor of being the first President since Herbert Hoover to end his term with fewer jobs than he began it with. More than that, real hourly wages in the US actually fell in 2004, the first time that has happened since 1993. This is an unprecedented (for the New Deal and after era) disconnect between GDP growth on the one hand and job and wage growth on the other.

Yet the Beatified Banker continues to tell us that robust income-based consumption is just around the corner -- that the "hand-off" from inflated assets to growing wages and salaries will soon be upon us. In Stephen Roach's words,
Greenspan also expresses the belief that �An increase in household saving should also act to diminish borrowing from abroad.� This is a key assertion. What he is saying implicitly is that the Fed will need to withdraw support from the Asset Economy by restoring some semblance of normalcy to America�s real interest rate structure. What he is also implying is the hope that the US labor market will now provide increased support to the American consumer -- in essence, spurring the long-awaited �hand-off� from the new asset economy back to the more traditional income economy. January�s disappointing employment survey -- just the latest in a long string of subpar gains on the hiring front -- underscores how difficult it will be to execute this hand-off.
Some see the demise of rapid US productivity growth as the harbinger of new Happy Days of Labor, the latest made up reason to come down the pike explaining why labor's doldrums just have to end sooner or later.

For something closer to reality, check out what Wal-Mart has done in Quebec.
The Canadian arm of U.S. retailing giant Wal-Mart Stores Inc. said its store in Jonquiere, Quebec, will close this spring after becoming the first unionized Wal-Mart in North America about six months ago.
McDonald's did the same thing when one of their Quebec stores unionized. But the home office in Little Rock assures us this has nothing to do with union-busting.

The contradictions of capitalism which were ably managed for thirty years after WWII, and even managed somewhat capably during the 1980s and 1990s, are catching up to us.

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