Pete Murphy

What if the Credit Crunch Is Just a Symptom?

Marc, first of all, regarding your last sentence - "Re-linking wages and salaries to productivity growth is not simply a function of fairness, but an issue of economic necessity." - there has never been a link between productivity and wages. An analysis of BLS (Bureau of Labor Statistics) data bears this out. It is true that wages and productivity rose in lockstep at one time, but it was always demand for labor that drove wages higher, not productivity growth. If anything, increases in productivity tend to drive wages down as workers are freed up and returned to the pool of available labor. But wages rose because there was sufficient demand to re-absorb them back into productive roles. That is what is now broken - the demand for labor is declining as the American labor force is cast into an enormously bloated global labor force.

I agree that the credit crisis is a mere symptom. You have come very close to the root cause of our economic collapse when you identify "consumption" as the problem. The question then becomes, why is consumption declining? As population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.

These effects of an excessive population density - rising unemployment and poverty - are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.

Please visit my web site at PeteMurphy.wordpress.c... to learn more about this important new theory.

Pete Murphy
Author, "Five Short Blasts"