Point of View (AFL-CIO), February 6, 2008
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As Congress and the president hammer out a stimulus package to counter the recession, it is worth asking how we got into this mess. While the suppression of workers’ right to organize may appear to have little direct relationship to the collapsing housing bubble that is the cause of this recession, on closer examination they are closely linked.
To see the relationship, we have to go back to the period before 1973, when the economy was experiencing strong growth, which produced rising wages and growing prosperity for the vast majority of the country’s workers. During this period, the economy saw strong productivity growth, which meant workers were producing more. The gains in productivity were passed on to workers in the form of higher wages. Profits also rose, with workers and businesses each getting their share of a growing pie.
Wage growth led to increased consumption demand, which in turn led firms to produce and invest more. Additional investment spurred productivity growth, maintaining this virtuous cycle.
This cycle collapsed over the past three decades. While productivity has continued to grow, most workers have seen little benefit from these gains as wages have been virtually stagnant for most workers over this period. There are many reasons for this wage stagnation. The deregulation of such major industries as airlines, telecommunications and trucking placed downward pressure on the wages of the millions of workers in these sectors. International trade has been an important force suppressing the wages of many workers.
However, the suppression of unions also has been a major factor preventing workers from getting their share of productivity growth. During the past three decades, management at many companies has adopted a posture of unmitigated hostility to unions. Employers have been willing to use a wide variety of tactics, both legal and illegal, to prevent workers from organizing.
To a large extent, the government has tolerated these abuses, with lax enforcement of the already weak laws designed to protect the right to organize. John Schmitt and Ben Zipperer, my colleagues at the Center for Economic and Policy Research (CEPR), estimate that one in five workers actively involved in an organizing drive can expect to be fired for their union activity. Firing a worker for trying to form a union is a clear violation of the law, but because the penalties are so minor, such firings are now a standard management practice.
With wage-driven consumption growth no longer possible in an era in which most workers do not see rising wages, the economy needed a different engine for growth. The alternative to wage-driven growth was bubble-driven growth. We had a growth cycle spurred primarily by the stock bubble in the 1990s and by a housing bubble in the current decade.
The bubbles have both a direct and indirect effect in spurring growth. The 1990s stock bubble spurred growth directly through the investment of tech start-ups that could raise hundreds of millions or even billions of dollars with new stock offerings. The housing bubble spurred growth with an explosion of housing construction, which rose to its highest levels in three decades.
Even more important than the direct growth spurred by these bubbles was the indirect growth. In the case of both the stock and housing bubbles, people spent heavily against the wealth created by the bubbles. This effect was especially important in the case of housing. Tens of millions of home owners borrowed heavily against the wealth in their homes, through home equity loans or by refinancing their mortgages. They used this money to buy cars or take vacations, or in many cases to pay the bills. This borrowing pushed the national savings rate down to nearly zero over the past three years, as households in aggregate spent an amount that was nearly equal to their income.
In effect, instead of consumption growth being driven by wage growth, it was driven by borrowing. The problem with this path of growth is that it is unsustainable. Financial bubbles inevitably burst. The stock bubble burst because they ran out of suckers who were willing to pay lots of money for nonsense start-ups that would never make a profit. The housing bubble burst because record construction rates eventually caused supply to outstrip demand. House prices are now plunging at double-digit annual rates. The current level of price decline in the housing market will destroy more than $3.2 trillion in housing wealth over the course of a year, almost $70,000 for every home owner in the country.
This price decline is the cause of the recession. Housing construction has already fallen back to half of its pace of two years ago. More important, families are starting to cut back their consumption because they no longer have equity in their homes against which they can borrow. The massive loss of equity from the collapse of the bubble is likely to lead to a substantial drop in consumption, which can fuel a long and severe downturn. The stimulus package being crafted by Congress will be helpful, but it is likely to be far too small to fully offset the impact of the collapsing housing bubble.
While it is important to devise measures like the stimulus package to boost the economy in the short term, it is also important to design policies to get the economy back on a healthy long-term growth path. Adopting policies, such as the Employee Free Choice Act, that restore the freedom to join a union, will be an important part of this story. If workers are able to form unions and get their share of productivity growth, it can again put the country on the path of wage-driven consumption growth. Restoring a wage-driven growth path will be a long-term project, but it will provide workers and businesses with much more stability than the current bubble-driven economy.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.