During a conference call today, former Secretary of Labor Robert Reich explained vanishing consumer demand:
One big reason we are in the crisis we are in, apart from the meltdown from financial markets, is that consumers have run out of money. Consumer spending accounts for about 70% of this economy, and after the housing bubble burst, consumers were back to where they were before the housing bubble, which was not a very happy place. […] The bursting of the housing bubble really cut off the last coping mechanism that many consumers had, and that was going into debt. If they can’t borrow any more and have to rely on their sinking wages, the entire economy is in trouble, because there’s just simply not enough demand out there.
One of the problems stunting the economy is that business capacity “far outstrips demand,” meaning that businesses currently have the capability to produce a lot more than consumers are willing to buy. “There is over-capacity in everything,” said Richard Yamarone, chief economist at Argus Research. “If capacity is too large, you don’t need that many people employed, which is another reason we’re seeing such high job losses.”
So how did this imbalance come about? It is partly a result of the current economic circumstances: “Consumers are slashing their spending because they’re perilously in debt and worried about keeping their jobs.” However, for years there has also been a general decline in wages as they relate to productivity:
If American workers were rewarded for 100 percent of their increases in labor productivity between 1980 and 2008 — as they were during the middle part of the 20th century — average wages would be $28.53 per hour — 42.7 percent higher than the average real wage in 2008.
As the Economic Policy Institute pointed out, “of the 20 richest countries tracked by the U.S. Bureau of Labor Statistics, the United States ranks 17th in hourly pay for production workers in manufacturing.” Of the 16 countries ranked higher in wages only one (Ireland) is more productive.
One way to correct this imbalance is increased unionization. As David Madland and Karla Walter found, “if unionization rates were the same now as they were in 1983 and the current union wage premium remained constant, new union workers would earn an estimated $49 billion more in wages and salaries per year.” That’s $49 billion in demand that the economy could desperately use right now.