“Goldman Sachs: Sobriety scares us.”

America Is Getting a Raise, and Goldman Sachs Is Freaking Out About It

In a private newsletter to wealthy investors, Goldman Sachs analysts warn that “rising wages are a threat to corporate profit margins.”

On Tuesday May 23rd, investment firm Goldman Sachs sent an edition of their Global Markets Daily e-newsletter to customers. It’s the kind of email that goes out to high-rollers and high-stakes investors—the big shots who will gladly chase profits across international boundaries. The newsletter contains a combination of investment news — in this case a couple of bullet points about Chinese industrial production and OPEC’s quest for stability — and analysis for investors in the global marketplace.

Global Markets Daily is apparently not available online unless you’re a Goldman Sachs customer, but Civic Ventures obtained a copy after Luke Kawa published a piece of it in Bloomberg. Specifically, we’re interested in the second item in the newsletter, which is written by Goldman strategists Charles P. Himmelberg and James Weldon. It’s titled “What Happens to Profits if Wages Catch up with Productivity?” and it begins with some unequivocally good news.

Wages are rising. The ‘wage tracker’ maintained by our US economics team — a composite measure of wage growth based on the four main wage indicators — hit 3.0% year-on-year in the first quarter for the first time in this expansion.

Fantastic! Worker wages have been flat in the United States for almost the entire 21st century. If more workers have more money, surely they’ll spend it, thereby supercharging the economy with their increased demand. Good news for Goldman Sachs investors, right?

Apparently not. Here’s the very next sentence, with emphasis added:

And as our colleagues in equity strategy have recently pointed out, rising wages are a threat to corporate profit margins (“Labor Costs and US Equities: Stocks Confront Rising Wages with Economy at Full Employment”, Portfolio Strategy Research, May 9, 2017).

A “threat?” How can that be? Weldon and Himmelberg explain that worker productivity is growing, too, but it’s not likely to grow at pace with wages. “More importantly for profits,” they write…

…it seems highly unlikely that labor productivity will keep pace with wage growth. On the contrary, with labor markets already tight and likely to tighten further, and wages already growing at 3%yoy, odds are strong that wage growth will continue, while the outlook for productivity growth remains far less certain. With this backdrop in mind, we ask: What would happen to US corporate profits if real wages were to catch up with average labor productivity?

The most important words in that last paragraph are “catch up.” See, labor productivity in the United States has long been divorced from wage growth. The Economic Policy Institute says the gap erupted in 1973 and has been widening ever since, as shown in this graph:

Put simply, this means that for the last 40 years, when you’ve been working harder, you’ve been paid less. (And make no mistake: we do work harder and longer than anyone in the world, putting in “137 more hours per year than Japanese workers, 260 more hours per year than British workers, and 499 more hours per year than French workers.”) In the note, Weldon and Himmelberg even refer to this “opening of the gap” between wages and productivity as “extreme” and “unprecedented.”

Recently — thanks in part to the $15 minimum-wage movement — wages and productivity have started to converge again. Your paycheck has finally started to represent the real value of your work.

Seems like a good thing, right? Not for Goldman Sachs. In their newsletter, Himmelberg and Weldon played out what might happen if American workers started to get paid what they’re worth again—specifically, “a decline in the annualized 5-year growth rate of corporate profit margins of roughly 10% by 2020.”

Please bear in mind that Weldon and Himmelberg aren’t calling your wages “a threat” to the survival of corporations. They’re not even “a threat” to corporate revenue. No, the “threat” that they’re predicting is a ten percent decrease in corporate profits.

For reference, here’s a chart showing US corporate profits since 1950:

Click the link below to view this chart on its home page at tradingeconomics.com.

So corporate profit has been spiking for forty years while the schism between productivity and wages has widened into a Grand Canyon. Anyone who can read a chart can see that these trends are unsustainable.

What do Goldman’s experts think the cause of the worker wage-productivity gap could be? Why haven’t workers been paid what they’re worth? Well, Himmelberg and Weldon don’t have the faintest clue:

Our scenario analysis declines to address the economics of the question, namely, why aren’t markets equating real wages with average labor productivity? We suspect the answer has much to do with changes in market power over time (which may or may not be reversing).

Dig those weasel words: “suspect,” “may or may not be,” “declines to address.” Could it be that worker wages became so divorced from productivity not because of some mysterious market forces, but because corporate bosses just declined to give their workers raises and kept the money for themselves?

Could it be that the outrageous profits enjoyed by Goldman Sachs investors are way too high, and that investors and CEOs have over time transferred a larger and larger share of worker pay to their own bottom line?

Could your wages possibly be so low because those in power prioritize shareholder profit maximization above all else? Can we truly say we live in an advanced economy when the moneyed few who subscribe to a Goldman Sachs e-newsletter profit on the relentless exploitation of millions of American workers?

Does Goldman Sachs value a small sliver of profit over the opportunity to create a sustainable economy that works for everyone?

Seems pretty likely to me. Especially since Weldon and Himmelberg spend the first half of the note bellyaching over a possible ten percent decline in corporate profits if wages and productivity begin to match up again.

The final sentence of their note, to me, is when the whole damn thing tips over into being flat-out bonkers:

In the meantime, we find the prospect of what a normalization would look like to be sobering.

Himmelberg and Weldon admit that increased wages for American workers represents “normalization.” It’s how things should be. But they call the very idea of a normalization “sobering.”

That phrasing is so telling. Think about this for a moment. Who needs sobering? Someone who’s really drunk. Someone who maybe ate a little bit too much of that pot brownie. Someone who’s out of control.

And what Goldman Sachs analysts find “sobering” is the idea of a job market doing what it should do. The very thought of losing ten percent of their outsized annual profits to what they admit would be a properly functioning job market is “sobering.”

And that’s not even the dumbest part of all this! Himmelberg and Weldon are forgetting a very important part of this model. They’re treating this trade between profits and wages like it’s a zer0-sum game—that investors have to lose when workers win. That’s not the case at all.

What Weldon and Himmelberg fail to understand, of course, is that when workers get paid, that money doesn’t disappear. Workers are much more likely to spend their money than, say, CEOs (who, according to the Economic Policy Institute, on average “make over 300 times what typical workers earn”) or corporations. By raising worker wages,we are investing in the economy — increasing consumer spending and creating more jobs with that demand.

Goldman Sachs employees seem to have come to believe the hype perpetuated by the Republican Party communications apparatus—the flatly false claim that it is Wall Street and investors who are the true job creators. In fact, it is and has always been the American middle class who create the demand. Their spending, and not corporate profits, is what grows the economy.

Goldman Sachs is wrong to believe that a raise for the working class is a “threat.” In fact, the real threat to America’s economy comes from the indefensibly enormous corporate profits that Goldman Sachs analysts are so eager to protect.