The basic argument over economic stagnation, its causes and remedy, continues - in the Congress and across the nation.
There are two general conflicting viewpoints for remedy: supply-side and demand-side. The supply-side view holds that if taxes were reduced, and burdensome regulations - usually unspecified - eliminated, businesses would have the incentive to invest and employ more people.
Supply-side advocates generally favor reduced government spending, and believe that reducing the annual federal deficit and public debt would instill confidence, encouraging business to invest and employ more workers. It sounds tempting - simple and painless. Doesn't everybody urge reduced government spending - until it hits their own wallet? And does anybody enjoy paying taxes?
Readers of this column know that I don't subscribe to supply-side economics. Sure, there are government expenditures we could do without, such as decade-long counterproductive wars. There are doubtlessly some regulations that don't make sense. And either as individuals or businesses, people, don't like paying taxes. But neither taxes, government spending, nor regulations, are major obstacles to economic recovery.
The fundamental reason that businesses are not employing more workers is that there is not sufficient effective demand with which to purchase the additional products and services that could be produced. So there is no reason to hire more people.
Reasons often cited for unemployment include technology that enables substituting capital for labor, and international mobility of capital that encourages American firms to produce abroad using lower wage labor. While valid, both of these reasons result in reduced labor income, and come right back to reduced domestic demand for goods and services.
Textbook economics holds that increasing productivity of labor allows for real wage increases. But in the real world, this does not occur if the deck is stacked so that gains in productivity accrue only to top management and stockholders. (Recall that some 80 percent of stocks are held by the wealthiest 10 percent of the population.) Since the feeble recovery from the Great Recession, roughly 90 percent of economic gains have gone to 5 percent of the people. This explains why the vast majority of people don't feel that the economy is recovering.
Along the same lines, mobility of capital and international trade should not, and need not, result in a race to the bottom for wage rates. As an economist, I can easily recite the textbook example of how specialization according to a nation's resource base, and producing according to comparative advantage, results in increased total production and more efficient use of resources. But in the real world there are some caveats.
How is the increased production distributed? What happens to the labor that is no longer employed because another nation can produce more efficiently? And if an American corporation produces offshore using lower cost labor, does this have to mean that it is at the expense of American labor? How about raising the wages of foreign labor instead?
In the quest for lower cost production, America has paid far more attention to the welfare of big corporations than to the prosperity of our own labor force. Friend and former colleague, NMSU Regents Professor of Economics Jim Peach, asserts convincingly that America missed an opportunity when negotiating the North American Free Trade Agreement (NAFTA) that opened up trade with Mexico and Canada.
America should have insisted that if we were to reduce tariffs and increase trade, that Mexican workers receive equivalent wages, or at least some substantial percentage thereof, that American workers receive. And Mexican labor would have the right to organize without putting their very lives in jeopardy.
Increasing Mexican wages to some equivalence of American wages would increase their demand for their own goods, increase Mexican demand for American goods, and diminish the incentive for American production to move south to take advantage of lower cost Mexican labor.
It all comes back to lack of demand that inhibits our economic recovery. And once again, the matter of income inequality. To equal the purchasing power of the minimum wage of 1968, the current federal hourly minimum of $7.25 would have to be raised by 47 percent. Opponents of raising the minimum wage insist that it would "harm the poor," and not eliminate poverty.
Of course it would not eliminate poverty any more than higher marginal tax rates on the wealthiest 1 percent of our population would eliminate the federal deficit. But both measures would be at least small steps to reduce income inequality and increase effective demand.
Several states have taken it upon themselves to increase the minimum wage above the federally mandated $7.25 per hour. Using the logic of those who insist that raising the minimum wage would "harm the poor," these higher wage states have already ostensibly "harmed the poor." But we see no hue and cry of those states to revert to the former, lower wage.
If raising the minimum wage really "harms the poor," do its opponents suggest that we lower the minimum wage to really "help the poor?" I doubt it. So the advocates of maintaining the current minimum must believe it's the "Goldylocks solution" - not too low, nor too high, to "harm the poor."
It's not only that extreme inequality of income is a barrier to effective demand and full employment. Extreme income inequality results in concentration of wealth and political power, producing cynicism and distrust of our entire system of democratic capitalism.
There will always be some degree of income inequality - there must be some inequality that rewards ability and effort, and encourages self-improvement. But all workers deserve to share in the wealth they help create through their labor.
It is when those who achieve extreme wealth and power use that very power to suppress others from sharing in the wealth they help create, that extreme income inequality becomes a serious national problem.
It is that condition to which the nation need be on guard - and it seems that we are now there.
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds.net.
There are two general conflicting viewpoints for remedy: supply-side and demand-side. The supply-side view holds that if taxes were reduced, and burdensome regulations - usually unspecified - eliminated, businesses would have the incentive to invest and employ more people.
Supply-side advocates generally favor reduced government spending, and believe that reducing the annual federal deficit and public debt would instill confidence, encouraging business to invest and employ more workers. It sounds tempting - simple and painless. Doesn't everybody urge reduced government spending - until it hits their own wallet? And does anybody enjoy paying taxes?
Readers of this column know that I don't subscribe to supply-side economics. Sure, there are government expenditures we could do without, such as decade-long counterproductive wars. There are doubtlessly some regulations that don't make sense. And either as individuals or businesses, people, don't like paying taxes. But neither taxes, government spending, nor regulations, are major obstacles to economic recovery.
The fundamental reason that businesses are not employing more workers is that there is not sufficient effective demand with which to purchase the additional products and services that could be produced. So there is no reason to hire more people.
Reasons often cited for unemployment include technology that enables substituting capital for labor, and international mobility of capital that encourages American firms to produce abroad using lower wage labor. While valid, both of these reasons result in reduced labor income, and come right back to reduced domestic demand for goods and services.
Textbook economics holds that increasing productivity of labor allows for real wage increases. But in the real world, this does not occur if the deck is stacked so that gains in productivity accrue only to top management and stockholders. (Recall that some 80 percent of stocks are held by the wealthiest 10 percent of the population.) Since the feeble recovery from the Great Recession, roughly 90 percent of economic gains have gone to 5 percent of the people. This explains why the vast majority of people don't feel that the economy is recovering.
Along the same lines, mobility of capital and international trade should not, and need not, result in a race to the bottom for wage rates. As an economist, I can easily recite the textbook example of how specialization according to a nation's resource base, and producing according to comparative advantage, results in increased total production and more efficient use of resources. But in the real world there are some caveats.
How is the increased production distributed? What happens to the labor that is no longer employed because another nation can produce more efficiently? And if an American corporation produces offshore using lower cost labor, does this have to mean that it is at the expense of American labor? How about raising the wages of foreign labor instead?
In the quest for lower cost production, America has paid far more attention to the welfare of big corporations than to the prosperity of our own labor force. Friend and former colleague, NMSU Regents Professor of Economics Jim Peach, asserts convincingly that America missed an opportunity when negotiating the North American Free Trade Agreement (NAFTA) that opened up trade with Mexico and Canada.
America should have insisted that if we were to reduce tariffs and increase trade, that Mexican workers receive equivalent wages, or at least some substantial percentage thereof, that American workers receive. And Mexican labor would have the right to organize without putting their very lives in jeopardy.
Increasing Mexican wages to some equivalence of American wages would increase their demand for their own goods, increase Mexican demand for American goods, and diminish the incentive for American production to move south to take advantage of lower cost Mexican labor.
It all comes back to lack of demand that inhibits our economic recovery. And once again, the matter of income inequality. To equal the purchasing power of the minimum wage of 1968, the current federal hourly minimum of $7.25 would have to be raised by 47 percent. Opponents of raising the minimum wage insist that it would "harm the poor," and not eliminate poverty.
Of course it would not eliminate poverty any more than higher marginal tax rates on the wealthiest 1 percent of our population would eliminate the federal deficit. But both measures would be at least small steps to reduce income inequality and increase effective demand.
Several states have taken it upon themselves to increase the minimum wage above the federally mandated $7.25 per hour. Using the logic of those who insist that raising the minimum wage would "harm the poor," these higher wage states have already ostensibly "harmed the poor." But we see no hue and cry of those states to revert to the former, lower wage.
If raising the minimum wage really "harms the poor," do its opponents suggest that we lower the minimum wage to really "help the poor?" I doubt it. So the advocates of maintaining the current minimum must believe it's the "Goldylocks solution" - not too low, nor too high, to "harm the poor."
It's not only that extreme inequality of income is a barrier to effective demand and full employment. Extreme income inequality results in concentration of wealth and political power, producing cynicism and distrust of our entire system of democratic capitalism.
There will always be some degree of income inequality - there must be some inequality that rewards ability and effort, and encourages self-improvement. But all workers deserve to share in the wealth they help create through their labor.
It is when those who achieve extreme wealth and power use that very power to suppress others from sharing in the wealth they help create, that extreme income inequality becomes a serious national problem.
It is that condition to which the nation need be on guard - and it seems that we are now there.
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds.net.
