The Beginning of “The Great Regression?”

February 8, 2011

I found the above-linked opinion piece that appeared on Reuters this morning interesting in that it forecasts a “great regression” to follow what’s been dubbed the “great recession.”  (It’s also interesting how quickly it was pushed off the front page of Reuters.)  I found it interesting because it’s forecasting the very phenomenum (albeit for more superficial reasons) that I forecast in Five Short Blasts – that rising unemployment and poverty and a decline in living standards would be the inescapable consequences of allowing population growth to drift ever higher while ignoring the relationship between population density and per capita consumption.

The author of this piece, a Europe-based Reuters associate editor, sees the dramatic cuts in government spending in European countries leading inevitably to declining living standards there.

Wages, pensions, unemployment insurance, welfare benefits and collective bargaining are under attack in many areas as governments struggle to reduce debts swollen partly by the cost of rescuing banks during the global financial crisis.

The European Union, which long trumpeted a European social model with a generous welfare state, social partnership between unions and employers and a work-life balance featuring limited working hours and long paid holidays, has lost its swagger.

At first, you may think to yourself, “Good!”  “It’s about time that those Europeans had to experience some of the same things that Americans have been going through for decades.”  But not so fast.  In spite of the fact that American workers have always been far more productive than their European counterparts with their 35-hour work weeks and weeks-long vacations, the U.S. has a big trade deficit in manufactured goods with Europe.  Do we really want them to get more competitive?

The problem is that it’s inevitable there, just as it’s inevitable here.  For quite some time, government spending (which includes “spending” in the form of tax cuts) has been used to mask falling wages and cuts in benefits by the private sector.  In spite of all the talk of the need to cut taxes, the truth is that taxation in the U.S. is at historically low levels, having been used time and again to breathe life into a flagging economy.  There was a time when private sector wage increases outpaced inflation, while tax rates were simply shrugged off as a fact of life.  But no more.  And there was a time when every company provided generous health insurance and pension plans because the demand for labor was so great that if you didn’t, your competitor would end up with all the talent.  But no more.

Why pay high wages or provide such benefits now?  Good workers are a dime a dozen.  Announce a job opening and you’ll get a hundred or more applications.  Corporate America eventually figured out that annual merit increases and generous benefit packages were a waste of money when labor was so plentiful.  The only way to prevent declines in take-home pay that would surely result in a recession or worse was to cut tax rates and bolster social safety net programs.

But the government spending can’t be sustained.  The debt crisis may appear to be the problem on the surface, but dig deeper and you’ll find that the problem is really rooted in an ever-worsening imbalance between the supply of and demand for labor.

Greek Prime Minister George Papandreou, one of Europe’s few remaining socialist government chiefs, lamented in Davos that the global crisis had speeded a race to the bottom in labor standards and social protection in the developed world.

Emerging countries such as China and India had achieved competitiveness through low wages, no collective bargaining, little or no healthcare and social insurance and disregard for the environment in exploiting resources and production.

These factors are not what makes a nation competitive.  These factors are the result of a gross over-supply of labor.  It’s the over-abundance of labor that makes them competitive.  And if these factors cited above are the consequences of such badly bloated labor forces, then it begs the question:  why should we want to emulate them?  Why should we “compete” with them at all?  What do we gain?  Wouldn’t we be far better off if we stopped sharing access to each other’s markets?  Of course we would.

But back to the great regression.  With the “great recession” put to bed by the explosion in government spending, now we can tackle the deficit issue, or so the thinking goes.  That is, until someone figures out that cutting wages, pensions, social programs and government spending in general is a recipe for economic disaster, just as the spending itself is a recipe for the same thing.  Such “regression” will manifest itself in the macro-economy in a familiar way – as a recession, or worse.  What will be the approach for dealing with a double-dip recession?  More spending and tax cuts.  Bank on it.

Without addressing the conditions that are driving the ever-worsening imbalance in the supply of labor relative to demand, there is no escape from this conundrum.  “Creating jobs” may sound appealing, but jobs cannot be created from thin air.  Every job depends upon consumption of some product or service.  Per capita consumption in the developed world is in decline as over-crowding there worsens, and manufacturing for export to even more badly overpopulated, already-export-dependent, low per capita consumption nations of the developing world is a logic-defying pipe dream.