Darrell Berkheimer: When buying power plummets
Aren’t sales what drive our economy?
Without sales there can be no profits, no money to pay wages, to pay utilities, or to issue dividends.
The net profit, the bottom line, of course, is what all business owners, CEOs and stockholders are most interested in. But it all goes back to the need for sales.
More sales mean more profits. It’s simple mathematics.
It’s also simple mathematics to realize that more sales are possible only when people have more discretionary money to spend. And that happens only when they have more money than what is necessary for their basic needs of food and shelter.
That’s simple logic as well as simple mathematics.
And when sales decline, what must businesses do?
They can buy cheaper materials and see quality decline — perhaps losing more sales. They can cut services, hours of operation and move to a smaller location. And they can cut payroll — read that layoffs.
Or they can close stores — meaning major layoffs.
We have all seen the news stories about how the middle class is shrinking. Those stories report that many folks who had been members of the middle class are now facing poverty.
But a strong middle class is what drives the volume sales needed in our economy.
Our economy is based on high volume, assembly-line production and high volume sales. But high volume sales can no longer continue when the declining middle class can no longer afford to buy much beyond their basic needs.
Our own history provides the examples of the Great Depression and deep recessions that follow when middle class buying plummets.
Such situations occur when top management declines (mostly as a result of greed) to provide a more equitable share of profits to those who produce the products and services — so that wages climb along with rising costs. When profits are shared more equitably, we won’t have millions of folks pressuring government for more services and higher minimum wages.
A March 6 story by The Cheat Sheet, an economics publication, reported a list of eight items the middle class can no longer afford. Foremost in that list were vacations and new vehicles. The others are student loans, emergency savings, retirement savings, medical care, dental work and skipped paychecks.
As I understand that article, if a middle class family today expects to buy a new car, the family will need to slash and scrimp on all other purchases — such as clothing, electronic gadgets, entertainment and perhaps even food.
And naturally it would be the same with any of those other items they can no longer afford — such as vacations, retirement savings and medical care.
Is it any wonder families have been forced into bankruptcy when major medical problems occur?
So what are families doing to cut back on expenses?
For one thing, they are buying more and more items online. And why not? Online merchants offer a wide array of selections, price comparisons for the best buy, easy return policies, and often free shipping. In addition, online buying saves travel time plus gasoline and auto maintenance expenses.
But what is that shift in buying doing to our economy?
On March 27, the Sacramento Bee published a story on the front page of its Business section headlined “Big chains shedding stores, shifting gears amid industry changes.” That story reported hundreds of stores will be closed this year by big-name retailers – “on the heels of aggressive store closings in 2015.”
Two years ago – on Feb. 12, 2014 – in a guest editorial published in Montana, I wrote:
“Our nation already has seen department store and retail chains closing some of their stores. We will see more of that as the wealth gap continues to grow. … And with more store closings, more people are thrown out of work. Then they have less money, and they buy less. The cycle simply grows worse.”
It boggles my mind how the rich cannot see the disaster facing our economy as a result of the shrinking middle class. We are facing that disaster unless big businesses finally realize the need to share their big profits with employees, rather than lavishing outrageous salaries and bonuses on CEOs and boards of directors.
A few businesses, like Costco, have proven that providing good benefits and paying employees well will yield more stability. Employees are happier. And happy employees build the customer base and produce little turnover, which creates tremendous savings in costly recruiting and training.
But let’s carry the store closings even further. In addition to all those employees losing their jobs, what happens with the empty buildings? How many cities and counties will lose substantial tax revenues from those stores and the jobs they provided? Will that mean municipal layoffs and fewer services?
And many of those stores were built and leased through real estate investment trusts. What happens when those rental fees stop coming in? More jobs lost, and the trust’s stocks become worthless, meaning no dividends for stockholders.
We do not need to be rocket scientists to realize the ramifications of these situations.
A report in 2012 noted nearly half of the U.S. workforce was unable to meet all of their families’ basic needs without assistance from relatives or the government. That number has grown to more than half of our workforce as a result of the shrinking middle class. And when families in a community can no longer afford basic needs, the necessary social order collapses and businesses are the ones that suffer.
Unfortunately, too many people think it is the government’s role to subsidize America’s workforce. But the responsibility really lies with employers and business owners — and especially with the big corporations hiding U.S. dollar profits in foreign accounts and mergers. A strong economy and strong communities can be maintained only when employers provide a stable and well-compensated workforce. People clamor for government action when employers fail to meet that responsibility.
A large middle class of wage earners is necessary for businesses to maintain appropriate levels of sales. But as the middle class declines, only the rich can buy non-essentials and luxury items. And there never are enough rich folks to provide the volume sales needed for a healthy economy.
An economy remains healthy only when the income of a large middle class can maintain a pace that is equal to increases in the cost of living. That has not occurred since the 1970s.
It should be obvious, then, that the future of our economy is in grave jeopardy unless wages and benefits are increased.
Darrell Berkheimer, who lives in Grass Valley, writes a biweekly column published Saturdays by The Union. Contact him at firstname.lastname@example.org.
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