Labor Cost Reductions REDUCE Corporate Profits

[unlawflcombatnt]

Recent increases in American business profits have come almost exclusively from decreased labor costs, combined with debt-financed consumer spending increases. Aggregate demand is essential for these profits.

Aggregate demand can only be maintained if wages are maintained, or if consumer borrowing increases enough to compensate for wage declines. Wages have not been maintained, however. In fact, inflation-adjusted hourly wages have declined 0.5% over the past year. In contrast, productivity has increased markedly over the same period. Corporate profits have also increased. Despite wage declines, consumer spending has actually increased. Consumer borrowing has been the source of this paradoxical increase. Consumer borrowing has prevented the consumer spending decrease that would've otherwise occurred. Consumer borrowing has maintained the demand necessary for businesses to profit. The aggregate demand needed to sustain our economy is being maintained exclusively by increased borrowing.

There are 2 ways businesses can increase profits. They can increase the sale of production, or they can reduce the cost of production. Sale of production only increases if aggregate demand increases. If aggregate demand does not increase, the only way profits increase is by reduced production costs. This almost always comes from reducing labor costs. However, labor cost reductions reduce labor/consumer income, which reduces aggregate demand. If there's a total, nationwide reduction in wages, total product sales will also decline. The reduction in sales reduces profits and completely nullifies gains made from labor cost reductions.

Labor cost reductions may temporarily increase individual company profits. But this is true only on a small scale. If labor cost reduction is a nationwide phenomena, the aggregate loss in labor income becomes noticeable. It reduces the total amount of money available to buy goods. Here again, the reduction in aggregate labor costs is completely nullified by the reduction in total sales. There is simply NO benefit from aggregate nationwide labor cost reduction, because the loss of consumer sales equals the labor cost reduction. As a result, there is no aggregate increase in nationwide business profits. There is simply a shift in individual company profits away from companies not reducing labor costs, to companies that are reducing labor costs.

This effect does not remain "balanced," however. The nationwide (and global) decline in wages reduces aggregate consumer demand for production. This further reduces demand for labor to provide that production, causing further declines in labor income, consumer spending, and consumer production demand.

Thus, on a national or global scale, short-term profit increases from labor cost reductions cause long-term decreases in profits. This short-sighted concern with short-term profits is leading us toward long-term economic ruin.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[OregonBlue]

1. Yes, but they're only interested in short-term profit.

Take the money and run. Don't really care about the corporation, only about executive salaries and moving on when things get tough.

[unlawflcombatnt]

2. Short-term profit

You're absolutely right. That fixation on short-term profits at the expense of long-term gains may very well sink our economy.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[senseandsensibility]

3. Thank you for posting something pro labor

as we head into Labor Day.

[unlawflcombatnt]

7. Always happy to post pro-labor information

I'm always happy to post pro-labor letters. Labor income finances the consumer spending that is essential to our economy. Anything that hurts labor decreases the long-term growth of our economy. Corporate profits are made from sale of goods, not production. Labor income provides the income necessary to purchase production, as well as the dollars of sale necessary for business profits.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[are_we_united_yet]

4. The bean counters just don't fucking get it.

[unlawflcombatnt]

6. They sure don't

The right-wingers just don't get the concept that labor income is necessary for them to make profits. Lowering wages may lower production costs, but it lowers the ability of American labor to buy production as well. The excess profits obtained from labor cost reductions have no long-term benefits at all. There is ample capital for investment at present. But there is not ample income to buy the production resulting from investment of that capital. The benefit of further capital investment is limited by the ability of consumers to buy the resulting production.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[PurityOfEssence]

5. Yes, but how can you feel good about yourself if others aren't paid dirt?

The true sickness is the need to be better than others, and for those who determine wages for others, to grind them down and be oh-so-much more valuable in comparison.

Truly, the mechanism that made America work is that workers made reasonably good wages and bought things. This stoked the fires of the economy and made us a powerful economic engine. With the need to crush the peons, we destroy the core dynamic of our society.

The true ugliness of the soul that needs to lord our success over others is precisely what will bring it all down around our ears. It's sick, yet it's as old as the colonization of this country. The dark side of the solitary cowboy is a great big fuck you to the rest of the world.

Oh, and more than anything else, it doesn't work.

[unlawflcombatnt]

8. Core Dynamic of Our Society

You are certainly right about destroying the core dynamic of our society.

What the corporatists fail to fully realize, is that destruction of this core destroys their ability to make profits. Right-wing think tanks, funded by millions of dollars of corporatist donations, have devoted tremendous effort into proving that many economic fairy tales are actually true.

It's amazing how long it takes to "prove" that a complete falsehood is true, and how little time it takes to prove that a simple reality is true. This is what Right-Wing economic theory is all about. It's about trying to prove that something completely illogical is true. "Investment creates jobs" is one such myth. The assertion that tax cuts for the rich are good for the economy is another such falsehood.

Tremendous amounts of money are spent in an attempt to brain-wash the American public into believing these economic myths. Hopefully I can dispel some of these myths, by applying simple common sense to these illogical assertions.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[kineneb]

9. I have been making this point

quietly to the some of the businesses in the local Chamber.

You, as a business, can produce all you want but if the consumer lacks a good-paying job then they can't buy your product. So having jobs that pay well, have benefits, etc. is important to the whole economy.

We can't go on forever borrowing money against our houses, while the economy bleeds jobs. One day it is going to come back to bite us on our collective kiester.

[unlawflcombatnt]

10. Good-paying jobs

We completely agree. The housing bubble, and the consumer spending it finances, is going to deflate eventually. When that happens, the lack of good-paying jobs will become apparent, because the artificial maintnenance of consumer spending from home equity loans will vanish. In addition, the myth that "investment creates jobs" will be exposed as pure economic fantasy.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[Hidden Stillness]

11. Another Angle--"Out of Sight, Out of Mind"

So this was Labor Day again, the strangest Labor Day I can recall. It feels like the world is collapsing, burning, drowning, all around us--I hope this is the end of George Bush. At any rate, even though my middle-class, union, Democratic city observed it, and had flags out, etc., you know that most people had to work today. I think Labor Day is just about the most "neglected" of the active holidays, as the powers-that-be have always tried to kill it. This is what happens when an oppressed group achieves an holiday of recognition, the oppressor group usually observes it only grudgingly, if at all.

About the topic--this proves yet again that management does not even consider us (workers) to be equal parts of the enterprise: we are not also "the people," earning the money; we are "their expenses," cut and deleted whenever possible. They still totally fail to understand this obvious fact, that as we lose our disposable income, and have only enough to live on--buy food and gas, pay bills and credit cards--we will not be buying any products of any kind, and real Census data shows that.

An example I think of on this issue of cutting labor expenses, yet still trying to sell as much--a futile pursuit--happened with a brand of dry spice mixes I like (don't know if they want you to not use brand names). I had been buying this chili mix in the stores for years, when all of a sudden a few years ago, this corporation decided it was going to "save a lot of money" by not shipping to stores, but having everybody only order online, killing off their distribution employees. Well, when it isn't conveniently available in the stores, then eventually you just forget about it, and don't go to all the trouble of ordering bulk amounts, waiting for it, etc. Whether it is "logical" or not--if it is not convenient, you stop doing it, and I did. After a couple of years, their "brilliant money-saving" idea was such a disaster, and lost them so many sales, that they started sending their products to the stores again, and I went back to buying. This was a slightly different angle on this idea that you can't just cut the operation down to the bone, and have it somehow work. It won't. You have to spend money to make the operation work right, and only then, get sales.

[unlawflcombatnt]

14. "Me-Side" Economics

Hidden Stillness,

Thank you for your response. I'm glad people such as yourself also appreciate the significance of American labor, and its essential role in our economy.

You're so right about management's view of labor as simply an "expense." Management simply ignores the even more important function of workers. Workers are also the consumers. Without consumers, business and corporations would make NO profits. By cutting their labor "expenses" every way possible, they cut the consumer income necessary to buy their products.

This misplaced concern about labor "expenses" is the result of thinking only in terms "business management," "investment theory", and microeconomics. Much more concern should be paid to the field of macroeconomics and the effect of aggregate demand.

This misplaced concern about individual profits, at the expense of the economy as a whole, has a perfect parallel. It parallels the thinking of the "me" generation. Current obsession with business management and microeconomics is the equivalent of the "me" generation applied to economics. Instead of supply-side or demand-side economics, we could call this "Me-Side" Economics,

We need to move away from "Me-Side" Economics back to Demand-Side Economics.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[PsycheCC]

15. Remember when companies changed "personnel" to "human resources"?

I thought then that there was something very not human about the labeling of people as just one more resource exploited by a business.

They are VERY fond of reminding us that workers are the most expensive element of doing business. Well, that is because workers create by far the largest part of the value in any product. Of course workers are costly; they should be. Business should celebrate the fact that they can pay workers enough to be able to afford to buy product, thereby keeping businesses profitable.

On another note, I was struck as I read this thread by two things. One, I have learned a lot from reading your posts Unlawful; I'm really understanding more about how the economy works. Thanks for that. And two, the posters on this thread understand the importance of well-paid labor to a strong economy too. This was very interesting reading! :applause:

[unlawflcombatnt]

16. Human Resources

PsycheCC,

Thanks for your compliments. I completely agree with your sentiments about the importance of workers, and how it is often understated by business.

I think sometimes "human resources" is shortened to just "resources" or even "assets." Assets are something you own. Do you think this relates to Bush's "ownership" society? Do businesses look at workers as something they "own"?

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[unlawflcombatnt]

17. Labor importance

I, too, have been impressed with some of the outpouring of support for labor that I've seen here. Maybe we can help restore the Democratic Party to one that is an advocate for labor and the middle class, and less of a party that caters to big corporate campaign donors.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[doc03]

12. Interesting this is Labor Day and this was the only post

I have seen on labor on a Democratic forum.

[unlawflcombatnt]

13. Labor

That is pretty amazing. My wife was just wondering why there isn't some kind of big Labor Day celebration. I think Katrina has stolen the headlines.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."