The “Pain” of a Forced Recession is Mostly Intended for the 90%

Disclaimer: I’m now referring to the blog posts in this Q4 chunk of publishing as my “personal finance angst” era, because when I wrote them in September, I was genuinely angered by the Fed’s decisions and how callous the goal of “unemployment” felt given the last 40 years of meager wage gains for the working and middle class. You can feel my frustration in this piece, so I’ll ask for grace upfront.

There’s one word on the Federal Reserve’s mind in Q1 2023: Pain. Pain! We’re all going to feel some worthwhile pain, Fed chair Jerome Powell has warned us, in order to get things back under control. 

When they say “pain,” they’re usually referring to two phenomena they’re trying to induce with rate hikes: unemployment and downward pressure on wages.

It’s the only way out of this inflationary nightmare, or so the story goes. Josh Brown encapsulates it cynically (and perfectly) in his piece “You weren’t supposed to see that.”

“Look here, look there, look anywhere else. Just don’t look at the almost-liberated wage slaves being put back into their places. How dare you ask for more, how dare you expect more? Stock trading time is over, get back to loading these cardboard boxes. 

I know we’re not supposed to admit these things about our system. We’re not supposed to say them aloud in polite company. But how can you say they aren’t true? How can you say that reality is anything other than what you’ve just witnessed with your own eyes?”

The “reality” Josh is referring to? The last two years—but more broadly, the last 40.

How valuable are “essential” laborers?

The pandemic lifted the veil on a lot of carefully maintained “truths” in our economy. Among the most disorienting? The widespread realization that there isn’t a perfectly rational relationship between “price” and “value.” 

The more valuable your work is, the more you’re paid, we thought. The market price you can command for your labor is mostly tied to how important you are to the functioning of the business, right?

It was easy to maintain this collective ruse—until it wasn’t. Until a rapidly spreading virus forced most of us inside, and those who often make the lowest wages in society were deemed the most “essential.” The people whose labor was so crucial for society to continue functioning that they had little choice in whether or not they came to work. Yes, this included doctors and pilots and other people who are compensated well for their labor, but it also included grocers and bank tellers and line cooks and Uber drivers and those who are, in most cases, not compensated handsomely for their time and effort. 

If price equals value, the thinking goes, we can rationalize whom we pay very little and whom we pay extravagantly. 

The top 14 Fortune 500 CEOs each made at least $200,000,000 in 2021. While the highest paid CEO, Elon Musk (with a total compensation of $10,000,000,000—that’s billion), was also the entrepreneur who assumed the risk by owning the company (a common line of pushback when we question executive pay), the vast majority of executives are no different than any other employee—they’re simply hired to do a job. 

Even if you’re working 80 hours per week—approximately equivalent to working 12-hour days, every single day, 365 days a year—earning $200 million is equivalent to a rate of $50,000 per hour. 

Per Bloomberg, the average Fortune 500 CEO made $18.3 million in 2021, an 18% raise from the year before.

To suggest “price equals value” in American capitalism is insulting to anyone with access to a calculator and median wage job: You aren’t paid what you’re worth, you’re paid what you have the bargaining power to demand.

This is usually the point at which someone says something like, “Well, you can’t blame all your problems on CEOs, you know! They work hard! We aren’t entitled to their money!” (See also: My TikTok comments section full of billionaire apologists.)

And sure, it’s easy (and palatable) to forget that the economy is, in some ways, a zero-sum game—when some earn more, that necessarily means others earn less. A company’s revenue is finite; the profit pie can only be divided into so many slices. 

So who typically gets the shaft? I’ll give you one guess.

Over the last 40 years, it’s been the “bottom 90%.” Right now, 70% of our collective “wealth pie” belongs to the top 10%, and the remaining 30% of the pie is being divvied up with plastic forks among the remaining 90%. 

When adjusted for inflation, the median household income in the US 40 years ago was around $55,000. Today, it’s $70,000. A real increase of 27%—hardly representative of the increase in corporate profits from $220 billion ($220,000,000,000) in 1984 to the staggering $3+ trillion ($3,043,000,000,000) in 2021, a nearly 1,300% increase.

At the lowest end of the wage distribution, meager pay is usually justified by the qualification that the work is not only less valuable, but “unskilled.” And sure, a line cook almost certainly requires less up-front training to perform their job than, say, a surgeon—but this language is sneaky in its undermining of the true value of the job being performed (as evidenced in 2020 by some people being deemed so valuable they weren’t allowed to stay home).

The more we examine so-called “solutions” for the low- and median-wage laborer crisis, the more threadbare they appear—especially since none of them involve the rather obvious solution of lowering pay for those at the very top of the income distribution who’ve been capturing a disproportionate, ever-increasing share for decades.

Proposed solution #1: A supposedly endless supply of student workers?

Up first: “College students should do these jobs.” 

I’ve tried to square those numbers myself, and I can’t figure out how this suggestion would work in practice. Take New York City, for example, a place featuring both high cost of living and population density. It’s estimated there are 2.5 million service industry workers in New York City. (To be clear, that’s not necessarily the same thing as being “low wage,” but typically, service industry jobs are what we associate with lower-paid work.) 

According to the latest data I could find, there are roughly 600,000 college students living in New York City (this comes from a NYC real estate investment site that appears to be using US Census Data), meaning we’d need roughly four times as many students to fill all these jobs (assuming every single college student also worked full-time in the service industry, which…ain’t gonna happen).

Then there’s the issue of how these students afford their living expenses while in school in the first place; they’re either surviving on student loans or family money (since we’ve already identified that the wages themselves are not high enough to support a dignified life). 

Then there’s the problem of what happens to the 2.5 million existing workers. Where do they work once the college kids have taken their jobs? If the implication is that white collar work is more dignified, “valuable,” or aspirational, you’d need 2.5 million white collar job openings to re-employ all these people—assuming they even wanted or were qualified for the work. 

But—and here’s perhaps the biggest plot hole—even if you could find a willing college student with family money to work every single low-wage service industry job, and you could find higher-paid white collar work for all the existing service industry workers, there’s the issue of employee turnover. A student employee is functioning on a ticking clock of four, maybe five years before they’re going to deploy their degree to (hopefully) find different, higher-paid work. 

It’s estimated that employee turnover costs businesses thousands—if not tens of thousands—of dollars per person in training costs and lost productivity, depending on the nature of the business, so if you have a workforce that’s turning over at a rate of 20%–25% every single year at graduation time, that doesn’t seem ideal for the businesses, either. 

In short, it’s a whole lot of mental and logistical gymnastics to solve a problem that’s actually pretty simple: Pay a living wage to a worker who’s not a student—to someone who wants to work in that role to support themselves and their families. And while we run the risk of conflating small businesses like restaurants with major corporations in this example, the reality is that profit margins (read: what’s left over after accounting for costs of payroll) have almost never been higher—it’s not like we can’t afford to do this, but Washington is the Gucci glove the 1% wears to ensure we don’t.

Proposed solution #2: Some word salad including the phrase “automation & globalization”

Up next: “These jobs can be automated, and that’s why they’re paid so poorly.”

Then automate them.

The threat of automation has been held over our heads for as long as I can remember, but there’s a reason some of these jobs haven’t been automated yet—because that would require massive up-front technological investment that nobody’s incentivized to do until people stop accepting low wages (a phenomenon that’s currently playing out, generating a chorus of omnipresent refrains that nobody wants to work anymore). 

Or perhaps more popular: “Globalization! The US has to remain globally competitive.” 

…except for the fact that the $50 trillion wealth transfer from the working class to the top 1% that’s occurred over the last 40 years happened within the US economy, not between the US and its global trade partners. Translation: The profits were (and are) available to pay everyone fairly, but they’re accruing to a very specific, very small, very removed group at the top in a cosmically disproportionate fashion. 

And lest you think you’re exempt from this phenomenon because you’re not a low-wage worker, remember that wage suppression has occurred for everyone in the “bottom 90%.” That means if you earn less than around $200,000 per year, this affects you, too.

“But the free markets!”

Free markets can correct for many things, but they can’t correct for 40 years of deliberate policy choices intended to benefit the richest 1%–9% of our nation’s populace. 

It’s important to remember the labor market isn’t really free—it’s manipulated by the regulation (or lack thereof) of corporations. Beginning in the 1970s and 1980s, certain government and corporate interests chose to cut taxes on the ultra-rich and deregulate the financial industry, allow CEOs to manipulate share prices through stock buybacks, permit corporations through M&A to reach monopoly power so they can determine prices and wages, erode minimum wage and overtime thresholds, and shrink the bargaining power of labor. 

We made four decades of deliberate, conscious choices and then called the consequences the result of perfectly-rational-oh-shucks-what’re-ya-gonna-do-about-it free market economics.

Unmasking the truth

The pandemic turned this entire narrative upside down and right side out, because it forced most everyone—not just the low-wage workers living the most extreme version of this reality every single day—to square all the “truths” of economic theory with the world that was actually playing out around them: 

The world in which the CEOs and hedge fund managers earning tens of millions (if not hundreds of millions) for moving numbers around on a screen retreated to their Manhattan penthouse apartments and second houses in the Hamptons to work from the comfort of mahogany man caves and delivered groceries. Those deemed “too important to stay home” made $8/hour ringing up groceries behind a plexiglass barrier that didn’t actually do anything. 

The harsh reality was that these very workers were those most vulnerable to, oh, you know, the medical repercussions of the pandemic itself, both because of their lack of socioeconomic resources and lack of paid time off. Their jobs required them to be public-facing, and likely didn’t provide the health insurance to see a doctor if they began experiencing symptoms. (And this isn’t just my theory; we know now that people who live in low-income counties died at twice the rate of Americans in wealthier areas.)

And now, the Fed’s relentless rate hikes will ensure those same people lose any sort of bargaining power they gained over the last two years, in the name of fighting inflation and keeping the capital class happy. 

Of course, this isn’t to say inflation isn’t a problem that needs to be addressed—just that our crude mechanism for addressing it (increasing interest rates) does little to directly remedy the problem, and simultaneously creates damaging fallout (job loss, loss of wage gains, and decreased bargaining power) for average Americans.

Personal finance-ing your way out of an economic hellscape?

The advice to do things like just “budget more aggressively” or “save for a home” feels out of touch sometimes because it is. Because while it’s technically true that it’s technically possible, it outright and willfully ignores an entire half of the equation—the simple, obvious answer of companies simply paying people more. 

(Point this out and you’ll be called “whiny” or “ungrateful” by some guy named Bill on Twitter or a real estate investor named Jason on Instagram.) 

There are only so many things you can cut—so many subscriptions, takeout meals, and manicures you can relentlessly hack from your budget—before you’ve effectively stripped your life of all the small joys that make it feel worth living. Maybe that’s why a lot of personal finance advice (including mine, sometimes) ends up boiling down to the frustratingly obvious directive to just earn more money. “Find a way to get yourself into the 10%—they’re the only socioeconomic tranche with a prayer anymore.” 

I paid $7 the other day for a “pumpkin upside down latte,” which would almost certainly invite disdain and tsk-tsks from those who believe young people’s experience of constant economic precariousness is self-inflicted with such frivolity. 

But why should the working and middle classes have to give up their relatively infrequent, sub-$20 pleasures in order to afford their first home, while the capital ruling class—the 1%—is bebopping between their third and fourth ones via custom, cashmere-seated private planes? Half the time I feel like we’re living in a simulation concocted by Kylie Baby/Kylie Swim/Kylie Lip Kit, brought to you by Kris Jenner.

The more things worsen, the more the “individual responsibility” suggestions to strip your life of all joy so you can afford to build wealth on your $50,000/year salary feel completely disconnected from common sense and, worse, human compassion.

Is it possible? I guess. Should it be necessary? I suppose that’s a decision we all have to make for ourselves.  

To make matters worse, there’s a distinct strain of well-intentioned personal finance gaslighting (of which I’ve certainly been guilty in the past) that fetishizes wealthy people who cosplay poverty. Simply continue eating McDonald’s every day and you, too, can be as rich as Warren Buffett! 

It’s coded as inspirational—the rich, they’re just like us!—but it inadvertently reinforces the idea that the result of 40 years of wage stagnation shouldn’t just be okay, it should be manageable.

That it shouldn’t meaningfully impact your own honest attempt at working hard and accumulating enough wealth to provide for your kids and retire someday.

Sure, the 90% can forgo all the little luxuries that were within reach for the middle class of the 1950s, 1960s, and 1970s so that the top 1% can maintain their “Escalade car service and bespoke Armani suits” standard of living—but eventually, the vast absence of those little luxuries will make themselves known in corporations’ bottom lines.

Eventually, the masses will stop going to Starbucks. And buying new cars. And subscribing to streaming services—and there simply aren’t enough people in the top socioeconomic echelon to sustain the daily coffee habit of 300,000,000 people who will eventually be priced out of these little delights if they ever want to retire someday, and we’ll take the wind out of the profit sails.

(Hey, maybe cutting out Starbucks really is the answer here!)

While ridiculous, this highlights an important truth that the pandemic exacerbated: The “economy” is not an abstract, naturally occurring phenomenon. It’s not money. It’s people. People, their output, their consumption, and the way resources flow through various systems to hundreds of millions of individuals.  

To suggest we can continue on this way—suppressing wages, raising prices, and propping up the 1% with underpaid labor—and the economy as a whole won’t collapse in on itself, is absurd. When 90% of the country systemically falls behind for decades, so does the economy itself. The OECD has confirmed as much. 

So yes, there will be pain for the 90%, J-Pow—but hey, that’s a feature, not a bug.