William Galston wrote an op-ed for the Wall Street Journal titled Soaring Profits but Too Few Jobs that helps demonstrate the failure of governmental economic policies and interventions that have attempted to address the nation’s employment issues. Galston points out that it has been 57 months since the great recession ended and 32 months since the country’s GDP surpassed previous highs. However, today fewer Americans have jobs than when the recession began in 2007. The labor participation chart tells only part of this story. For example, prior to the recession the average duration of unemployment was 16 weeks. Today it stands at over double that.
Galston shares other figures that demonstrate how dismal this recovery has been for employment.
- 60% of jobs lost during the recession occurred for those paid between the $14 and $21 per hour, with only 20% of the losses from jobs paying less than about $14 per hour. However, the recovery has only created 22% of the new jobs at the $14 and $21 rate, while 58% of the created jobs were at lower rates.
- Median household income is nearly 4.5% lower today than it was when the recession officially ended.
While the employment figures are anemic, wealth has been created for wealthier Americans. For example, after tax corporate profits for Q4 2013 increased to an annual amount of $1.9 trillion or over 11% of GDP, a seven decade high. Meanwhile, total workers’ compensation, wages and benefits, fell to its lowest share of GDP during the same period.
After the Great Recession (meltdown), the government, first under George W. Bush and then Barack Obama, enacted the most massive interventions in the economy since the Great Depression. These policies included huge bailouts of banks, companies and individuals, as well as historically low interest rates that were justified by promising to keep the economy from dropping into the abyss. It is not possible to determine whether the economy would have dropped off the cliff without these policies. However, evidence indicates that they have not benefited the bulk of Americans, but instead increased the income disparity in the country.
Wealthier Americans own a greater percentage of equities. The government’s interventions have helped increased values with US stocks increasing a whopping 30% during 2013 alone and over 170% since their March 2009 lows. The growing income disparity is clear when charted over time. This begs the question as to who actually benefited from the governmental interventions. The evidence clearly points to wealthier Americans.
Banks, some whose policies helped create the 2008 2008, have fared well with the government interventions and Fed policies. For example, bank equity values have increased by 250% since their 2009 lows.
How do President Obama and his Progressive allies respond the growing economic inequity and failed policies that have helped fuel it? Incredibly, they advocate of the same policies with still more government interventions. In addition, the President calls for an increase in the minimum wage from $7.25 to $10.10 per hour. While this policy is politically expedient, it has a proven track record of failure.
- Since the first minimum wage of 1938, it has been increased 30 times with the latest one in 2009. Why should we expect this 31st increase to be any more successful than the previous 30 in curing the growing income disparity?
- If increasing the minimum wage is a good thing, why stop at $10.10 an hour? Why not go for $20 an hour? The answer is obvious.
- The nonpartisan Congressional Budget Office (CBO) has estimated that President Obama’s proposed minimum wage increase will result in the loss of 500,000 jobs. It does not take a rocket scientist to understand what income group will be most hurt by these job losses.
In addition to the downward pressure on employment and increased minimum wage will have, the CBO also determined that Obamacare will dampen employment estimating that this program will reduce the working hours for Americans by an equivalent of 2.5 million jobs by 2024. The CBO basis this conclusion on its belief that people will decrease their incomes in order to be eligible for subsidies under Obamacare.
The interventionist policies of President Obama and the Federal Reserve (Fed) are a continuation of the slippery slope started under the presidency of Franklin Delano Roosevelt during the Great Depression. While many of FDR’s policies can be justified due to the worldwide depression, they opened the door for more interventions under less dire economic circumstances going forward. Such interventions increased dramatically during the presidency of Lyndon Johnson and his Great Society programs. The trend has continued under administrations since for varying reasons (excuses). The overall effect on the US economy and society demonstrates the consequences of these interventions.
The charting America’s GDP growth during the economic expansions since 1950 shows an unmistakable trend. There is been continually decreasing recovery rates with the current one being the weakest since World War II. While government policies are not the only reasons for this trend, they have significant culpability.
At the same time GDP growth has been slowing, America’s consumer debt has been expanding, fostered by Governmental policies. For example, student debt is now larger than overall credit card debt with the included chart showing its dramatic growth. Governmental policies have promoted this debt growth by not only offering artificially low interest rates, but by also back–stopping the debt for lenders thereby facilitating loans to people who do not have the means to repay them. In addition, this growing debt has created bubbles within the educational industry, increasing their “profits”. Finally, the huge debt placed on young people will inhabit that generations economic growth and wealth creation long into the future resulting in still more negative macroeconomic consequences
Governmental policies have also increased overall household debt as indicated in the next chart. Subsidizing mortgages, low interest rate Fed policies, as well as the government forcing banks to give mortgages to those that cannot repay them to promote progressive social policy, have played a large role in this debt growth. Absence a bubble in the housing market, those with these mortgages, especially at lower income levels, will have their economic well-being hindered in the future, again causing long-term negative economic consequences.
The low interest rate policies promoted by the Fed have caused other economic distortions including:
- They have lowered the income on safe investments for people on fixed incomes, especially for older Americans. This inhibits their spending hurting industries that serve this demographic.
- Low return on safe investments cajoled people into more risky investments. When the next downturn occurs, these investors will suffer significantly more losses than under a more normal interest environment.
- Companies have been able to refinance their debt at artificially low interest rates. This has given them a short-term boost in profits, which has inflated equity values. When interest rates return to more normal levels, the negative impact will be amplified.
- With historically low interest rates, the cost of investing in capital equipment versus the cost of labor has been distorted, offering incentive for companies to invest in capital equipment for efficiencies before adding jobs.
The Right often blames Democrats for the overuse of debt and economic interventions in the economy. While correct to appoint, it is a distortion. Both political parties have been responsible handing out “goodies” to their political constituents financed by debt in the desire to maintain power. Politicians do not get elected by sharing difficult news or promoting policies that could include pain for voters. Instead, they promise pain-free solutions that only kick the can down the road. This reality means that the markets will ultimately have to be the mechanism for corrective action. While this has always been the case, the amount of pain involved with such corrections is amplified by distortions in the law of supply and demand caused by the interventions.