Tuesday, September 14, 2010

America in a Death Spiral

The problem with a deflationary environment is that it is a race to the bottom. Here's a bit from an article on Slate by Daniel Gross that gives you a taste of this problem:
Low-Ball America

When employers and shoppers pay less, everyone suffers.

By Daniel Gross

The strike of about 300 workers at a Mott's apple-juice plant in Williamson, N.Y., is nearly four months old. Union members walked off the job after Mott's parent company, Dr Pepper Snapple Group Inc., pushed them for concessions. Although Dr Pepper Snapple is highly profitable, a company representative said that it wanted to cut wages by $1.50 per hour and freeze pensions to align factory cost with "local and industry standards." In other words, because its employees were doing better than other workers in the depressed upstate New York region, the company demanded that they do the same jobs for lower wages.

Mott's isn't the only company squeezing its employees during this recovery. With millions out of work, it's a buyer's market for employees. In the economy at large, wages have risen only 1.7 percent in the past year while corporate profits are up nearly 40 percent. A report by the Washington-based Economic Policy Institute found that between the second quarter of 2009 and the second quarter of 2010, men's wages fell 1.3 percent.
This pervasive new atmosphere of low-balling prices creates a feeedback that leads to a downward spiral:
The searing experience of the 2008-09 recession has also conditioned consumers to seek discounts. Americans have always loved bargains, but today they require them. Coupons have morphed from a hobby of retirees to a technologically enabled form of social media. Since its launch in November 2008, Chicago-based Groupon has become a phenomenon. It sends out a daily e-mail blast to people in specific cities, offering a huge discount on teeth-whitening, or pizza, or jeans from a specific vendor—but only if a certain number of your peers commit to buying at the low price. "This is a way of introducing e-commerce to local and small businesses," says Andrew Mason, founder and CEO of Groupon. Mason notes that local businesses had traditionally looked down on coupons and discounting because they didn't attract the upscale, repeat customers they desired. But Groupon has tapped into the new low-balling tendencies of yuppies. "The demographic we attract is one businesses want to reach—21 to 35 years old, 70 percent female, making good money," says Mason. (Groupon splits the revenues from sales with vendors who sign up.)
Whether you're an executive at Mott's or a fashionista in Chicago seeking a deal on jeans, low-balling makes economic sense. It's good for balance sheets, and the fact that people are being more cautious about what they pay for goods and service is a welcome reaction. But systematic low-balling has broad implications. Economist John Maynard Keynes identified the "paradox of thrift"—if everybody saves, everybody gets poorer, since a rise in savings tends to dry up demand. By the same token, there may be a paradox of low-balling. If everybody low-balls and steadfastly refuses to pay existing prices as part of an effort to improve their financial standing, then everybody will suffer.

Low-balling is most dangerous when it comes to wages. For the past couple of years, employers—even those making solid profits—have been scrimping on wages and benefits. Now they express mystification as to why sales aren't growing. If you low-ball your own workers, they'll spend less, or shift to cheaper goods, or start low-balling their service providers. In 1914, Henry Ford instituted the $5 day for employees at his booming auto plants. He willingly paid above the market rate for labor in his region and industry because he thought it would stave off unionization, make it easier to retain employees, and help his business. Ford reasoned that paying his assembly-line workers more would allow them to buy cars.
It is a brave new world out there. Those fat cats who started the problem are quietly preening and enjoying their ill-gotten wealth. The rest of us rats on the ship are running for our lives hoping we won't be on the dinner menu. And the leaders? Where are the captains of state with the vision to get the ship off the rocks, to refloat it, to set sail for balmier seas? Obama is finally showing some sparks of life, but he still has no clue about how he failed Americans by not coming out fighting in January thru March 2009 to get a stimulus that would have pulled the economic ship off the reef that was sinking it. He did keep the ship afloat but with engines barely able to turn the propeller. And he still hasn't pulled out the map and pointed out the route to get out of these dangerous waters.

And of course... the malfactors of great wealth who caused the problem, sit cozily in the rafters watching all the "little people" running hither and yon. With greedy eyes, these fat cats are eyeing a pleasant dinner or two or three. There is not dog or catcatcher in sight to control these rapacious felines.

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