Sunday, March 06, 2011

Wage Increases = Economic Growth

Found this on the web and thought I would share it with ya' all. While Capitalist governments around the world attempt to reduce workers wages with austerity measures, union busting, and government reductions in public sector employment, lets remember who keeps capitalism functioning, the workers who produce the goods and buy them. And as Marx pointed out the declining rate of profit, which is key to the continuing cyclical crisis nature of capitalism results from overcapacity. Take the auto industry as an example.

Development Through Wage-Led Growth

Henry C.K. Liu

Part I: Stagnant Worker Wage Income Leads to Overcapacity

This article appeared in AToL on November 24, 2010

In the economics of development, there is an iron-clad rule that “income is all”. The rule states that the effectiveness of developmental policies, programs and measures should be evaluated by their effect on raising the wage income of workers; and that a low-wage economy is an underdeveloped economy because it keeps aggregate consumer demand below its optimum level, thus causing overcapacity in the economy that needs to be absorbed by export.

Workers income is the key factor in generating national wealth in a country. Export through low-wage production is merely shipping under-priced national wealth outside the national border without adequate compensation, by under-pricing labor within the nation. During the age of industrial imperialism, export of manufactured goods was promoted by high-wage economies to the low-wage colonies in return for gold-back money, so that more investment could be made to provide more jobs for high-wage workers at home. In post-industrial finance economies, cross-border wage arbitrage in unregulated global trade exploits workers in low-wage economies to produce for consumers in higher wage economies to earn fiat crrency in the form of the dollar that cannot be spent in the exporting economy.

Globalization of Trade Preempts Domestic Development in All Countries

This “income is all” rule has been mostly obscured in recent decades during which globalized foreign trade promoted by neoliberals has pre-empted domestic development as the engine of economic growth in all market economies around the world. In today’s game of globalized international trade, the new operative rule is that “profit is all” and that high profit in competitive export trade requires low domestic wages, even if low local wages retard domestic economic development by reducing aggregate purchasing power in the domestic market to cause overcapacity that rely on export. As workers wages are not sufficient to buy the goods they produce, domestic markets fall into underdevelopment and export to high-wage economies is needed to produce profit for companies.

Excessive Corporate Profit From Low Wages Leads to Overcapacity

This new rule of globalized trade is designed to produce short-term maximization of corporate profit for an export sector. But in the post industrial finance economy, the export sectors in low-wage economies are largely owned or financed by cross-border international capital. This type of international trade incurs inevitable long-term stagnation in the domestic economies of all trading nations because the low wages paid by international capital lead to insufficient aggregate domestic consumer demand. Stagnant wages everywhere in turn reduce aggregate global purchasing power needed for the expansion of international trade. It is a clear case of imbalanced economic sub-optimization.

Foreign Capital Invested in International Trade Has No Incentive to Raise Local Wages

The export sector of foreign trade in any economy naturally does not consider the purchasing power of local workers as being of any consequence because the goods produced and services provided by local workers in the export sector are sold in higher-wage foreign markets for profit denominated in the reserve currency generally accepted in international trade, which since the end of World War II has been the US dollar.

As a result, the import sector in foreign trade in all economies also underperforms because of insufficient domestic purchasing power for both domestic products and needed imports. This is true in varying degrees for all economies that participate in international trade. The only exception is the US economy whose gold-backed currency had been generally accepted as the reserve currency for international trade since the end of World War II. But the dollar has been a fiat currency since 1971 when it was detached from gold.

In the advanced financial economies, consumer debt is used to overcome stagnant consumer purchasing power caused by low wages. Low wages have been the fundamental cause of recurring debt bubbles in advanced economies. Even for the US, cross-border wage arbitrage has also kept US wages stagnant, which US policy makers compensated with a policy of high consumer debt that was unsustainable by stagnant wages. The biggest item in consumer debt is home mortgage. This excessive debt in relation to wage income has been the real cause behind the current global financial crisis.

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