The Real Economy

There's also nothing like a crisis to strengthen people's insistence that nothing is seriously awry, that what they reverently term "the fundamentals" are all in sound working order, that the dizzying drop in stock values was merely the consequence of alien turbulence in the Asian markets.

Now it doesn't require advanced training in economics to see that U.S. stocks are vastly overvalued. (Unless, of course, you argue that advanced training in economics is about the only thing that could persuade one to such a foolish view.) One recent study by a London-based investment firm used Federal Reserve numbers to show that stock market values are running at a ratio of around 130 percent of underlying corporate net worth, higher than at any time since 1920 and twice its long-term average.

It doesn't require any prodigious feat of memory either to see that the plunge on the New York Stock Exchange had far less to do with the Hong Kong markets than with what Federal Reserve Chairman Alan Greenspan said on Oct. 8. In his prepared testimony before the House Banking Committee, Greenspan warned that the U.S. economy was running at an unsustainable rate of growth and inflation was a virtual certainty unless job growth slowed. Once the word "inflation" passes Greenspan's lips, everyone knows perfectly well that the next shoe likely to drop is a hike in interest rates and economic slowdown.

Today, as the market seesaws down and up, we should take another look at that momentous Greenspan testimony and see what it imparts to us about the nature of the mighty boom that was under siege at the start of the week.

In the old days, when someone like Greenspan talked about inflation, the next word out of his mouth would probably be "prices." But on Oct. 8, Greenspan had no patience for such a roundabout path to his central concern, which was wages. He told the House Banking Committee that the question was "when, not whether, labor costs will escalate more rapidly" and that labor shortages "must eventually erode the current state of inflation quiescence."

So here was Greenspan's message: If the economy goes on growing, then employers will have to pay more to attract workers, and to quell this unacceptable threat of inflation (and threat to profits), Greenspan will have to slow down the economy, create unemployment, cheapen the cost of labor and thus sustain profits.

So here we come upon a truth about one of the "fundamentals" of the U.S. economy today that is sobering. When Greenspan talks about wages rising too fast, what he really means is wages rising at all. In effect, Greenspan is saying that we have an economy that cannot absorb even the slightest wage increase.

Here, on data from the Bureau of Labor Statistics, is what has happened to real compensation (wages plus benefits) since the start of the Clinton presidency. In 1993, real compensation fell by 0.4 percent; in 1994, it fell by 0.9 percent; in 1995, it fell by 0.3 percent, and in 1996, it rose by 0.3 percent. By the end of 1996, a family of four in the median bracket had income 3 percent below that of a similar family in 1989, which itself was sitting just 1.5 percent above the income of just such a family in 1973. And remember, this has been a period when women have poured into the labor force to boost family earnings. By contrast, workers in beleaguered Japan did much better for the same period.

Some further chastening figures, courtesy of Professor Robert Brenner of UCLA who has been preparing a long study for New Left Review on what the real "fundamentals" actually tell us. Here's what "stability" in wages means, beyond the bleak numbers cited above. About one-third of today's labor force in the United States makes $15,000 or less. Brenner calls them the surplus army of the employed.

It's true that the overall proportion of the population in the work force is high, but the proportion of people losing jobs is at an all-time high. Between 1992 and 1995, 15 percent of all people holding jobs for more than a year lost those jobs and on average made 14 percent less than their old wage if they found a new one. The rate of job loss in the '90s boom is higher than in the recession years of the early 1980s or early 1990s.

The great boom of the '90s is the slowest in the postwar period, bumping along at an average of 2.6 percent growth in gross domestic product between 1992 and 1996. The numbers tell us that Greenspan and the system in whose service he toils know that the economy has to run slow, with tight money and austerity in the interests of budget balancing because that's the way to keep wages down. Another way is to cheapen the cost of labor by introducing workfare.

Here's our fundamental truth: What's described as a "boom" in America today -- a boom in which relatively few have struck it rich -- is in fact a wage freeze. And the minute Greenspan says it looks as though the wage freeze won't hold, the system goes into shock.