Rich Get Richer, Poor Get Blamed

07/13/2011 10:15 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

It’s a complete fallacy to fault the increasingly powerless unemployed and working classes for costly health care and cozy oligopolies, writes senior editor Igor Greenwald.

The economy’s failure to generate jobs two years into a recovery hovers over the policy debates like a biopsy referral.

One by one, the immediate causes of the Great Pink Slip Blizzard of 2008-2009, which blew away 8.7 million paychecks, have gone away:

  • Final demand is no longer falling, and the bloated inventories signaling the onset of a downturn are nowhere in evidence
  • Big corporations are no longer getting strangled by a credit crunch; to the contrary, bond buyers are tripping over each other to loan them money for next to nothing, and for just a bit more than that in the case of junk issuers
  • After suffering a severe downturn at the time of the bloodletting, corporate profits are near the top of their historic range as a percentage of the gross domestic product, and corporate balance sheets have never been healthier.
  • The US dollar, thought to be so overvalued by safety-seeking foreigners in 2009 and blamed for damaging US competitiveness, has since declined against most other currencies. Yet the jobs it was thought to be inhibiting have not come back, at least not yet.

Over the last 18 months, we’ve recouped only 1.7 million jobs, a rebound so disappointing that the discussion has recently shifted from when unemployment might ease to why it might not.

Last October, Federal Reserve Chairman Ben Bernanke could mostly dismiss suggestions that high US unemployment was structural, rather than cyclical. By February, he was hedging his bets a bit.

By June, the structural impediments were front and center—Bernanke blaming the recent slowdown, in part, on the housing slump, the associated financial malaise, and continued debt de-leveraging.

Federal Reserve Governor Sarah Bloom Raskin offered up another culprit a few days later, complaining of growing income inequality.

“This phenomenon appears to be driven primarily by the rapid growth in income and assets for those in the top 1% of the distribution, while most everyone else has experienced stagnation,” she said.

“This inequality is destabilizing, and undermines the ability of the economy to grow sustainably and efficiently. It is associated with increases in crime, profound strains on households, lower savings rates, poorer health outcomes, and diminished levels of trust in people and institutions.

"All of these forces drag down maximum economic growth and are anathema to the social progress that is part and parcel of such growth.”

Two International Monetary Fund economists recently came to a similar conclusion after research.

The numbers are pretty glaring. According to the Washington Post, the bottom 90% of income earners have seen their share of the national pie sliced from two-thirds or so in the 1950s, 60s, and 70s to barely over half today.

Their misfortunes and insecurities matter much more to the economy then the splurges of the other 10%, assuming they’re splurging any more than they otherwise would. More likely, the money is invested rather than consumed.

And money sitting in Treasury bonds, or overseas—even in US companies hiring aggressively overseas—just isn’t doing much for domestic demand.

There are other structural problems that deserve urgent attention. Many people rightly blame our bloated, indefensible health-care costs for pricing Americans out of jobs, especially the many jobs that used to be created by small business.


And healthcare is hardly the only reason Main Street isn’t hiring. We celebrate dot-com boom survivors like (AMZN), but forget that they’ve thrived at the expense of the neighborhood bookstores (and a chain or two) that used to dot the country. We cheer on Oracle (ORCL) but haven’t found another use for the layers of middle management made redundant by its software.

The constantly expanding reach of new technology has made it ever easier for the smartest and most efficient operators to roll up market share at very little marginal cost or additional investment in people. For every big winner, there are many losers…and more layoffs.

Throw in cheap bond financing that companies borrowing from banks can only dream of, and factor in growing regulatory capture that has allied lawmakers and rule enforcers with the biggest players in the field.

The result is a sort of economic sclerosis in which oligopolies with tremendous market power—be they the few too-big-to-fail banks or our two-and-a-half telecoms industry—drive up everyone’s cost of doing business.

Let’s also not forget the marooned housing market. It’s hard to move where the jobs might be with an underwater mortgage—or even an above-ground one, given the glut of homes on the market and the difficulties of taking out a mortgage.

And it’s hard enough for the unemployed to get a job without employers refusing to even consider anyone so stigmatized.

Alternately, we can ignore all these obvious problems, because former Fed chairman Alan Greenspan—the one who slept through the dot-com bubble, Enron, Worldcom, and the subprime gold rush—has just honed in on the real reason jobs are so scarce.

According to Greenspan, it’s the fault of the unemployed themselves and the lousy schools that failed to prepare them for global competition. His solution is to let more of the competition in, so companies can hire it for openings Americans are no longer qualified for.

The real problem is an economy slipping and sliding on uneven playing fields tilted by patent lawyers, corporate lobbyists, and captive regulators. And that’s no fault of the unemployed.

Greenspan should look in the mirror, read his old speeches about self-regulation, and slink away in shame, never to be heard from again.

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