For most of the last century, the basic bargain at the heart of the American economy was that employers paid their workers enough to buy what American employers were selling.
That basic bargain created a virtuous cycle of higher living standards, more jobs, and better wages.
Back in 1914, Henry Ford announced he was paying workers on his Model T assembly line $5 a day -- three times what the typical factory employee earned at the time. The Wall Street Journal termed his action "an economic crime."
But Ford knew it was a cunning business move. The higher wage turned Ford's auto workers into customers who could afford to buy Model T's. In two years Ford's profits more than doubled.
That was then. Now, Ford Motor Company is paying its new hires half what it paid new employees a few years ago.
The basic bargain is over -- not only at Ford but all over the American economy.
New data from the Commerce Department shows employee pay is now down to the smallest share of the economy since the government began collecting wage and salary data in 1929.
Meanwhile, corporate profits now constitute the largest share of the economy since 1929.
1929, by the way, was the year of the Great Crash that ushered in the Great Depression.
In the years leading up to the Great Crash, most employers forgot Henry Ford's example. The wages of most American workers remained stagnant. The gains of economic growth went mainly into corporate profits and into the pockets of the very rich. American families maintained their standard of living by going deeper into debt. In 1929 the debt bubble popped.
Sound familiar? It should. The same thing happened in the years leading up to the crash of 2008.
The latest data on corporate profits and wages show we haven't learned the essential lesson of the two big economic crashes of the last 75 years: When the economy becomes too lopsided -- disproportionately benefiting corporate owners and top executives rather than average workers -- it tips over.
In other words, we're in trouble because the basic bargain has been broken.
Yet incredibly, some politicians think the best way to restart the nation's job engine is to make corporations even more profitable and the rich even richer -- reducing corporate taxes; cutting back on regulations protecting public health, worker safety, the environment, and small investors; and slashing taxes on the very rich.
These same politicians think average workers should have even less money in their pockets. They don't want to extend the payroll tax cut or unemployment benefits. And they want to make it harder for workers to form unions.
These politicians have reality upside down.
Corporations don't need more money. They have so much money right now they don't even know what to do with all of it. They're even buying back their own shares of stock. This is a bonanza for CEOs whose pay is tied to stock prices and it increases the wealth of other shareholders. But it doesn't create a single new job and it doesn't raise the wages of a single employee.
Nor do the wealthiest Americans need more money. The top 1 percent is already taking in more than 20 percent of total income -- the highest since the 1920s.
American businesses, including small-business owners, have no incentive to create new jobs because consumers (whose spending accounts for about 70 percent of the American economy) aren't spending enough. Consumers' after-tax incomes dropped in the second and third quarters of the year, the first back-to-back drops since 2009.
The recent small pickup in consumer spending has come out of their savings. Obviously this can't continue, and corporations know it. Consumer savings are already at their lowest level in four years.
Get it? Corporate profits are up right now largely because pay is down and companies aren't hiring. But this is a losing game even for corporations over the long term. Without enough American consumers, their profitable days are numbered.
After all, there's a limit to how much profit they can get out of cutting American payrolls or even selling abroad. European consumers are in no mood to buy. And most Asian economies, including China, are slowing.
We're in a vicious cycle. The only way out of it is to put more money into the pockets of average Americans. That means extending the payroll tax cut. And extending unemployment benefits.
Don't stop there. Create a WPA to get the long-term unemployed back to work. And a Civilian Conservation Corp to create jobs for young people.
Hire teachers for classrooms now overcrowded, and pay them enough to attract people who are talented as well as dedicated. Rebuild our pot-holed highways. Create a world-class infrastructure.
Pay for this by hiking taxes on millionaires.
A basic bargain was once at the heart of the American economy. It recognized that average workers are also consumers and that their paychecks keep the economy going.
We can't have a healthy economy until that bargain is restored.
Robert Reich is the author of Aftershock: The Next Economy and America's Future, now in bookstores. This post originally appeared at RobertReich.org.
Follow Robert Reich on Twitter: www.twitter.com/RBReich
Richard (RJ) Eskow: The Long Game: Payroll Taxes, Hostage-Taking, and Social Security
http://www.sciaticnervepainblog.com
In other words, you win by completely destroying the economy within the game. High-five!
They have killed the goose that laid the golden eggs. Corporations are feeding off the carcass but soon they will have no gold and no meat left. All that will be left is to feed off themselves. Corporations will begin to fail and M&A activity will skyrocket. An ever smaller percentage of the super wealthy will survive. Economic Darwinism will drive the breed to extinction.
Be careful what you wish for Kochs, you may just get it and destroy the world.
Finally the conversation ended when Grandad said, "I'm not keeping him for what he can do. I'm keeping him for what he did."
It's heart breaking that this should be an unknown concept to my country.
President Obama is operating out of that centrist mode. A mode that is politically right, not left. He was elected to move the 'ship of state' back to left of center. While it will take more than one term to affect this change, he failed to communicate or to create a narrative on what he is doing. GOP was able to capture the spotlight because 'race baiting' was the backdrop of all their messaging in 2009 and 2010. This riled up the base and corporate america via the media set up the tea party to shield their plan to further exploit the american people.
Bottom line is that corporations want a global wage structure where all workers hourly wages will be under $10 an hour with variances in some countries. I learned of this in 1982. The plans to accomplish this were to eliminate high paying jobs for middle class by: 1) bust unions in USA, 2) move manufacturing to 3rd world countries where labor cost is $1.00 a day, 3) increase automation in manufacturing, 4) merge companies to eliminate jobs, 5) cut taxes for corporations to move jobs overseas, and much more.
The Oligarchs, using 'free market' GOP have brought us to this hardship.
2) Mr. Reich what part of broke don't you understand? We are so deep in debt that we simply do not have the money to embark on the grandiose public works plans you call for.
3) "Pay for this by hiking taxes on millionaires." is good in theory, but if you at the real numbers, not the feel good rhetoric, even if we were to illicitly seize 100% of the wealth of the top 1% or even 5%, we would still be in the fiscal toilet.
Nowhere in a corporate charter has it ever been written as a goal to "employ more people/americans".
Their goal is to generate a profit for their owners, period.
Also remember the purpose of modern government is to regulate commerce to ensure social aims are achievable and the society is able to progress and provide for the needs of the people.
Please show me where it says that...
This goes to show that Wall Street Journal is no virtuous oracle either.
We need more Henry Ford's in America once again, to replace these selfish, short-sighted business leaders we have today!
You are right on about Roemet. Notice though that the media owners have blackballed him from sight of the US public. The owners of the media do not want his views heard by the public at large because it would mean less profits.