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Are slow growing wages holding back economic recovery?

By Dr. Peter Morici
web posted March 24, 2014

Over and over we hear, slow growing wages and increasing inequality are holding up the recovery. It's not so simple.

To the untrained ear these nostrums sound plausible. After all, giving the average American more to spend should boost demand, production and growth.

Progressive politicians and labor leaders use this line to argue raising the minimum wage would push the economy into high gear. If that were so, then increasing the federal minimum to $10.10 an hour, as President Obama happily campaigns, would not kill 500,000 jobs, as the nonpartisan Congressional Budget Office predicts.

The president and unions neglect businesses can't print money to cover higher wages. They must charge higher prices, slash profit margins and reduce dividend payments to stockholders. The latter are often middle-class workers with IRAs, and the elderly, who will spend just about every dollar they get as they draw down from those nest eggs.

Those folks spend too, and in fact many of them buy more domestic products and fewer imports at Wal-Mart, because older folks spend more on health care and other services, which are made in America, not China.

Much the same applies to wealthy Americans—they are more likely to spend their dividends at home.

Giving rise to the myth that higher wages will boost growth is another misperception about demand. Americans really are spending again but not enough of those dollars stay at home to create jobs.

Thanks to oil imports and the rising tide of Chinese manufacturers—made artificially cheap by the Middle Kingdom's purposeful undervaluation of the yuan, subsidies and steep barriers to foreign products—U.S. imports have been rising faster than exports and that is sending a lot of consumer dollars abroad.

The root causes are well catalogued but ignored by a president who spends his time campaigning for $10.10, playing diplomat with a Vladimir Putin who is really playing war, and scheming ways to avoid legal and constitutional restrictions to do as he pleases without the inconvenience of Congressional ascent.

The president opposes drilling for oil off the Atlantic and Pacific Coasts and severely limits drilling in Alaska and the Gulf—and is blocking pipeline projects, which adds to the cost of transporting onshore oil and the environmental risks of rail shipments.

Fixing petroleum policy and a bit more conservation would eliminate the 5 million barrels a day of oil the United States still imports, and along with confronting China and other currency cheaters on protectionism, the economy could easily cut the ranks of the unemployed in half and drive the headline rate to 4 percent.

That would put a lot of upward pressure on wages—especially in the lower and middle ranks of the labor force and mitigate income inequality.

Since the recovery began, wages have barely kept up with inflation, but cutting unemployment in half would easily boost wages after inflation by 3 percent overall, and 5 percent or better for folks on the lower end.

$10.10 an hour with its devastating 500,000 job loss would sentence many workers now employed into deep poverty and dependence on government programs. Silver lining for the president—folks dependent on federal handouts are more likely to vote Democratic.

Which should the president do with his time: address those problems to really stimulate growth and equality, or tar Republicans as unworthy of any public office above blackboard monitor for opposing ideological hidebound prescriptions?

Perhaps if he paid attention to those issues—instead of encouraging friends at major newspapers to publish bad economics masquerading as science—he might have something to show for his second term other than being outwitted by Vladimir Putin with periodic certainty. ESR

Peter Morici is an economist and professor at the University of Maryland Robert H. Smith School of Business and a widely published columnist. He tweets @pmorici1






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