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Robert Reich: Stock Tip: Be Worried. Workers Are Consumers

August 22, 2011

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Corporate earnings are the highest they’ve been relative to worker wages and benefits since just before the Great Depression. It was only a matter of time before the boom on Wall Street turned into a bust.

By **Robert Reich**

By arrangement with RobertReich.Org.

Robert Reich.JPGRepeat after me: Workers are consumers. Consumers are workers.

We’re slouching toward a double dip, and the stock market is imploding, because consumers—whose spending is 70 percent of the economy—have reached their limit.

It’s not just the jobless who can’t spend. It’s mainly people with jobs. Median wages continue to fall. Weekly wages in July for Americans with jobs were 1.3 percent lower than eight months before.

America’s median earners are now earning less (adjusted for inflation) than they earned ten years ago.

Every CEO of every company that continues to squeeze payrolls (Verizon, are you listening? Ford?) needs to understand they’re shooting themselves in the feet. Where do they expect demand for their products and services to come from?

They’re doing the reverse of what Henry Ford did back in 1914—paying his workers three times what the typical factory employee earned at the time. The Wall Street Journal called his action “an economic crime” but Ford knew it was a cunning business move. With higher wages, his workers became his customers, snapping up Model-Ts and generating huge profits.

Many on Wall Street are scratching their heads, trying to understand why the stock market is plummeting. After all, they tell themselves, corporate earnings are still near record highs.

But it’s becoming clear those earnings can’t be sustained. Corporate earnings are the highest they’ve been relative to worker wages and benefits since just before the Great Depression. And the richest 1 percent of Americans are getting a higher percent of total income since just before the Great Depression.

Get it? It was only a matter of time before the boom on Wall Street turned into a bust. Economic booms cannot continue without American workers participating in them.

Foreign consumers have helped sustain earnings, but that won’t continue, either. The European economy is sinking and China is pulling in the reins on growth.

What will happen to the Dow Jones Industrial Average when corporate earnings revert to their historic average relative to American wages? I’ve seen various estimates. They’re not pretty.

________________________________________________________________________

By arrangement with RobertReich.Org.

Robert B. Reich is Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He has written eleven books (including his most recent, Supercapitalism, which is now out in paperback). Mr. Reich is co-founding editor of The American Prospect magazine. His weekly commentaries on public radio’s Marketplace are heard by nearly five million people.

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