December 22, 2008
Dean Baker
The Guardian Unlimited, December 22, 2008
See article on original website
You probably didn’t see this in the newspapers, but real wages rose at an incredible 14.8 percent annual rate over the last three months. The basic story is straightforward, while nominal wages have continued to grow at a modest 3.2 percent annual rate, prices have plummeted, hugely increasing the value of the paychecks of those workers luck enough to still have a job.
This pattern is not likely to continue. Price declines will almost certainly slow, and rising unemployment will dampen nominal wage growth, but the nature of this wage gain presents an extremely important economics lesson.
Put simply, real wages rose because house prices and stock prices crashed. The collapse of the housing bubble destroyed more than $6 trillion of housing bubble wealth, while the plunge in the stock market eliminated more than $8 trillion in stock wealth.
This means that more than $14 trillion of paper wealth (@$46,000 per person) has been destroyed in the last couple of years. This paper wealth gave its owners command over the goods and services the economy produces.
The elimination of this wealth has the same impact on those of us not directly affected as the elimination of $14 trillion of counterfeit money. The economy still has the potential to produce the same amount of goods and services, but the owners of housing and stock have much less claim over this output. That means more for the rest of us.
The more for the rest of us part of the story shows up in the form of lower prices for a wide range of goods and services. The most obvious item on this list is oil, as weakened demand, combined with speculation on both sides, has pushed the price of oil below $40 a barrel from its peak near $150 a barrel. This has allowed drivers to buy gas for less than $2 a gallon, as opposed to the $4 plus prices faced earlier during the summer.
It is not just energy prices that are falling. New car prices have fallen at a 6.9 percent annual rate over the last quarter, while used car prices have plunged at a 22.9 percent annual rate. There is an enormous glut of cars on the market right now and sellers are forced to slash prices to reduce their inventories.
There is a similar story with hotel prices, where a large number of empty rooms are forcing price reductions. Hotel prices fell at a 7.1 percent annual rate over the quarter.
In short, the loss of a massive amount of wealth by stockholders and homeowners has produced real dividends for those who had little wealth in stock or housing. Of course, the resulting falloff in consumption from these stockholders and homeowners is throwing the economy into a severe recession, which will threaten the jobs of almost everyone.
However, this just points to the urgency of a large government stimulus package. We need to replace the consumption of stockholders and homeowners with some other form of demand. The government has the capacity to spend enough money to replace this demand (as Fed chairman Ben Bernanke said, we can always print more money), the only question is whether it will have adequate political will.
The real lesson that the public should learn from recent experience is how the income of one segment of society is a cost to others. The wealthy understand this point very well, which is why they design policies (for example trade and immigration policies) that are intended to depress the wages of less-educated workers.
If they can get low-paid workers to tend their gardens, serve them meals in restaurants, paint their homes, and serve as nannies for their children, it raises their standard of living. The wealthy, along with the highly educated professionals who are largely sheltered from international competition, directly benefit when most workers are forced to accept lower living standards.
In the same vein, when the rich lose wealth it is a gain to everyone else. In short, they have our money. We don’t need them to spend, since the government can spend just as well as rich people do. Unless they can show how their actions are increasing the productive potential of the economy as a whole (that would be quite a joke with regards to the Wall Street gang), the rest of us made better off when the rich have less.
In this particular episode of downward redistribution, tens of millions of middle class people took a big hit also, as their wealth was also tied up in the housing bubble and to a lesser extent the stock market. This is unfortunate (some of us did try to warn them), but it was an unavoidable part of a inevitable correction. Hopefully these folks will get better investment advice in the future.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer. He also has a blog on the American Prospect, “Beat the Press,” where he discusses the media’s coverage of economic issues.
