Economics 2005: Traditional terms don't apply to current problems

Thursday, April 14, 2005

Politicians, academics, economists and analysts are consistently using common historical terms to describe present economic conditions. These terms, however, have no contemporary relevance. Applying the traditional terms to current problems renders the descriptions senseless.

Inflationary pressures: As every schoolchild knows, all pricing is based on the principle of supply and demand. It is the invisible hand of the marketplace. If supply outstrips demand, prices go down. If demand surpasses supply, prices go up.

In the previous economy, competitive entities operated under this fundamental premise. Therefore, when prices began to rise, it was an indication demand was strong and the economy was good. This is not the situation today. The persistent merger and acquisition activity among large corporations in the commodity sector has eliminated the conventional competitive forces that create market conditions.

Oil, chemical and steel companies have consolidated to a point where a tiny number of giant companies control the basic material needed in the production of all the items we use. They maintain no excess capacity and are quick to use their monopoly positions to raise prices and profitability regardless of market conditions. Thus, inflation can occur totally outside the imperatives of the free market.

The current high oil prices have provided an ever-decreasing number of huge oil companies with windfall profits. When this occurred in the 1970s, consumers were outraged and Congress passed a windfall profits tax. Today economists are calling these ill-gotten gains a positive factor in the economy.

Unemployment rates: Employment is the hallmark of any economy. Individuals must have the opportunity to get a job and make a living. Historically, a reduction in unemployment rates is a positive factor in the economy, since it means more people are employed. This is not the situation today.

Economists refer to a natural unemployment rate of between 4 percent and 5 percent. This is based on frictional unemployment or people changing jobs for whatever reason.

In today's economy there is a rapidly growing number of structurally unemployed -- people who have lost their jobs to cheap Chinese labor and cannot find other employment. Many have given up looking for work and are, therefore, not considered unemployed.

As the number of unemployed-not-looking-for-work rises, the reported unemployment rates go down. People unemployed-not-looking-for-work have been estimated at 6 percent to 8 percent of the workforce. Individuals working as little as two hours a week, even though they are seeking full-time employment, are also not considered unemployed. These temp workers have been estimated as high as 18 percent of the workforce. Finally, there are the underemployed -- people working 40 hours a week and earning less than a living wage. They number 22 percent of the workforce.

Productivity gains: Economist and social theorist Karl Marx developed the concept of productivity more than 150 years ago. He understood that it is the fundamental nature of capital to invest in mechanical equipment to replace the cost of human labor. Purchasing apparatus like machine tools, computers and robots make people more productive. A capitalist can produce more goods with less labor.

Throughout U.S. industrial history, the increasing level of capital investment, and the improved productivity that resulted, was a positive economic indicator. Capital investment represented important scientific and technological progress. This was necessary for continued prosperity.

Further, the benefits of increased productivity and the consequent reduction in production costs enabled employers to pass along a portion of the ensuing profits to their employees, which resulted in a higher standard of living for everyone. Therefore, productivity, or higher output per employee, is good. This is not the situation today.

Increased productivity is the result of well-paying U.S. jobs being shipped to China where people earn a few cents an hour. U.S. production capacity is being rapidly abandoned. The imported goods are far cheaper, so American companies can sell more with fewer workers. Therefore, productivity is higher.

However, this leaves no investment in the future, and Americans are forced to work for less, endure a lower standard of living and face a bleak future.

Eli Fishman of Cape Girardeau is the owner of Cape Shoe Co.

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