Rock-Bottom Prices!

By Gross, Daniel | Newsweek, September 20, 2010 | Go to article overview
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Rock-Bottom Prices!


Gross, Daniel, Newsweek


Byline: Daniel Gross

How our new lowball culture is hurting the recovery.

The strike of about 300 workers at a Mott's apple-juice plant in Williamson, N.Y., is nearly four months old. Union members walked off the job after Mott's parent company, Dr Pepper Snapple Group Inc., pushed them for concessions. Although Dr Pepper Snapple is highly profitable, a company spokesperson said that the company wanted to cut wages by $1.50 per hour and freeze pensions to align factory costs with "local and industry standards." In other words, because its employees were doing better than other workers in the depressed upstate New York region, the company demanded that they do the same jobs for lower compensation.

Mott's isn't the only company squeezing its employees during this recovery. With lots of people unemployed and out of work, it's a buyer's market for employers. In the economy at large, wages have risen only 1.7 percent in the past year, while corporate profits are up nearly 40 percent. A report by the Washington-based Economic Policy Institute found that between the second quarter of 2009 and the second quarter of 2010, men's wages fell 1.3 percent.

Welcome to the lowball culture. In a world of sluggish growth, excess capacity, and depressed expectations, buyers of goods and services--labor, houses, and restaurant meals, among others--have come to believe that desperate sellers should take any offer they make. But that kind of systemic bargain hunting can create a dangerous spiral: employers short-change workers, workers buy fewer goods--and the overall economy suffers.

Some of the lowballing is a matter of survival. Due to technological shifts and global competition, some businesses and industries simply can't afford to pay the wages that prevailed even a few years ago. Network-television correspondents, mortgage brokers, bankers who structured CDOs, home-construction contractors--all are finding that it's near impossible to command the same wages that they did during the boom times. State governments, whose collective revenues fell 11 percent in 2009, according to the Nelson A. Rockefeller Institute of Government in Albany, N.Y., have been raising taxes, cutting spending, furloughing workers, and slashing pay.

But plenty of smart people simply are taking advantage of changed circumstances. Take the housing market. In 2005 and 2006, at the height of the bubble, real-estate agents advised clients to offer the asking price and be willing to bid higher. In today's housing market, which is glutted by inventory and foreclosure sales made by banks, the opposite dynamic is in play. Buyers toss in a lowball offer and see if it sticks. The most a seller can do is decline. During the housing boom, the listing discount--the difference between the list price of a home and the price at which it went to contract--was usually about 2 percent below the asking price. In the New York region, a comparatively healthy housing market, the discount was 9.1 percent in the second quarter. "The chasm between buyer and seller is wider than it has been in the past, and the wider the chasm, the lower the amount of sales activity," says Jonathan Miller, chief executive officer of New York-based appraisal firm Miller Samuel.

Of course, if buyers don't think the future price of housing (or labor, or a car, or a stock) will rise, then they will be reluctant to pay the current market price. And concerns and fears that prices will stagnate are contributing to the lowball culture.

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