If workers were paid better, there wouldn’t be so much of a demand problem, would there? But then we stumble upon a contradiction: the entire recovery in corporate profitability that began in 1982 came from squeezing wages and workers. The trajectory of profit expansion is very uplifting—returns are roughly double what they were in the early 1980s… So here’s the demand problem: there’s no longer an endless supply of easy credit to make up what’s not in the paycheck. The greatest product of the productivity revolution is the production of profits, which has enabled a vast upward distribution of income and wealth.
So, does productivity = unemployment?
No, not always, but it may be the case now. Consider that much of the productivity has come in the form of real wage stagnation here at home and sending production off to low cost regions (eg. China, India), people in the US began depending on easy credit to make up the difference.
The story so far has been that we had a housing bubble in the last decade, partly fueled by this easy credit. That’s a nice idea we’ve dug up but, actually, the facts don’t play out.
I think a lot of people are confused about this. There was, obviously, a huge boom in the price of land in the United States of America during this period. But was there really an extraordinary boom in housebuilding?
At the height of the “boom” we were adding units about as quickly as we were adding them in the late 1970s, when the total population was smaller and China’s “opening up” was just a glimmer of an idea of a possibility. If the Federal Reserve was trying to engineer a homebuilding boom it didn’t really work.
What really happened was we had a boom in home remodeling that was both fueled and was fueling the increase in the price of land.
The green line shows the postwar average and the chart shows that after a long slump in construction employment in the 1980s, we got a sustained surge in construction employment starting in the late 1990s. Given the fact that there weren’t really an unusual number of new housing units built during this period, how do we explain this? Doug Henwood’s points, combined with the ones I’ve made about this previously, seem to suggest that we had a boom in home remodeling. Basically your house is full of stuff. Some of that stuff can be put in a box and shipped over from China (“manufactured goods”) but other stuff needs to be built in place (“remodeling”) so when China increases its ability to produced boxable goods the labor force shifts into remodeling.
All of this could have been avoided if real income had not stagnated. It did. We got the so-called housing bubble, then the credit crunch and recession and we’re stuck in a world of hurt and economic stagnation. Whatever possible solutions we have at hand are going to be even more painful and, most likely, not even tried.