Tightening Credit = Bad Economic News (Revised)

Popular Economics Weekly

When is the next financial crisis? A Deutsche Bank study predicts it could be sooner than we know, as I said last week. Because the Federal Reserve reiterated its intent to begin to sell off the $4.5 trillion in excess reserves at its latest FOMC meeting at a time of record deficits built up to recover from the Great Recession.

“When looking for the next financial crisis, it’s hard to escape from the fact that we’re seemingly in the early stages of the ‘great unwind’ of global monetary stimulus at the same time as global debt remains at all-time highs following an increase over the past decade—at the government level at least—which has been unparalleled in peacetime history,” wrote Deutsche Bank strategists led by Jim Reid in an 88-page study entitled, “The Next Financial Crisis,” and cited by Marketwatch.

We haven’t fully recovered from the Great Recession, in other words, or the record deficit would have been paid down by now. So, this is the wrong time to be tightening credit. Instead, we should be raising taxes on those that have profited from the recovery—the top 1 percent that have garnered 96 percent of all income generated since the end of the Great Recession—as well as corporations with their record profits.

We really don’t need tax cuts, but pay raises for the majority of our workforce that hasn’t benefited from the recovery, if we want to boost economic growth; which is another way to pay down the deficit. Marketwatch reported on a recent employee survey that tells us exactly why personal incomes haven’t grown along with corporate profits that are the highest in history as a percentage of GDP.

“Pay raises for U.S. employees are not expected to improve next year, according to a survey released Monday by global professional services company Aon, based on a survey of over 1,000 companies. Base pay is expected to rise 3 percent in 2018, up slightly from 2.9 percent in 2017. Spending on variable pay — incentives or bonuses — will be 12.5 percent of payroll, low levels not seen since 2013. This suggests a “pessimistic view of corporate performance in the coming year,” Ken Abosch, a strategy and development analyst at Aon, said in a statement.

So where have all the profits gone that were generated since 2009? Executive Pay Watch, in a report conducted by the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), said last year CEOs were paid 335 times the average worker. The average production and non-supervisory worker earned $37,600 annually in 2016. “When adjusted for inflation, the average wage has remained stagnant for 50 years,” the report said.

That’s not a formula that will pay down the $10 trillion accumulated since the end of the Great Recession. The conundrum is why so much debt was issued with so little economic growth, and the US at near full employment?

It’s mainly because corporations have been able to successfully resist their employees’ demands for higher wages due to their monopoly positions in many industries, and massive lobbies. Instead they’ve used most of those profits to buy back their stock, and so enhance their earnings. CEO pay spiked 19.6 percent last year, before inflation.

The median total compensation for CEOs at S&P 500 companies totaled $11.5 million last year, an 8.5percent increase from the previous year and the largest increase since 2013, according to a joint report by the Associated Press and the executive pay data firm Equilar released earlier this year. 

So, we could be seeing a growth slowdown next year, or worse, unless we can reverse the huge redistribution of wealth that has occurred since 2009. But that would mean raising the nationwide minimum wage from its current $7.25/hour, last set in the 1990s, for starters.

And, then stopping the Trump administration and Republican congress from cutting taxes of the already wealthy, and cutting spending that supports the poorest and elderly in the new tax and budget proposals.

Their most blatant attempt to hurt those in most need has been the repeated attempts to repeal Obamacare (another tax cut for them). Otherwise, all that stimulus has gone for naught, and we could see this Great Recession turn into another Great Depression.

Harlan Green © 2017

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

About populareconomicsblog

Harlan Green is editor/publisher of PopularEconomics.com, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
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