The American economy has been staggering forward for the last five years. We are in the midst of the worst "recovery" ever seen in the USA. Year after year, we are promised that the economy is about to move strongly forward, and year after year, growth fizzles and dies. So far this year, the USA is limping along at about a 2% growth rate which, while awful, is still a bit better than last year. And it is not just the USA that is stuck in this rut. Japan has been in a slow growth mode for decades. Europe is currently falling into a recession. China has been growing, but there are worrisome signs that even this may be coming to an end. We may be entering a period when every major segment of the world economy is doing poorly.
We could consider just how we got here, but for now, let's just consider how we get out of this mess. What can be done to promote economic growth in the USA and around the world?
We should start with the proposals of our own government. I am being generous when I talk about economic proposals for growth coming from president Obama. Basically, Obama has no real proposals; he has mentioned things in speeches but has not actually put forth any proposals. Nevertheless, rather than discuss Obama's lack of leadership, I want to focus on the items that he talks about.
The first Obama proposal is to raise the minimum wage. That raise would affect a small segment of the American labor force that works in jobs like fast food restaurants and other entry level, low-skill positions. The problem, of course, is that while it sounds nice to give low wage workers a raise, that move will do nothing to jump start the economy. It may even hurt growth. The small numbers (under 5%) of the work force that earns minimum wage will get a raise, and others with slightly higher wages will also see higher paychecks; that is true. The net effect of such a raise, however, will be to slash the numbers of such jobs across the country. Businesses that operate on low margins will cut the number of employees in a bid to stay profitable. Since the vast majority of minimum wage workers are the very youngest members of the work force, the increase to the minimum wage will make the problem of youth unemployment (which is already substantial) much worse. The net increase in aggregate demand across the economy coming from increased wages will be offset by the lost jobs so that there will be a negligible positive effect. In short, raising the minimum wage won't increase growth.
The second Obama proposal is to start universal pre-school classes. When it comes to promoting economic growth, urging pre-kindergarten schooling for America's toddlers is a non-sequitur. No move of this sort will have any meaningful impact on the rate of growth. Indeed, the federal government's own studies show that pre-k education has no impact on the performance of students once they reach the third grade. So Obama is promoting a supposed plan for growth that not only won't cause any growth but which also won't even help the kids involved.
Obama's third proposal is to increase spending on infrastructure. It is hard to take this proposal seriously. After all, Obama could easily have had the White House or some other part of the Executive branch put together a list of proposed projects and send it to Congress for action. Sadly, there are no such lists. Indeed, one of the biggest proposed infrastructure projects in the country, the Keystone Pipeline, is being held up by Obama's failure to make a decision about it after six years of "consideration".
That's it. Those are Obama's main points. He has nothing, no plan, no proposals, just nothing.
So can the economy ever recover? We know that recovery won't be rekindled by monetary policy. The Federal Reserve has already pumped extraordinary amounts of money into the money supply and brought interest rates down to extremely low levels. There is really nothing left for the Fed to do.
Can Congress come up with policies that would help start the economy? Sadly, the answer there is probably not. Assuming that the Republicans take the senate this year, the next Congress will be controlled by the GOP. Almost any proposal for economic growth that will be favored by the Republicans will be opposed by Obama. That is because the GOP will want to energize the private sector to reinvigorate the US economy, and that is a tactic that Obama does not want to employ. Nevertheless, I hope that the next Congress tries to get measures passed that will promote economic growth. A major reduction in useless regulations would be a start. A reorganization of America's corporate tax structure would also help. The total amount collected need not be increased or decreased, but the inequities and high marginal rates have to go. So too, the provisions that retard economic growth have to go. For example, taxation of profits earned abroad when they are brought back into the USA must be repealed. Remember, is it good for the USA to have businesses that do business around the world, but we want those businesses to be able to bring their profits home rather than keeping them in accounts abroad. There are estimates that as much as half a trillion dollars would have been invested in American projects had this tax on repatriated earnings not existed. That sort of investment would mean many millions of additional jobs across America, higher earnings for the average family and faster economic growth.
We could consider just how we got here, but for now, let's just consider how we get out of this mess. What can be done to promote economic growth in the USA and around the world?
We should start with the proposals of our own government. I am being generous when I talk about economic proposals for growth coming from president Obama. Basically, Obama has no real proposals; he has mentioned things in speeches but has not actually put forth any proposals. Nevertheless, rather than discuss Obama's lack of leadership, I want to focus on the items that he talks about.
The first Obama proposal is to raise the minimum wage. That raise would affect a small segment of the American labor force that works in jobs like fast food restaurants and other entry level, low-skill positions. The problem, of course, is that while it sounds nice to give low wage workers a raise, that move will do nothing to jump start the economy. It may even hurt growth. The small numbers (under 5%) of the work force that earns minimum wage will get a raise, and others with slightly higher wages will also see higher paychecks; that is true. The net effect of such a raise, however, will be to slash the numbers of such jobs across the country. Businesses that operate on low margins will cut the number of employees in a bid to stay profitable. Since the vast majority of minimum wage workers are the very youngest members of the work force, the increase to the minimum wage will make the problem of youth unemployment (which is already substantial) much worse. The net increase in aggregate demand across the economy coming from increased wages will be offset by the lost jobs so that there will be a negligible positive effect. In short, raising the minimum wage won't increase growth.
The second Obama proposal is to start universal pre-school classes. When it comes to promoting economic growth, urging pre-kindergarten schooling for America's toddlers is a non-sequitur. No move of this sort will have any meaningful impact on the rate of growth. Indeed, the federal government's own studies show that pre-k education has no impact on the performance of students once they reach the third grade. So Obama is promoting a supposed plan for growth that not only won't cause any growth but which also won't even help the kids involved.
Obama's third proposal is to increase spending on infrastructure. It is hard to take this proposal seriously. After all, Obama could easily have had the White House or some other part of the Executive branch put together a list of proposed projects and send it to Congress for action. Sadly, there are no such lists. Indeed, one of the biggest proposed infrastructure projects in the country, the Keystone Pipeline, is being held up by Obama's failure to make a decision about it after six years of "consideration".
That's it. Those are Obama's main points. He has nothing, no plan, no proposals, just nothing.
So can the economy ever recover? We know that recovery won't be rekindled by monetary policy. The Federal Reserve has already pumped extraordinary amounts of money into the money supply and brought interest rates down to extremely low levels. There is really nothing left for the Fed to do.
Can Congress come up with policies that would help start the economy? Sadly, the answer there is probably not. Assuming that the Republicans take the senate this year, the next Congress will be controlled by the GOP. Almost any proposal for economic growth that will be favored by the Republicans will be opposed by Obama. That is because the GOP will want to energize the private sector to reinvigorate the US economy, and that is a tactic that Obama does not want to employ. Nevertheless, I hope that the next Congress tries to get measures passed that will promote economic growth. A major reduction in useless regulations would be a start. A reorganization of America's corporate tax structure would also help. The total amount collected need not be increased or decreased, but the inequities and high marginal rates have to go. So too, the provisions that retard economic growth have to go. For example, taxation of profits earned abroad when they are brought back into the USA must be repealed. Remember, is it good for the USA to have businesses that do business around the world, but we want those businesses to be able to bring their profits home rather than keeping them in accounts abroad. There are estimates that as much as half a trillion dollars would have been invested in American projects had this tax on repatriated earnings not existed. That sort of investment would mean many millions of additional jobs across America, higher earnings for the average family and faster economic growth.
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