by Robert B. Reich

Most of Wall Street thinks the biggest threat to the economy right now is inflation. It's not the first time the Street is dead wrong. The bigger threat is another recession.

The most significant economic news from the first quarter of 2011 is the decline in real wages. That's unusual in a recovery, to say the least. But it's easily explained this time around. In order to keep the jobs they have, millions of Americans are accepting shrinking paychecks. If they've been fired, the only way they can land a new job is to accept even smaller ones.

The wage squeeze is putting most households in a double bind. Before the recession, they'd been able to pay the bills because they had two paychecks. Now they're likely to have one-and-a half, or just one, and it's shrinking.

Add to this the continuing decline in the value of the biggest asset most people own -- their homes -- and what do you get? Consumers who won't and can't buy enough to keep the economy going. That spells recession.

Consumer spending is slowing. In the first quarter of this year it grew at a tepid annual rate of 2.7 percent -- down from 4 percent during the last quarter of 2010. Less spending means slower growth. The economy grew only 1.8 percent from January through March. A snail could do better.

Why doesn't the Street get it? For one thing, lenders always worry more about inflation than borrowers do -- and, in general, the wealthier members of a society tend to lend their money to people who are poorer than they are.

But Wall Street's inflation fears are also being stoked by several specifics.

First are price upswings in food and energy. The Street doesn't seem to understand that when most peoples' wages are flat or dropping, additional dollars they spend on groceries and at the gas pump mean fewer dollars they have left to spend in the rest of the economy. Rather than cause inflation, this is likely to lead to more job losses.

The Street is also worried that the Fed's easy money policies are pushing the dollar down and thereby fueling inflation -- as everything we buy abroad becomes more expensive. But if wages are stuck in the mud and everything we buy abroad costs more, Americans have even fewer dollars to spend. This also spells recession, not inflation.

Finally, the Street worries that if Democrats and Republicans fail to agree to a plan to cut the budget deficit, the credit-worthiness of the United States as a whole will be in jeopardy -- causing interest rates to rocket and inflation to explode. Standard & Poor's, the erstwhile credit-rating agency, has already sounded the alarm.

The Street has it backwards. Over the long term, the budget deficit does have to be tackled. But not now. When job growth remains tepid, when wages are dropping, and when the value of most households' major asset is declining, government has to step in to maintain overall demand.

This is the worst possible time to cut public spending or reduce the money supply.

The biggest irony is that the Street is doing wonderfully well right now, in contrast to most Americans. Corporate profits for the first quarter of the year are way up. That's largely because corporate payrolls are down.

Payrolls are down because big companies have been shifting much of their work abroad, where business is booming. The Commerce Department recently reported that over the last decade American multinationals (essentially all large American corporations) eliminated 2.9 million American jobs while adding 2.4 million abroad.

What the Commerce Department didn't say is the pace is picking up. In 2000, 30 percent of GE's business was overseas and 46 percent of its employees; now, 60 percent of its business is outside the U.S., as are 54 percent of its employees. Over the past five years, Oracle added twice as many workers overseas as in the U.S.; 63 percent of its employees now work abroad.

Corporations are simultaneously finding ways to cut the pay of their remaining U.S. workers -- not just threatening job losses if they don't agree to the cuts, but also automating the work or sending it to non-union states.

America's jobless recovery is becoming a wageless recovery. That puts the odds of another recession greater than the risk of inflation. Wall Street and its representatives in Washington don't understand -- or don't want to.

 

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 book Aftershock: The Next Economy and America's Future.

 

The Wageless Recovery