A crash course in growth economics

By Hedrick Smith
February 6, 2014

Congressional Republicans like to talk about creating jobs and growing the economy. With the government shutdown and rigid spending cuts, however, Congress created a fiscal drag that cost the economy a full percentage point of economic growth in 2013.

Now, Congressional Republicans are again digging in their heels against measures that would ramp up the economy and generate jobs. It’s time for Congress to take a refresher course in growth economics — the economic forces and programs that power U.S. growth.

As President Barack Obama barnstorms the country, he should be making the argument that it is not only fair, but smart growth economics to raise the minimum wage, extend unemployment benefits and reduce income inequality. These steps will help accelerate economic recovery this year above its anemic 1.9 percent growth rate in 2013.

Stagnant middle class pay and a yawning wealth gap have been the main obstacles to U.S. economic growth for the past three decades, especially the last 10 years, according to a new study by two economists at Washington University in St. Louis.

In mid-December, The Wall Street Journal ran a chart that explained why. It showed that 90 percent of American households suffered a 10 percent fall in income from 2002 to 2012, while the top one percent enjoyed sharp increases.

Common sense as well as Macroeconomics 101 tells you that if 270 million Americans earned less in 2012 than in 2002, they had less to spend. They had to cut back on consumption. That caused weaker consumer demand — a bad trend, because what economists call “aggregate consumer demand” is the engine of economic growth.

So the declining incomes of 90 percent of Americans over 10 years spell slow recovery, even as corporate profits soar and the stock market hits new highs. We are indeed Two Americas — the elite 1 percent riding high and the rest of us mired in the stagnation.

The economic picture was quite different three decades ago. America’s middle class was prosperous. Chief executive officers shared corporate profits. In the 1950s, ‘60s and ‘70s, Charlie Wilson of General Motors, Reginald Jones of General Electric and Frank Abrams of Standard Oil of New Jersey (now Exxon Mobil) practiced “stakeholder capitalism” — sharing profits among all stakeholders in the corporation, with workers as well as bosses and owners. To those CEOs, strong wages and generous employee benefits were good business and smart economics.

Not today. The mantra of most modern CEOs is to deliver maximum return to shareholders – “shareholder capitalism.” Most gains go to the financial elite, while average Americans face frozen wages, cuts in benefits or jobs shipped overseas.

Last year, America’s corporate captains spent $750 billion of their $2 trillion in accumulated profits in buying back company stock — not on expanding production or hiring more workers. Why? Because that delivers higher stock prices to shareholders and fattens CEO pay packages.

If American CEOs had shared more corporate profits with their workforce, average Americans would be better off today and we would all be enjoying a stronger economic recovery.

The same goes for the minimum wage, which at $7.25 an hour is now about 25 percent lower than in 1968, adjusted for inflation.

But that is not what you hear from the National Restaurant Association, in which members employ many minimum-wage workers. Increasing pay, restaurant owners say, would force them to fire waiters, raise food prices or both.

What the restaurant lobbyists don’t tell you is that the minimum wage for waiters who get tips is $2.13 an hour. What also goes unsaid is that in places like Washington state, where the minimum wage is now $9.32 an hour (before tips), national chains like McDonalds and Burger King, as well as local restaurants, are doing just fine.

It’s important to understand that what may happen in individual restaurants is not what happens in the economy. Raising the minimum wage may crimp the profit margins of some restaurants, but applied nationwide, a higher minimum wage lifts the whole economy. It puts tens of billions of dollars of increased buying power into the hands of average Americans.

If that puzzles you, imagine what would happen if restaurant owners pushed the minimum wage to zero. All those working families would have no money to spend and the economy would shrink from lost buying power. Raising the minimum wage, on the other hand, boosts purchasing power nationwide. Eventually even minimum-wage employers would begin to profit from having more customers with more money to spend.

The same logic applies to extending unemployment insurance. Not only does it give a lifeline to families drowning financially, it pumps purchasing power into the national economy — a formula for growth.

Many economists, including former Treasury Secretary Larry Summers, warn that unless we take action to break our current cycle of low wages and high economic inequality, we are in for a long period of “secular stagnation.”

That is economist lingo for a long-term economic slump — hardly what any of us wants.


PHOTO (TOP): Demonstrators gather during a nationwide strike and protest at fast food restaurants to raise the minimum hourly wage to $15 in New York, December 5, 2013. REUTERS/Shannon Stapleton

PHOTO (INSERT): The Chevrolet Corvette assembly line in 1953.   REUTERS/Courtesy GM


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