How the low wage economy caused the credit crunch

December 13, 2008 at 2:30 pm | Posted in U.S. Politics | 3 Comments

As a coda to the last post, it seems appropriate to post this speech by Damon Silvers, Associate General Counsel for the AFL-CIO. The speech is a compelling (and frequently ignored) alternate history of the credit crunch, which places the plight of the American worker at its core. Among his many observations, Silvers blames the dismantling of union rights, wage stagnation and the outsourcing of jobs as having contributed to a credit crisis which, when the speech was made in April ’08, had not yet reached its most destructive extremes:

But the real roots of the crisis do not lie on Wall Street. The cause of the crisis can be found in the long-term weakening of the real American economy in an era of globalization—in closed factories, outsourced high tech jobs and low wage jobs with no benefits, and in the unsustainable effort to maintain middle class living standards through borrowing. It is to be found in the reality of lives like that of Kimberly Somsel of Westland Michigan, a member of the AFL-CIO’s community affiliate Working America, an unemployed single mother of two battling breast cancer and facing foreclosure due to a ballooning “2 and 28” loan payment. She is selling the family car and her furniture just to get by. Five houses on her block are threatened with foreclosure.

Powerful voices in our country say that public resources should be there for Bear Stearns, but not for Kimberly Somsel, to keep the champagne flowing on Wall Street, but not to build a future for Michigan. But there is another way — a return to a high wage economy driven by productive investment in the United States. This way requires not that we retreat from the global economy, but that we insist that the globalized economy have real rules that work for working people. At the center of these rules must be labor market regulation, and in particular, regulation that empowers workers to speak for themselves by acting together. But rules are no enough. The United States must pursue a real national economic strategy in a globalized world economy.

For thirty years, America’s economic elites and their political allies have pursued a combination of economic and social policies designed to produce a low wage economy. These policies—our labor laws and our broader system of labor market regulation, our tax policies and our approach to globalization, have yielded decades of stagnant wages and rising economic inequality.

But at the same time, policymakers of both parties have sought, with some success, to maintain high levels of consumer spending. The pursuit of the contradiction of a low wage, high spending economy has systematically destroyed the various ways we individually and collectively save and invest. Instead of an income driven economy, we have become an economy driven by asset bubbles fueled by cheap debt. The ultimate unsustainability of this strategy has brought us to our current economic crisis.

The whole speech can be read here. Whilst it’s pretty long, it’s also very thoughtful & well-researched interpretation of the events and policies which have brought us all low.



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  1. I agree. Corporate earnings over the past decade set historic records and most of it was built on the backs of the $5/hour worker. Are we handcuffed by the concept of minimum wage?

    Further to the point of national strategy in a global economy, as an ex-pat living stateside, I find a ton of resentment among many Americans about both the outsourcing of low skill jobs overseas, tax prep and word processing for example, and the import of workers for high skill jobs like engineering that have at times been in short supply among domestic workers. The world appears to be getting “flatter”, to borrow from Friedman, and the sense of American ingenuity and sweat equity that created the $13 trillion GDP seems to be waning among many who seem to be unwilling to compete in a global economy and look to change the rules of the game rather than change the approach.

  2. A very interesting comment, Michael. One of the charts in the lecture I link to shows worker productivity vs wages, and it’s just startling to look at. It seems, from my understanding, that two things need to happen:

    1) A massive investment in American infrastructure, which will guarantee/create new jobs, and
    2) A strengthening of the rights of labor/labour (delete as appropriate) which could guarantee the American worker a purchasing power that is less reliant on debt.

    The first point seems to be an inevitable by-product of President Obama’s stimulus, but the second point will be much tougher to bring about, given Republican objections to the Employee Free Choice Act.

  3. President Obama’s stimulus

    Imagined stimulus, I should’ve said. There’s not much good proposing legislation when you’re not the President yet.

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