Since then, the Federal
Reserve in the US had taken up aggressive quantitative easing, maintained near
zero interest rate to enhance money supply in the economy and spent trillions
of dollars in bailing out financial institutions. Economists, Lobbyist, the
American Media and even college professors (and text books) place the blame on
the deregulation of the financial institutions initiated by the Reagan
Administration in 1978, on the American firms for off shoring/outsourcing
American jobs, on the Clinton Administration for the Gramm-Leach-Bliley Act –
which repealed the two provisions of the Glass-Steagall Act which strictly
separated investment banking and commercial baking – and most importantly they
blame majority of the Americans for living beyond their means. However, the fact that an average American lived
beyond his/her means is a mere symptom of a larger problem that economists
and policy makers have failed to realise.
Since the late 1970s to
2008, the average salary of a worker working outside the Wall Street increased
by not more than 25%, whereas, the average salary of an investment banker
increased by more than 150%. Senior Executives, Directors and consultants have also
experienced a rise in mean income similar to that of the investment bankers. While
the Gross Domestic Product has grown by leaps and bounds since the end of the
Second World War, the average income of a middle class family in the United
States has grown at a relatively slower rate. This resulted in a growing income
disparity between the top 10% of the Americans and the remaining 90% of the
American Households. As the article establishes, the main reason behind a slow
rise in wages can be attributed to the poor bargaining power exercised by an
average American worker. For instance, through 1990-2005, not more than 8% of
the American workers were unionised.
If we use the income
tax statistics published by the Internal Revenue Service and Treasury Department
to further analyse the change is the average income over the last 100 years.
What is even more interesting is the negative correlation between the rate of
growth of wages and the GDP growth rate in the United States. As the GDP grew,
the rise in wages did not keep in pace. For instance, between 1970 and 1990 the
per capita GDP was 1.5 times the 1970 level – backed by an inflation rate that
tripled in the same period – however, the minimum wage barely doubled from
$1.45 to $2.90.
In order to maintain their
standard of living (and the gradual improvement in it) and to maintain their
level of consumption, Americans resorted to four key coping mechanisms before
they resorted to
First, workers and
middle class employees started working overtime. Even the employers preferred
their existing employees working overtime vis-à-vis hiring new employees simply
because of the recruitment and employee benefit related costs associated with
expanding the Human Resource of an organisation.
Second, women
participation in the workforce increased manifold. The compounded annual growth
rate in female workers was approximately 120% for the two decades after 1975. This
growth can significantly be attributed to the adoption of the Equal Pay Act in
mid 1960s, Sections 501 and 505 of the Rehabilitation Act of 1973, Title VII of
the Civil Rights Act of 1967 and much such federal and state legislation(s).
Third, after the
adoption of the Age Discrimination in Employment Act, 1967 – which prohibits
discrimination in employment among employees over the age of 40 years –
Americans started delaying their retirement and as a result, stalled the
creation of new jobs. At the same time, the ageing workforce grew relatively
less productive and hence employers were even more reluctant to increase wages.
Fourth, as the ability
of the above three coping mechanisms to generate additional income were
exhausted; Americans started borrowing more money than ever. After the
Gramm-Leach-Bliley Act of 1999, Investment Banks preferred investing in sub-prime
loans as they higher risk also guaranteed higher returns. At the same time,
massive Chinese investments (in the form of US borrowings) in the US ensured
the steady supply of money to the economy. The easy credit skyrocketed the
demand – and hence the prices – for real estate. Americans started mortgaging
their real estate in order to sink themselves deeper into debt.
Because of these
reasons, though individual wages continued to remain stagnant, the middle class
households continued to support the economic growth by ensuring a rise in the
net family income. However, such a surge in demand is unsustainable as proven
by the burst of the housing bubble. As the credit stream dried up, the demand
for real estate plunged and therefore resulted in a massive liquidity crisis.
Americans could not borrow anymore and hence demand (and consumption) collapsed
– pushing the economy into recession.
As the Wall street
collapsed and so did the return on pension funds and other securities.
Americans started delaying their retirements as they realised that their
savings could no longer generate sufficient returns to sustain their
post-retirement standard of living.
Thus, we can safely argue that though until long
term systemic alterations are not made to the American Economy, any recovery
from the crisis shall merely be apparent and hence unsustainable. The US economy will continue to be in a
limbo. For instance, though unemployment seems to have been falling, however,
majority of the jobs created are contractual in nature – and hence, temporary.
On the basis of all these symptomatic
problems analysed, one can propose a three step long term solution towards the
resolution of these systemic problems – in the form of a strong(er) social
security system, inflation adjusted floating wage rates, an end to the crony
capitalist governance model and other measures to enhance the workers’
bargaining power.
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