Hyundai, a big South Korean carmaker, has a big problem with labor unions, they want higher wages. It might be curious to argue this on an investment site, but with a few exceptions, this is actually just what much of the world needs right now, the US in particular.
That wage hikes aren't necessarily anti-capitalist is something that was keenly understood by Henry Ford, who introduced the $5 working day. This was an unprecedented step in his times, more than doubling existing pay. Of course, this wasn't just a 'demand management measure,' but a way to combat the enormous amount of staff turnover after introducing the assembly line system with its sharp division of labor and monotonous, repetitive tasks which could be performed by unschooled (hence cheaper) labor.
But Ford understood that a system of mass production needs a system of mass consumption, and unless productivity increases are matched by rising demand, which needed rising purchasing power by wage earners, the system would be out of kilter. This is exactly where we are today, and where we have been for some time.
In many developed economies and some emerging economies, we see the same development (only the extent varies):
- Wage increases lag productivity increases
- Inequality rises
- The part of national production going to profits rises, at the expense of labor.
We think these trends, most of which have been in place since the 1970s (at least in much of the developed world) have gone too far. It is one, perhaps even the fundamental reason behind the economic crisis. Here is why. In the US, median wages have been literally stagnating since the mid 1970s:
In order to participate in the rising wealth, the middle and working classes started to borrow more, helped by financial deregulation and, in the first decade of this century, by rising house prices. Banks could lower their lending standards dramatically as they could shift the credit risk off balance by repackaging the mortgages into complex tradable instruments that hide the risk from sight.
Basically everybody who could sign a contract could get a mortgage as banks forsake their traditional role as assessors of credit risk without anyone filling their boots. This led to a dramatic rise in borrowing. Since risk hadn't disappeared but only hidden from sight, this was always going to end up in a bloodbath.
The excessive credit creation isn't a model for an economy to thrive. While many argue that the shift from low to high income earners and from labor to capital favors investment and job creation, this isn't really visible in the figures, as:
- There has been no subsequent lasting investment boom
- There was no subsequent productivity boom (bar one that started in the second half of the 1990s).
There are those that argue that taxes should be reduced on business and high incomes in order to boost investment and job creation, but business is enjoying record profits, sit on $2T of cash and considerable excess production capacity. Also, corporate tax receipts amount to just over 1% of GDP and have been falling for decades, despite record profits:
We think it's fairly obvious that a deficiency in demand, not high taxes, is what keeps companies from investing as even zero interest rates aren't reviving demand. What is needed for business to invest is more demand of products and services. More demand isn't forthcoming from policy makers as the Fed will start to taper, interest rates are already rising, and increasing public spending isn't politically feasible. Demand is suffering from ever more skewed income distribution.
Not all high income earners are job creators and most have already benefited disproportionally by taking an ever increasing slice of the economic pie the last 40 years:
the average wealth of the top one percent is now 288 times the median wealth for Americans. That number is up more than 50 percent since 2007, up 85 percent since 1989 and nearly double the levels of 1962 [Yahoo]
Here is job creator Nick Hanauer:
As an entrepreneur and investor, I have started or helped start, dozens of businesses and initially hired lots of people. But if no one could have afforded to buy what we had to sell, my businesses would all would have failed and all those jobs would have evaporated... I earn 1000 times the median wage, but I do not buy 1000 times as much stuff. My family owns three cars, not 3,000. I buy a few pairs of pants and a few shirts a year, just like most American men. Like everyone else, we go out to eat with friends and family only occasionally. I can't buy enough of anything to make up for the fact that millions of unemployed and underemployed Americans can't buy any new clothes or cars or enjoy any meals out.
The wealthy are much more likely to save disproportionally and stash a significant part of their wealth in tax havens:
The One Percenters put 56 percent of their available cash into savings accounts and money markets in 2012 - that's up from 24 percent in 2007 [CNBC]
The world's super-rich have taken advantage of lax tax rules to siphon off at least $21 trillion, and possibly as much as $32tn, from their home countries and hide it abroad - a sum larger than the entire American economy. [The Guardian]
The tax system in the US already disproportionally favors the very wealthy:
The richest 400 individual taxpayers, with an average income of more than $200 million, pay less than 20 percent of their income in taxes - far lower than mere millionaires, who pay about 25 percent of their income in taxes, and about the same as those earning a mere $200,000 to $500,000. And in 2009, 116 of the top 400 earners - almost a third - paid less than 15 percent of their income in taxes. [Stiglitz]
One should also realize that tax loops and off-shore tax havens are disproportionally used by the wealthy, not Joe Sixpack. The shift of income and wealth from bottom to top and the shift in economic activity from developed to developing countries is producing a world savings glut.
And taxes were cut under Bush:
taxes were cut in 2001, 2002, 2003, 2004 and 2006. It would have been one thing if the Bush tax cuts had at least bought the country a higher rate of economic growth, even temporarily. They did not. [Bruce Barlett]
And even under Obama:
keep in mind that the single largest piece of his policies - in dollar terms - has been tax cuts [Fareed Zakaria]
Did it lead to vigorous economic growth? Hardly. And if you are worried about those disincentives that some redistribution would bring, here is Christina Romer:
History shows that marginal federal income tax rates have varied widely. ... If you can find a consistent relationship between these fluctuations and sustained economic performance, you're more creative than I am.
And there is always former Shell CEO Peter van der Veer:
if I had been paid 50% more, I would not have done it better. If I had been paid 50% less, then I would not have done it worse [The Guardian]
A modest increase in wages could, apart from reviving demand, serve another purpose, like boost productivity. This is the second plank of 'Fordism.' Wage increases could be used as a form of gainsharing. Many companies are massively profitable, there is no reason why much of their employees, who have contributed to that success, should not participate a little more in that success.
If profit sharing is linked to productivity or other improvements in certain metrics that are actionable and measurable (either at the individual or team level), such a practice of gainsharing could not only help reviving demand, it could increase productivity as well, and everybody wins.
One might have worries about competitiveness, which is exactly why we propose to apply these principles. First, wage hikes would only occur where companies can afford them, second, they would be instituted in a way to give a boost to productivity.
We're taking this position not from a moral stance. The economic logic behind it seems pretty compelling to us. When income and wealth are shifting upwards (reinforced by changes in taxes) and median wage earners aren't participating in the economic growth. This results in demand deficiencies that no amount of borrowing or zero interest rates can repair.
And without sufficient demand, companies have little incentive to invest and create jobs, and profitability can't increase forever through squeezing cost and restructuring.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.