Explaining Wage Stagnation

Why?

Well, my intuition says one thing — the change in trajectory correlates very precisely with the end of the Bretton Woods system. My intuition says that that event was a seismic shift for wages, for gold, for oil, for trade. The data seems to support that — the end of the Bretton Woods system correlates beautifully to a rise in income inequality, a downward shift in total factor productivity, a huge upward swing in credit creation, the beginning of financialisation, the beginning of a new stage in globalisation, and a myriad of other things.

Some, including Peter Thiel and James Hamilton, have suggested that there is data to suggest that an oil shock may have been the catalyst that put us into a new trajectory.

Oil prices:

And that this spike may be related to a fall in oil prices discoveries:

I certainly think that the drop-off in oil discoveries was a huge psychological factor in the huge oil price spike we saw in 1980. But the reality is that although production did fall, it has recovered:

The point becomes clearer when we take the dollar out of the equation and just look at oil priced in wages:

Oil prices in terms of US wages ended up lower than they had been before the oil shock.

What happened in the late 70s and early 80s was a blip caused by the (very real) drop-off in American reserves, and the (in my view, psychological — considering that global proven oil reserves continue to rise to the present day) drop-off in global production.

But while oil production recovered and prices fell, wages continued to stagnate. This suggests very strongly to me that the long-term issue was not an oil shock, but the fundamental change in the nature of the global trade system and the nature of money that took place in 1971 when Richard Nixon ended Bretton Woods.

UPDATE: Commenters are pointing out that I should probably have concentrated a bit more on the trade and globalisation dimension, which I did mention in passing. However, I see this as an outgrowth of the end Bretton Woods, because it began just after Bretton Woods was ended and there is no way that America could afford to run the kind of trade balance it runs today with the world had America stayed in the Bretton Woods system.

I have covered this issue in quite some depth in the past.

https://azizonomics.com/2012/03/18/global-trade-fragility/
https://azizonomics.com/2012/07/09/the-real-fiscal-cliff/

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American Infrastructure Is Being Built By The Chinese

Just how dependent is America on Chinese labour, manufacturing and supply chains? Decide for yourself.

From Addicting Info:

San Francisco is getting a new bridge connecting to Oakland. But it’s not being built by American workers. It’s being built in China and shipped back to America for assembly. But that’s not the only infrastructure project being built by the Chinese, and it’s not just being built in China. It turns out, the state-owned Chinese contractors are being hired out to build American infrastructure right here in the United States.

According to Engineering News Record, five of the world’s top 10 contractors, in terms of revenue, are now Chinese. One of them, China State Construction Engineering Group, has overtaken established American giants like Bechtel.

The Chinese contractor has already built seven schools in the US, apartment blocks in Washington DC and New York and is in the middle of building a 4,000-room casino in Atlantic City. In New York, it has won contracts to renovate the subway system, build a new metro platform near Yankee stadium, and refurbish the Alexander Hamilton Bridge over the Harlem river.

But why are we hiring contractors from China to build American infrastructure, when we have a perfectly good workforce here in the states? The answer is profit, and it’s the reason why Republican politicians and many corporations do not support infrastructure projects that would put millions of Americans to work. Because the Chinese contracting firms are government owned, they are able to bid for contracts at very low prices. In other words, the labor is cheap. American companies don’t want to hire Americans to do the work when they can call up Communist China to come do the work instead.

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