Consumers’ financial health has substantially
improved in 2015, according to the Fed’s 2015 Q4 Flow of
Funds report, plus, their real wages are finally
rising because of lower inflation. And
since consumer income drives aggregate demand—the overall demand for goods and
services, and so Gross Domestic Product —it directly impacts economic growth.
This dearth of aggregate demand has
happened at the same time as diminished corporate investment in more productive
capacity, according to a recent Bank of America report. “Since the Great Recession, US business
investment has grown at an average annual rate of 4.9 percent, compared with
the 8.1 percent average for the corresponding period of all post-war
recoveries. This shortfall is a much larger than the 1.8pp shortfall for
household consumption, and the 2.0 pp for residential investment.”
Why? The Great Recession occurred in 2008, and businesses
and financial markets have been slow to recover. But a recent Economic Policy Institute report
highlights a more serious reason for slower growth—wage inequality.
“The rise in wage inequality over
the last three-and-a-half decades largely stems from intentional policy choices
that have eroded ordinary workers’ leverage to secure higher pay (Bivens et al.
2014), said the EPI author Elise Gould. “These policy choices—made on behalf of
those with the most economic power—include allowing the minimum wage to
stagnate, eroding workers’ rights to bargain collectively, and (the Fed) prioritizing
low inflation over low unemployment. Policies such as these have resulted in
hourly pay for the vast majority of American workers stagnating despite growing
economy-wide productivity, with economic gains highly concentrated at the top.”
And because wages and salaries of
most Americans haven’t increased more than 2.2 percent since 2000, economic
growth has also been stuck in the 2 percent range. This creates ever larger budget deficits,
needless to say, and so endangers social security, Medicare, crimps investments that would
increase productivity and boost our standard of living, and is the reason for
our crumbling infrastructure of roads, bridges, resulting in even more
productivity losses, for starters.
So raising the minimum wage floor
is a start. In fact, states that have
already raised the minimum wage have boosted wages of the bottom 10th
percentile—as much as 5.2 percent for women in states where it was legislated,
vs. states with no minimum wage increase.
That makes it even more important
for companies and governments to invest more in capital expenditures, i.e., the
best way to spend the profits made from higher productivity. But
it is hardly surprising that businesses lack confidence in any sustained
upswing in demand that would justify taking the risks associated with large
increases in investment, concludes the BofA report. For many listed
companies, returning surplus cash to shareholders through dividends or share
buybacks has seemed a safer strategy.
It is the old chicken and the egg
puzzle. Which comes first, investing to
expand business, or waiting for household incomes to increase enough to
encourage businesses to use their cash for productive growth rather than stock
buybacks that benefit the few?
We really do know how to boost
aggregate demand. We have to create more
jobs to fix our public infrastructure that hasn’t been upgraded in 75 years, build
and upgrade our schools to educate a growing population, and spend more for the
research and development of new, productivity-enhancing inventions.
These are really the functions of
governments, when businesses lack confidence to do anything but buy back their
own shares.
Harlan Green © 2016
Follow Harlan
Green on Twitter: https://twitter.com/HarlanGreen
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