Low Marx for Powell

Powell the (Chico) Marxist Part 3 - In a nut's shell....

In part one we looked at US dominance of global markets and capital flows. In part two, we started to look at the evolution of the understanding of labour as a factor of production. Today, we’ll delve deeper into the significance of labour in economic terms.

The Economic Importance of labour

In all models that we’re aware of, labour remains a key factor in global business and the relative ‘health’ of labour markets is a key determinant in economic performance. If unit labour costs rise too sharply, the prices of goods and services increase, tending to limit the volume of aggregate consumption (if everything that we buy goes up in price, not all buyers will be able to afford to continue buying at the same rate – their individual financial constraints will limit how much of the higher cost good or services they will be able to afford, which may result in scaling back of purchases). This can lead to situations where businesses are forced to compete, for instance by cutting profit margins, or where the labour force looks for higher wages to offset goods and services inflation. However, higher wages, or labour costs, increases the need to either pass on these higher costs through increased prices or to reduce profits margins. In fact, American corporate profit margins, which had spiked following World War II, fell reasonably consistently throughout the second half of the twentieth century, especially during or preceding recessions, when unemployment tended to increase, which typically reduces labour’s bargaining power:

However, corporate margins have rebounded since the turn of the millennium, returning to prior highs following the post-pandemic rebound, which by the Fed’s own admission, came about because of policy responses to COVID.[1] Long-term readers will recall our view of policy responses evolved from being initially supportive to ultimately horrified as the Fed and its global cohorts, seemingly enamoured with their own success at staving off economic calamity, continued to rinse and repeat the solution of broad, indiscriminatory stimulus too much for too long, way after it had ceased to be helpful and even when it was becoming harmful. Direct distribution of stimulus payments (‘stimmies’) resulted in a welcome unprecedented spike in disposable personal income in April 2020, when economic activity plunged almost overnight with half the global population confined at home in nearly 100 countries. When the level of disposable income returned to roughly normal extrapolated trend levels, the second round of direct stimulus payments resulted in a second spike at the end of that year. The third and most extreme spike, created a final concentrated (most Americans received ‘stimmies’ at almost exactly the same time) disposable income boost at times when supply chains remained broken and while the consumer psyche remained impacted by the effects of lockdown (e.g. record Peleton home fitness equipment purchases and extreme levels of online stockmarket speculation):

Inflation outcomes (red line) of ham-fisted policy clumsiness later became evident:

Inflation spiked from 1.23% year-on-year in 2020 to over 8% by 2022:

The last 65 years has also seen widening wealth disparity in America. Alarmingly the policy reaction to lockdown appears to have exacerbated this trend -the combined wealth of America’s billionaires has grown by 88% since 2020, while measures of wealth of the broader population have actually shown much lower increases or even decreases. We have prepared an accompanying Appendix which explores this inequality in greater detail and is available on request.

Although corporate margins declined from 1950 until 2000 before rebounding, and following lockdown, re-testing previous high levels, workers’ share of economic activity (GDP) fell from almost 65% in the early 1950s and again in 1970 to 60% in the mid-1990s before also recovering sharply but briefly during the late 1990s. In contrast with corporate margins, it has fallen precipitously this century, barely rebounding post COVID:

Monetary and fiscal policy in the longer and medium term drove corporate profits to record levels, but decimated employees’ share of these profits. Policy responses provided much-needed initial boosts to the US economy, it has subsequently been the primary driver of inflation. This has dissipated over the last two years as financial conditions have worsened for most Americans, whereas the most concentrated owners of asset wealth, (especially America’s 700 billionaires) have seen their financial situations continue to improve. This is partly because Americans received the same personal stimulus payments without regard to individual circumstances or needs but also because asset owners (especially the 700 billionaires) benefitted disproportionately from the remaining 84% of economic stimulus, whereas ‘stimmies’ represented only $814 billion of a total of $5 trillion – i.e. 16% of the total US$5 trillion in pandemic stimulus was distributed to the US population between April 2020 and March 2021. For the least wealthy/lowest income earners this was largely spent by the end of 2021, leaving them worse off than pre-pandemic:

In many cases, the financial situations of the most economically disadvantaged have worsened over the subsequent 2 ½ years, as evidenced by the decline in personal savings to lower levels than at the end of the Global Financial Crisis. America’s aggregate savings are lower today than 15 years ago and while a minority have significantly higher personal savings, most have less.

Without applying any kind of moral or sociopolitical lens, we have long made the point that running an economy of one third of a billion people for the benefit of only 700 participants is unsustainable in an era where the 700 lack direct connection with the 333 million, in ways that prevailed in feudal times.

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[1] https://www.washingtonpost.com/business/on-small-business/2023/09/11/greedy-us-firms-not-to-blame-for-inflation-fed-study-suggests/7158f840-50da-11ee-accf-88c266213aac_story.html

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About the Author:
Paul Gambles is licensed by the SEC as both a Securities Fundamental Investment Analyst and an Investment planner. 

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