High Profits, High Unemployment

Perplexing statistics have been surfacing concerning the economy. While corporate profits are returning to pre “crisis” levels, unemployment seems to remain stuck around ten percent. Worsening the scenario is the fact that this doesn’t capture the entire employment picture, as some believe at least another ten percent have given up on finding a job or have been forced into early retirement.

Companies have been moving to more efficient production which translates to less labor. But, less labor per unit of output hasn’t always translated to higher unemployment. Big corporate has been dumping huge sums of capital into more efficient production for decades. Why the high unemployment condition?

The traditional fix for overproduction/unemployment was instituted in 1913 as the Federal Reserve Act. The banking industry realized that for their profits to remain high and out of the danger of “competitive” restrictions, they must have direct access to a stable flow of credit. The regulation and centralization of the banking industry was their answer. As usual when large business interests ask, big government complies.

While this would seem to have the most beneficial impact on the titans of the financial world such as Morgan, and it did, it also had an interesting side effect that wouldn’t thoroughly materialize for a couple of decades.

For industry to sustain consolidation, as it had been attempting unsuccessfully since the end of the nineteenth century, it must have access to enormous amounts of capital to complete the necessary mergers and acquisitions that in unison with federal regulation would cartelize the various sectors of the economy. The central bank with its omnipotent power of money creation and distribution was the solution.

Once this system became solidified, big banking and industry no longer experienced the restrictions that a quasi-value based economy inflicts on its players. The Great Depression was the result of the over exuberance and excitement that realization of the benefits of the new system brought on. The status quo, firmly in control of the progressive economy, had lost sight of its limits, somewhat similar to our modern crisis.

The situation today, high profits and high unemployment, are easily explainable if we remember the basic formula of the planned capital economy: the availability of “artificial” capital to be utilized in the creation of profits through the exchange of capital for the labor portion of production. In other words, the incessant use of capital to lower the labor input to production and raise the capital input which subsequently raises the profit margin attributable to capital.

There are other forces at play. Very high and firmly entrenched wage taxes, that portion of the income tax that directly affects the wage laborer and lower tier salary workers, exacerbates the condition by further lowering the purchasing power of the fewer production workers.

Relatively lower capital gains taxes and actual tax [rather than theoretical] from the high end managerial sector works to further concentrate capital and further submit capital through investment of the income surplus to the same process: replacement of labor with capital within the production process.

This can be done in two different ways: the replacement of high cost labor, as here in the United States and Europe, with cheaper third world labor and/or the replacement of higher cost labor with mechanization or efficiency measures that lower the worker unit ratio to production unit.

The end result is that less of the cost of the product, which is ultimately the value, winds up in the hands of the production sector and more ends up in the capital sector. The process repeats itself endlessly through production cycles until we arrive exactly where we are today: the capital sector shows itself as highly capitalized, probably as never before, and profitable, while the productive sector has tremendous output capability per labor unit, resulting in high unemployment and lower relative wages. Put simply; tons of product with nobody to consume it!

A few tendencies attempt to mitigate the situation. The capital sector requires a very large bureaucracy, much like big government, to manage the ever growing capital portions of the forever expanding corporation. This management and related marketing personal receive beneficial wages due to the greater return gained from the cost reduction to the production sector. Since their compensation is figured “after production” and “before dividend” and taxation, it is in the interest of the corporation to disperse of a good deal of this return. Thus, performance of these two sectors is not based so much on actual performance but rather on the greater efficiency of the production line resulting in a greater portion of return devoted to the capital side rather than reentry into the production process.

The other mitigating factor is that of the public sector which redistributes wealth through government programs. Increases in welfare and/or unemployment benefits and generous stimulus programs instituted without income tax increases attempt to increase the purchasing power of the production class without the necessary wage or production expansion. The theory here is to increase consumption before production without taxation through the use of public debt.

The public sector spending has two motives: the hope that economic stimulus in combination with federal money creation of historic proportions will loosen the stranglehold of concentrated capital and over efficient production, pushing the economy into another accelerated expansionary and inflationary spiral. Capital will be artificially freed up towards growth, which will require higher employment and some wage pressure. Consumption will resume at full force until the economic engines realize once again they have been tanked up with diluted fuel and the downward slide will commence.

The other motive is based on the probability that the capital economy will continue to thrive and profit without the need for lower unemployment. In that case, the public spending is used to smooth over the transition to an economy based on high unemployment and lower relative wages. The greatest threat to economic control is social unrest and this can usually be avoided by easing economic distress within the lower and middle strata of society.

The key to insuring the continuation of the status quo is successful masking of the true economic mechanisms. In this light, the bailout was a grave public relations error. The planning that usually lies deeply recessed in corporate boardrooms and the backrooms of state chambers came to view under the full light of public scrutiny. The short attention span of the public and Media manipulation has helped to diminish the gravity of the event. It still remains the greatest single transfer of wealth that we are historically aware of.

While some like to refer to this system as the “planned economy”, the bulk of the actual planning took place many years ago. What we see now is scheduled and unscheduled or impromptu maintenance. Recent regulation is an example of the former while the bailout is an example of the latter. The system must be tweaked to continue to produce the outcome that will ensure the perpetuation and growth of the status quo.

If higher unemployment is necessary [even in the face of higher profits] to sustain the system, it will be accepted and even justified. The same goes for intensified inflation. What is important to those who make economic decisions that affect us all is certainly not a “free economy” and not even the semblance of a “healthy economy”. What is important is the continued dominance of the existing economic system, no matter the consequences.

Gene DeNardo is a freelance writer and jazz musician living in the Pacific Northwest. Read other articles by Gene, or visit Gene's website.