"Put the jam on the bottom shelf so the little man can reach it," Sen. Ralph Yarborough used to say in the 1950s and 60s, when Texas still elected populist democrats to the Senate.
Well, it's time for Obama and the Congress to put some jam, in the form of stimulus and jobs (like a new WPA) in the reach of the little people, because if they aren't careful, the little people are about to get dragged back over the precipice into a chasm of wage deflation.
I've been optimistic about the economy moving out of free fall and actually improving by about autumn, and I still am. But I am bothered by the fact that while all other sectors of the economy, especially manufacturing, are on the cusp of improvement, the average American -- the wage earner and consumer -- is being left behind. My renewed concern is prompted by the report that consumer expectations of the future as reported in the U. of MIchigan survey yesterday, declined for the second month in a row, falling to 62.1 from 63.2. That is the lowest reading since March when this category measured 53.5. This is just about where the index was reported when Black September created the panic that (literally) decimated the economy last fall and winter. It also is one of the 10 acknowledged Leading Economic Indicators I have been citing relentlessly for the last 4 months. One month's decline might be an outlier. Two months decline looks suspiciously like a trend:
Back in the old days, a reading on this index below 80 meant a recession was likely. You can see that all during what Larry Kudlow used to call "the greatest story never told", the alleged "Bush Boom", consumer sentiment never really penetrated 80 to the upside. Consumers -- accurately -- figured out that none of the growth was accruing to them, and as we all know by now, that growth was vacuumed up into the pockets of the top 0.1% of society, creating a Gilded Age that has not been seen since the cusp of the Great Depression. It is fair to say that with the inauguration of Obama, and the quick passage of the stimulus package, Americans started to have hope that the economy might be turned around. Now that hope is fading, and consumers can be expected to act on their beliefs, spending less as we enter the back-to-school and pre-holiday seasons.
It isn't just the decline in one leading indicator that is causing me concern, it's that wages are on the cusp of out-and-out deflation. Here's a look at the four items of economic data that typically are supposed to coincide with recessions and recoveries:
You can see that retail sales have bottomed out but stayed basically flat all year. Industrial production probably just bottomed. Employment is still declining, but at a much lower rate in the last few months, and looks likely to turn positive by the end of the year if not sooner. But the metric at the top right -- real personal income -- as of June was still resolutely declining with no sign of change. Paul Krugman has written about this several times, pointing to the steep downward trend of the employment cost index (a data series that tracks median rather than mean wage growth, that can be distorted by the top tier of earners). What is most concerning is that, while wage growth is rapidly approaching 0, inflation appears to have bottomed, and is beginning to pick up. So far this year inflation is running at +2.1%. It is very unlikely wages will keep up with any further increase in inflation, meaning that real wages will enter deflation. Here is a graph, showing the ECI in blue, and CPI in red, both in year over year terms. On the right scale, they are shown in absolute terms since the beginning of the recession in green and orange, respectively.
One thing we know for sure from the Great Depression is that wage deflation + heavy debt is absolutely deadly. Personal savings statistics from the last year show that consumers are paying down debt and increasing savings such as they haven't in 20 years. But by no means has the overhang of consumer debt been substantially resolved. Attempting to pay back such debt in an atmosphere of declining wages creates a vicious cycle of continuing collapse in demand, and continuing declines in wages, exactly what made the Great Depression so severe.
So far, we have escaped that. As Krugman among others says, we have been pulled back from the abyss. But if wages are allowed to tip over into actual deflation, then just as the economy as a whole is primed to enter actual growth, it might be cut off at the knees by increasing consumer distress.
The actions undertaken in the form of the stimulus plan, as well as the massive injections of cash into the financial system by the Federal Reserve, have set the stage for a turnaround, but it will all go to waste if wage deflation pulls us back over the precipice into the abyss. It's time for cash-for-consumers, and it's past time for a new WPA type of plan. The $750 rebate to consumers in Spring 2008 gave us 1 season of actual economic growth during this "Great Recession". Another direct injection of spending money for average consumers is needed NOW to create sufficient demand over the next 6 months to counteract the pull from the death vortex of wage deflation. It's time to "put the jam on the bottom shelf where the little man can reach it."