Once again, financial scribes are exercised about the wrong stuff, namely the Fed's "tapering" instead of the real economy. Hence, the recent market dip.
But then, short-run markets are not necessarily rational. A more logical reason for the recent decline is that the economy is not really doing that well for the vast majority of Americans. And as I write this draft, the possible results of a military strike in Syria have investors as nervous as a cat in a room full of rocking chairs.
Markets hate uncertainty. About the only thing certain, with or without a military strike in the Middle East, is that a lot of things can happen and they are all bad. But I digress.
The inordinate attention paid to the Fed's monetary policy is, for macroeconomic policy, the only game in town, a result of a deep philosophical divide over the role of government.
One school of thought holds that the answer is to cut taxes and government spending, with the objective of reducing the annual federal deficit.
Readers of this column know that most economists, including myself, see it another way. Cutting government spending during recession simply cuts aggregate spending, constricting economic activity, and further reduces tax collections. It is therefore counterproductive in reducing deficits.
Furthermore, tax cuts will not encourage the business sector to borrow, invest, expand, or hire workers if demand for their product is not there.
The real roadblock to an expanding economy is lack of aggregate demand, including the erosion of America's middle class, and falling incomes of the working poor - people working diligently, but with low wages and no benefits.
This is where fiscal policy should come in with government spending to compensate for lack of aggregate demand. But in spite of President Obama's efforts, the Congress has taken itself out of the game, leaving the entire effort to monetary policy alone.
Fed Chair Bernanke's expansionary monetary policy has its share of critics and "Monday morning quarterbacks." But would these same critics actually recommend high and rising interest rates during recession and a sputtering economy? I think not.
As my friend and former colleague, New Mexico State University Regents Economics Professor Jim Peach reminds me, low interest rates of Fed Chair Bernanke's expansionary monetary policy are in large measure responsible for the resurgence of the housing and auto markets. And New Mexico oilmen tell him that rising interest rates would curb oil drilling.
In a rational world, monetary policy would be relegated to the role of supporting actor, with fiscal policy the main attraction. In contrast to fiscal policy, monetary policy works indirectly through effect on interest rates and availability of money and credit. Furthermore, monetary policy is uneven in its effect on expanding or contracting the economy.
For example, an expansionary monetary policy, with its low interest rates and greater availability of money and credit, encourages, makes it more possible, for consumers and businesses to borrow and spend. Note, "encourages" - it doesn't guarantee it will happen.
In contrast, if the objective is to dampen or slow down an economy that is expanding too rapidly, interest rates can be raised high enough, and credit restricted sufficiently, that spending would surely be curbed.
The point here is that although an expansionary monetary policy is the right policy during recession, it alone is not enough to get us to where we need to be. The approach of Labor Day reminds us of the role of labor and the middle class in aggregate spending and a vibrant economy.
A recent report from the Economic Policy Institute finds that labor productivity since year 2000 has increased 27.3 percent. But hourly compensation for private workers has increased by only 6.5 percent. For the bottom 60 percent of workers, wages were flat or have declined between 2000 and 2012. The study concludes, "The weak wage growth since 1979 for all but those with the highest wages is the result of intentional policy decisions - including globalization, deregulation, weaker unions, and lower labor standards such as a weaker minimum wage - that have undercut job quality for low-and middle-wage workers."
Clearly, there are a number of reasons for the erosion of the middle class. The minimum wage controversy is one aspect of this "witches' brew" of causes that needs to be addressed. Critics of an increased minimum wage cite negative effects on small businesses, and insist that a higher minimum wage will discourage hiring.
Leaving aside the small business argument, a separate issue as I see it, let's address its effect on employment. A substantial portion of the nation's low wage and minimum wage workers are employed by large corporations that are making record profits, and could well afford to raise wages. As economist Robert Reich reminds us, many of these jobs cannot be shipped overseas or readily mechanized. "The service these workers provide is personal and direct: Someone has to be on hand to help customers and dole out the burgers."
The wealth of the Walton family now exceeds the wealth of the bottom 40 percent of American families. In contrast to protestations by the clueless Mitt Romney, it is not a matter of envy or jealousy of the wealthy. And I'm not suggesting that one thin dime of the Walton family be "redistributed" to anyone else.
That said, it is hardly radical, and not the least bit "socialistic," to suggest that hugely profitable corporations that are sitting on mountains of cash - such as Walmart, the nation's largest employer - raise wages of the working poor and middle class workers so that labor might share in future profits and prosperity.
Forget about equity and "fairness." These ancient concepts cut no ice with today's corporate and political elite. But higher wages paid by profitable, cash-rich corporations would be a welcome shot in the arm for the entire economy - just a thought for Labor Day.
- John Waelti's column appears every Friday in the Times. He is a retired professor of economics.
He can be reached at jjwaelti1@tds.net.
But then, short-run markets are not necessarily rational. A more logical reason for the recent decline is that the economy is not really doing that well for the vast majority of Americans. And as I write this draft, the possible results of a military strike in Syria have investors as nervous as a cat in a room full of rocking chairs.
Markets hate uncertainty. About the only thing certain, with or without a military strike in the Middle East, is that a lot of things can happen and they are all bad. But I digress.
The inordinate attention paid to the Fed's monetary policy is, for macroeconomic policy, the only game in town, a result of a deep philosophical divide over the role of government.
One school of thought holds that the answer is to cut taxes and government spending, with the objective of reducing the annual federal deficit.
Readers of this column know that most economists, including myself, see it another way. Cutting government spending during recession simply cuts aggregate spending, constricting economic activity, and further reduces tax collections. It is therefore counterproductive in reducing deficits.
Furthermore, tax cuts will not encourage the business sector to borrow, invest, expand, or hire workers if demand for their product is not there.
The real roadblock to an expanding economy is lack of aggregate demand, including the erosion of America's middle class, and falling incomes of the working poor - people working diligently, but with low wages and no benefits.
This is where fiscal policy should come in with government spending to compensate for lack of aggregate demand. But in spite of President Obama's efforts, the Congress has taken itself out of the game, leaving the entire effort to monetary policy alone.
Fed Chair Bernanke's expansionary monetary policy has its share of critics and "Monday morning quarterbacks." But would these same critics actually recommend high and rising interest rates during recession and a sputtering economy? I think not.
As my friend and former colleague, New Mexico State University Regents Economics Professor Jim Peach reminds me, low interest rates of Fed Chair Bernanke's expansionary monetary policy are in large measure responsible for the resurgence of the housing and auto markets. And New Mexico oilmen tell him that rising interest rates would curb oil drilling.
In a rational world, monetary policy would be relegated to the role of supporting actor, with fiscal policy the main attraction. In contrast to fiscal policy, monetary policy works indirectly through effect on interest rates and availability of money and credit. Furthermore, monetary policy is uneven in its effect on expanding or contracting the economy.
For example, an expansionary monetary policy, with its low interest rates and greater availability of money and credit, encourages, makes it more possible, for consumers and businesses to borrow and spend. Note, "encourages" - it doesn't guarantee it will happen.
In contrast, if the objective is to dampen or slow down an economy that is expanding too rapidly, interest rates can be raised high enough, and credit restricted sufficiently, that spending would surely be curbed.
The point here is that although an expansionary monetary policy is the right policy during recession, it alone is not enough to get us to where we need to be. The approach of Labor Day reminds us of the role of labor and the middle class in aggregate spending and a vibrant economy.
A recent report from the Economic Policy Institute finds that labor productivity since year 2000 has increased 27.3 percent. But hourly compensation for private workers has increased by only 6.5 percent. For the bottom 60 percent of workers, wages were flat or have declined between 2000 and 2012. The study concludes, "The weak wage growth since 1979 for all but those with the highest wages is the result of intentional policy decisions - including globalization, deregulation, weaker unions, and lower labor standards such as a weaker minimum wage - that have undercut job quality for low-and middle-wage workers."
Clearly, there are a number of reasons for the erosion of the middle class. The minimum wage controversy is one aspect of this "witches' brew" of causes that needs to be addressed. Critics of an increased minimum wage cite negative effects on small businesses, and insist that a higher minimum wage will discourage hiring.
Leaving aside the small business argument, a separate issue as I see it, let's address its effect on employment. A substantial portion of the nation's low wage and minimum wage workers are employed by large corporations that are making record profits, and could well afford to raise wages. As economist Robert Reich reminds us, many of these jobs cannot be shipped overseas or readily mechanized. "The service these workers provide is personal and direct: Someone has to be on hand to help customers and dole out the burgers."
The wealth of the Walton family now exceeds the wealth of the bottom 40 percent of American families. In contrast to protestations by the clueless Mitt Romney, it is not a matter of envy or jealousy of the wealthy. And I'm not suggesting that one thin dime of the Walton family be "redistributed" to anyone else.
That said, it is hardly radical, and not the least bit "socialistic," to suggest that hugely profitable corporations that are sitting on mountains of cash - such as Walmart, the nation's largest employer - raise wages of the working poor and middle class workers so that labor might share in future profits and prosperity.
Forget about equity and "fairness." These ancient concepts cut no ice with today's corporate and political elite. But higher wages paid by profitable, cash-rich corporations would be a welcome shot in the arm for the entire economy - just a thought for Labor Day.
- John Waelti's column appears every Friday in the Times. He is a retired professor of economics.
He can be reached at jjwaelti1@tds.net.
