Wednesday, April 22, 2015

Yearly productivity growth + stagnating wages != booming economy

If you listen to the standard conservative line from Congress, what we hear is that keeping wages low will grow the economy. What we've seen over the last 30-40 years (depending on the economist you talk to), wages have stagnated in real terms. The minimum wage has lost purchasing power over the same term while productivity has gone up at a pace that leaves the growth of wages in the dust. If real wages are fairly constant and productivity increases faster than wages, shouldn't our economy be booming?

All of this is well documented. A number of sources have pointed out that if wages kept up with productivity, the minimum wage would be at least $16 per hour. The upper bound for a minimum wage in line with productivity is about $22 an hour.

Technology has been the biggest driver in productivity. Paper has been replaced by databases and electronic documents. Communications by phone and fax have been replaced by email, video conferencing and social media. Manufacturing has seen steady improvements in materials, designs and processes. Traditional energy sources have been augmented by renewable energy and eventually, they will replace oil, gas and coal.

Despite record high indexes in Wall Street, the real unemployment rate remains stubbornly high at 11%. The largest corporations are reporting strong earnings and some have done so since the collapse of the housing bubble. It is widely acknowledged that the largest corporations have parked almost $2 trillion offshore, supposedly waiting for repatriation when tax rates are lower.

So I don't get it. If wages are so low and productivity continues to grow, the economy should be booming right? I think that the reason the economy isn't booming is that America has turned into a country that only supports businesses not consumers. I also think that the current economics in America prove that no matter how much you try to help businesses, the only people who really generate demand are consumers.

70% of the economy is driven by consumer demand. Yet, we've spent the last 30 years digging a hole in the economy with supply side economic policy. In other words, if you make it easier for suppliers to produce goods and services, prices will come down and demand will emerge. A strong dollar policy over the last 30 years has been great for businesses with low cost supply chains around the world. That has kept prices down here, but the same policy has depressed domestic demand.

Strong dollar policies combined with trade deals like NAFTA have worked together to depress demand here while sending it elsewhere. Now our policy elites are promoting treaties like the TPP and the TTIP as if that is really going to help our economy when trade barriers are already very low. Both of those treaties have extensive provisions for intellectual property, but intellectual property rights here at home are already very strong.

Dean Baker has noted that between 1947 and 1969, the minimum wage actually kept pace with productivity:
"... the minimum wage generally was increased in step with productivity over these years. This led to 170 percent increase in the real value of the minimum wage over the years from 1948 to 1968. If this pattern of wage increases for those at the bottom was supposed to stifle growth, the economy didn’t get the message. Growth averaged 4.0 percent annually from 1947 to 1969 and the unemployment rate for the year 1969 averaged less than 4.0 percent."
So we've had more than 20 years of experience with a rising minimum wage with 4.0 percent annual GDP growth and 4% unemployment. Since the 1980s, we've had nothing but bubble after bubble to grow the economy only to fall back again into malaise and unemployment.

If we really want to drive demand, we have three very simple choices:

  • Increase government spending on things like infrastructure, education and health care
  • Increase the minimum wage to match productivity so people can buy what they make
  • Decrease the value of the dollar to the point of balanced trade - that would create 6-7m jobs

All three of these would work very well on their own and together to grow the economy and they would be great for business. But they would be terrible for the current program of excluding 99% of us from enjoying the growth of the economy. Now who would have the greatest amount of input on economic policy? The same people who benefit the most from them. The 1%.
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