We now turn to the fourth stage in the cascade of effects, slack consumer demand:
We have seen that offshoring jobs and the resulting slack labor market cause unemployment, underemployment and depressed wages, leading to dependency and social ills at the individual, family and community level.
At the macroeconomic level of the entire economy, these trends result in the next cascading effect: slack consumer demand. The secret of the American prosperity of the second half of the twentieth century was the economy’s ability to create a prosperity that was widely shared. Postwar consumers with savings and earnings in their pockets created demand for a wide array of goods from houses to toasters, and companies hired workers at good wages to produce those goods. Improvements in productivity were shared with employees in the form of increased pay, and consumer spending became a major engine of the national economy.
The necessity of consumer spending for a vital economy has not diminished. For example, observers of the Chinese economy, both within and outside China, have concluded that the country must shift toward a consumer-oriented economy, and the Chinese government is pursuing policies toward that end.
A recent Reuters article on Mexico brought the issue into clear focus.[i] The article considered the cause of Mexico’s economic stagnation despite the robust growth of its manufacturing sector, and concluded that an oversupply of labor due to population growth was driving down wages, preventing consumers from spending enough to fuel the economy. Among the article’s findings:
So, too, China thus far has largely failed to engage its consumers in the economy, relying to date on investments in capital-intensive industries. At the end of the day, it is consumers who drive the economy, and they can’t do so if they are struggling to make ends meet. However, in the United States, we have been killing the goose that laid the golden egg.[ii]
[i] Christine Murray, “Mexico manufacturing surge hides low wage drag on economy,” Reuters, June 2, 2014. http://www.reuters.com/article/2014/06/02/us-mexico-economy-analysis-idUSKBN0ED20H20140602
[ii] It has been pointed out that American consumer spending accounted for a rising percentage of GDP over the recent decades, rising from 61.8% of GDP in the 1960s to 70% of GDP in the 2000s, and that this may have resulted in “crowding out” of investment with possible ill effects on economic growth. William R. Emmons, “Don’t Expect Consumer Spending to be the Engine of Economic Growth it once Was,” Federal Reserve Bank of St. Louis, January 2012. http://www.stlouisfed.org/publications/re/articles/?id=2201. We would agree that excessive consumer demand that is based on debt incurred on a base of inflated assets is not a sound foundation for the economy. However, Emmons notes the difficulty of replacing consumer spending with investment and increased exports, and does not contest the need for a robust consumer sector, at least at the levels of the 1960s and 1970s.
In April 2014, a leading consulting firm to the retail industry gave a briefing in which it identified ten trends reshaping the U.S. retail landscape. Confidential online briefing attended by the author. Number one was the emergence of an “hourglass economy,’ in which there was more spending among high and low income levels as the middle class is being squeezed.
As evidence for the trend these experts noted, or the one hand --
And on the other –
The resulting advice, and prevailing wisdom for retailers, is to focus on either end of the spectrum and avoid the middle, where it is increasingly difficult to make a go of it: Embrace the hourglass economy and look for ways to exploit opportunities at the top or bottom, and don’t get caught in the middle.
This advice may be helpful to individual retailers and brands; however, it does not solve the problem for the larger economy -- consumers who are not able to make ends meet are not able to prime the pump of the economy with their spending.
We previously have reported on the N.E.L.P. study that found a tendency toward an “hourglass” employment situation: “Service-providing industries such as food services and drinking places, administrative and support services, and retail trade have led private sector job growth during the recovery. These industries, which pay relatively low wages, accounted for 39 percent of the private sector employment increase over the past four years.” On the other hand, the N.E.L.P. reported strong growth in some high-paying industries such as professional, scientific and technical services.[i]
As the New York Times reported: “Economists worry that even a stronger recovery might not bring back jobs in traditionally middle-class occupations eroded by mechanization and offshoring. The American work force might become yet more “polarized,” with positions easier to find at the high and low ends than in the middle.”[ii]
[i] “The Low Wage Recovery: Industry Employment and Wages Four Years into the Recovery.: National Employment Law Project Data Brief. April 2011. http://www.nelp.org/page/-/Reports/Low-Wage-Recovery-Industry-Employment-Wages-2014-Report.pdf?nocdn=1
[ii] Annie Lowrey, “Recovery Has Created Far More Low-Wage Jobs Than Better-Paid Ones.” New York Times, April 27, 2014. http://www.nytimes.com/2014/04/28/business/economy/recovery-has-created-far-more-low-wage-jobs-than-better-paid-ones.html
GO TO Stagnant Economy.
May 15, 2014, Ontario, CA - MIAA's founder, Jim Stuber, delivered the keynote address at the 20th annual World Trade Conference sponsored by the U.S. Department of Commerce and the California Inland Empire District Export Council in Ontario, California. To view the conference agenda, click here:
May 7, 2015, Radnor, PA. MIAA's founder, Jim Stuber, appeared as the guest of host Richard J. Anthony, Sr. on The Entrepreneur's Network TV at Radnor Studio 21. The program featured a discussion of the problems caused by offshoring manufacturing and white collar jobs and how consmers can solve the problem with their spending decisions.
Studio 21 has made the program available for viewing here: