WSJ: How the Problem of Low Wages Is Different from the Problem of Low Wages

This WSJ article–purporting to explain the difference between the 2008 crash from this crash (which is basically the extension of the earlier one)–is amusing for the way it avoids discussing the drop in real wages as the common cause for both crashes.

For example, it doesn’t consider why people were using their home as an ATM rather than spending non-existent wages on consumer goods in 2008…

The two crises had completely different origins.

The older one spread from the bottom up. It began among over-optimistic home buyers, rose through the Wall Street securitization machine, with more than a little help from credit-rating firms, and ended up infecting the global economy. It was the financial sector’s breakdown that caused the recession.

And then blames lack of trust (a version of the confidence fairy, I guess), rather than lack of customers, to explain why businesses aren’t investing or hiring.

The current predicament, by contrast, is a top-down affair. Governments around the world, unable to stimulate their economies and get their houses in order, have gradually lost the trust of the business and financial communities.

The two crises had completely different origins.

That, in turn, has caused a sharp reduction in private sector spending and investing, causing a vicious circle that leads to high unemployment and sluggish growth. Markets and banks, in this case, are victims, not perpetrators.

Aside from the way this ignores the “lack of customer” problem, since when does the business press’ flagship newspaper claim that the failure of the government to successfully stimulate business makes those inadequately government-stimulated businesses “victims”?

Someone has watched too many Cialis commercials.

The column continues, pretty much repeating the first difference using different words.

The second difference is perhaps the most important: Financial companies and households had feasted on cheap credit in the run-up to 2007-2008.

When the bubble burst, the resulting crash diet of deleveraging caused a massive recessionary shock.

This time around, the problem is the opposite. The economic doldrums are prompting companies and individuals to stash their cash away and steer clear of debt, resulting in anemic consumption and investment growth.

Once again, however, the column ignores that the same underlying problem–low wages forcing ordinary people to either rely on credit to continue spending, or stop spending–lies behind both crises.

Then, once again, the WSJ restates what is going on, repeating the claim that the failure of the financial bailout to work makes poor helpless businesses victims.

The final distinction is a direct consequence of the first two. Given its genesis, the 2008 financial catastrophe had a simple, if painful, solution: Governments had to step in to provide liquidity in droves through low interest rates, bank bailouts and injections of cash into the economy.

[snip]

The present strains aren’t caused by a lack of liquidity—U.S. companies, for one, are sitting on record cash piles—or too much leverage. Both corporate and personal balance sheets are no longer bloated with debt.

The real issue is a chronic lack of confidence by financial actors in one another and their governments’ ability to kick-start economic growth.

I find this last one the most interesting. The logic goes like this: Governments had to step in to provide liquidity (to banks, mostly). And they succeeded in making companies liquid (except for those burdened by the legal liabilities for the fraud they committed during the previous bubble, the WSJ forgets to mention). But for some reason that didn’t work, which makes these poor victim businesses lose confidence.

Somehow, the WSJ misses the obvious solution. Whether by direct government intervention, or by paying workers, you’ve got to put money in the hands of those who can stimulate the economy.

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8 replies
  1. allan says:

    “The economic doldrums are prompting companies and individuals to stash their cash”

    as if most individuals have any excess cash to stash.

    In so far as they are spending at all, companies are using their cash hoards to (1) buy each other up; (2) buy up their own stock; or (3) pay large compensation packages to their executives.

    In so far as they are spending at all, individuals are using their cash hoards to buy Charmin on sale.

  2. MadDog says:

    “…their governments’ ability to kick-start economic growth…”

    This is the WSJ’s argument that tickled my funnybone the most.

    Here is the flagship of Repug market propaganda ethos whining that rather than private businesses being the engine of all economic things great and good, it is that dagburned socialist government thingee that is supposed to transport us all to capitalist Nirvana.

  3. rugger9 says:

    And that this lurches far away from the rugged individualism theme the WSJ prefers to preach. They want USG $$$ to pad the bonuses, nothing more, hence the whimper today.

  4. Linnaeus says:

    There’s also that line near the end about “fiscal and labor reforms”. Hmm, wonder what they’ve got in mind?

  5. geoschmidt says:

    MSM dupe the masses, by repeating bs, with roundabout stories with jargon thrown in there to impress. Like “MSM” ( mainstream media,) sounds more intelligent, but economics and business columns always do that, WSJ is boring to read, but that isn’t because it says anything useful, it is to make the reader go away beaten up in defeat at not leaning anything after buying the f’n thing.

    “Emperors Clothes” bs 101. So much verbiage and so little of it is worth nothin, it’s a whole world a Cheshire Cat double talkers contest.

    But your making a lot of sense so that’s a one good thing.

  6. P J Evans says:

    I had to listen to some guy with a cellphone yesterday afternoon, part of whose conversation involved complaining about what the Ds have been doing to the economy (complete with the usual R talking points about taxes and spending). It’s going to be uphill as long as Murdoch’s propaganda pushers can reach most of the country.

  7. Bob Schacht says:

    EW,
    As good as your analysis is, I think you’re ignoring a big difference: before 2008, credit was not only cheap, but it was easy to get, with hardly any collateral or income. Now, the bank’s reaction to the 2008 bubble burst is to make credit really hard to get, even if cheap. For example, I tried to refinance my house recently. Same house that I bought less than 2 years ago, same income. But now my income isn’t high enough to justify (in their eyes) refinancing my loan– same house, same balance due. They’re now requiring that your monthly mortgage payment must be less than 40% of your monthly income, or something like that. So the bankster’s response to all the homes in foreclosure is to make dam* sure that you can pay your mortgage every month. How different this is than a few years ago!

    Bob in AZ

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