America's Corporate Recovery Is More Fragile Than You Think
Robert B. Reich

At a time when corporate profits are through the roof, the Dow has reached 12,000, Wall Street paychecks are fat again, and big corporations are sitting on more than $1 trillion in cash, you'd expect jobs to be coming back. But you'd be wrong.

The U.S. economy added just 36,000 jobs in January, according to the Bureau of Labor Statistics. Unusually bad weather may have accounted for some of the reluctance of employers to hire. But even considering the weather, the economy is still terribly sick.

Remember, 125,000 new jobs a month are needed just to keep up with the increase in the population of Americans wanting and needing work. And 300,000 a month are needed -- continuously, for five years -- if we're to get back to anything like the employment we had before the Great Recession.

How can big corporations and Wall Street be doing so well and the rest of America so poorly? Corporate profits are up, notwithstanding that most Americans still aren't buying much, for three reasons.

First, companies continue to make money selling abroad from their foreign operations. Second, big corporations continue to show profits by keeping their costs down in the U.S., especially their labor costs. They continue to outsource work abroad, or substitute automated and computerized machines for workers. Third, stock prices are being pushed up by Wall Street's speculation. The Federal Reserve is keeping interest rates near zero and giving Wall Street banks access to even cheaper money through its special lending window. Nothing makes Wall Street traders happier than free money with which to make bets.

The result: America's corporate economy is booming, but the real economy is still in the doldrums.

Most Americans are still struggling with a mountain of debt and job losses. The official rate of unemployment is 9 percent, but counting everyone who's working part-time but needing a full-time job and others who have become too discouraged even to look for work, the actual rate is closer to 17 percent.

Americans in the real economy own little or no shares of stock. Their major asset is their homes, whose values continue to drop. In coming months most Americans will also be contending with sharply rising prices for food and fuel.

The inhabitants of America's corporate economy, by contrast, are mainly managerial, professional and college-educated. Their unemployment rate is around 5 percent and their wages are good. The corporate economy is centered in New York and Washington, with outposts in other major cities.

Americans in the corporate economy have most of their savings in stocks and bonds, and right now they are living well off of global corporate profits. The richest 10 percent of Americans, holding 90 percent of all financial assets, are riding the wave of the stock market rally. Their upscale spending has given high-end retailers and producers a bounce.

Most Americans are not in the corporate economy, but the corporate economy is more visible and influential than the real one. That's why you hear that the U.S. economy is recovering, when for most people it's not. Our representatives in Washington see and hear mostly from the corporate economy. The business press reports mainly on it. Corporate and Wall Street economists are concerned largely with it.

The denizens of the corporate economy -- along with most of official Washington and the business press -- believe it will eventually pull along the rest of America into a strong recovery. They have it backwards. Unless the rest of America recovers, the corporate economy can't continue its upward rise.

The consumption of the richest 10 percent of Americans depends on a continuously rising stock market. The so-called "wealth effect" that's fueling their purchasing will end when the bull market runs out of steam. But corporate profits cannot continue to rise without a broad-based consumer recovery in the U.S.

Foreign sales aren't enough. Europe is busily adopting austerity measures -- shrinking public budgets and raising taxes. These measures are already slowing growth there. China is raising interest rates. It's worried about both an overheated economy and also rising unemployment. The result will be a slowdown in sales by the foreign operations of American-based corporations.

Cost-reductions in the U.S. can't continue to generate profits. Most of these cost cuts generate one-time gains. To the extent they're based on job or wage and benefit cuts, they reduce the capacity of American consumers in the first economy to buy the goods and services these companies are selling.

Nor, finally, will stock prices continue to rise because of debt-financed speculation on Wall Street. This will end as all speculative bubbles do -- with a pop. When? My guess is within the next few months.

Here's the bottom line.

Don't believe the economic cheerleaders on Wall Street and in Washington. Without a strong and broadly based recovery in America's real economy, America's corporate economy will fall in on itself.

Robert Reich, former U.S. Secretary of Labor, is professor of public policy at the University of California at Berkeley and the author of the new book Aftershock: The Next Economy and America's Future.

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