Repeating a familiar pattern, U.S. nonfarm productivity surged in the fourth quarter as unit labor costs fell, indicating that businesses are making the most of a weak jobs market and squeezing more profit out of each worker.
Not surprisingly, many economists viewed the report as a positive sign. If companies keep earning more money, the logic goes, then the economy's return to growth won't be far behind.
But is that the most likely outcome? Isn't it also possible that if hiring remains soft, a critical mass of those who are still employed -- especially those with a union standing behind them -- will say "that's enough!" and demand more money and benefits from their employers?
If so, that could set the stage for a period when wages and prices rise despite weakness in the overall economy.
Interestingly enough, if you look back at the history of the relationship between productivity and labor costs, the last time we saw a gap between the two as wide as it is now was -- you guessed it -- in the 1970s, before the Great Stagflation.
Although it is too soon to say whether this aspect of our economic history is about to repeat itself, today's allegedly good news from the Labor Department may not be all that it seems.
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The worldwide flight away from paper money into tangible assets will continue, hastened by the sovereign debt crisis in Europe.
Plans by the Obama administration to fund its increased spending by tax increases will be frustrated as Hauser's Law prevents the federal tax system from generating revenues in excess of 20 percent of GDP. Since federal spending will be much higher than 20 percent of GDP for the foreseeable future, the deficit will remain a much higher percentage of GDP than it has ever been in peacetime. This means that the national debt keeps growing faster than the economy into the indefinite future.
For the present, Fed policy is holding down the cost of servicing the federal debt, but rising interest rates will deepen Washington's predicament. The increased ratio of government spending to GDP will also push down the rate at which the economy can grow over the long haul.
All this implies a stagflation outlook for the next ten years, in which the US stock market is unable to produce a consistently positive return. But while the recovery lasts, the stock market is on track to earn a 20 percent return this year.
Over the coming year, the most favored asset class remains commodities, followed by equities and then by gold; bonds are out of favor.
Luis de Agustin
If energy prices were the cause of stagflation, note that ordinary water might replace oil as a transportation fuel. If that happens rapidly enough, perhaps energy prices will fall to more reasonable levels.
See the articles at: http://www.aesopinstitute.org to learn more.
Note also the Human Investment Tax Credit article on that same website. It includes an economic analysis that reflects the late Bob Edmonds efforts to avoid stagflation.
It's worth noting that (like the last period), energy prices are rising even as demand has gone flat. Last time it was caused by OPEC and the way energy prices rattled through the economy and raised prices on everything else. Employees were pushed and pushed back with demands for wage increases. Meanwhile, tax rates (which then and now are not indexed for inflation) and bracket creep meant that even if you were getting COLA's, you weren't keeping even because you were being ratcheted into ever-higher marginal tax rates.
http://rdwolff.com/content/capitalism-hits-fan-movie
No point to be made here, except to scare people ... with the usual inquisitive question mark!
From the above cited article:
In January, after-tax incomes actually dropped by 0.4 percent, the biggest monthly decline since last July.