A new report in the Wall Street Journal reconfirms what many of already know instinctively: the biggest problem with the economy is that wages just aren’t growing fast enough to sustain prosperity.
A long-awaited liftoff in the U.S. economy is facing pressure from stubbornly weak wage growth, muddying the outlook for consumers and challenging Federal Reserve policy makers who are counting on a pickup as they unwind the central bank’s extraordinary support for the recovery.
Growth in wage and salary income slowed to just 0.2% in April from the prior month, marking the weakest monthly increase of the year, the Commerce Department said Friday. After adjusting for inflation, wage and salary income was up 2% from a year earlier. The figures came in a report showing that U.S. consumer spending fell in April for the first time in a year even while inflation crept up.
The weak start to the second quarter, coming after the U.S. economy in the first quarter contracted for the first time in three years, is challenging the thesis of economists and investors who have been counting on a 2014 growth breakout. Those expectations have pushed U.S. stock benchmarks to record levels, while yields on safe Treasury bonds have dipped in part due to softer economic data.
“Economists and investors” have been assuming an uptick in wage growth for reasons that are purely ideological but have no sound basis in science. Supply-side theory says that a rising tide for the wealthy and for asset growth generally will lead to a lift for every wage earner’s boat. But 40 years of failed supply-side economic policy surely dictate otherwise. The United States has seen nearly half a century of stagnant wage growth even as income inequality and stock prices have risen to record levels.
Meanwhile, the labor protections that help maintain high wages have been intentionally undercut and decimated by decades of conservative “pro-business” policies. Globalization and mechanization continue to take their toll on the labor market via outsourcing and the flattening of entire industries.
All of this is good for stock prices as corporations pocket the gains from increasing productivity coupled with low overhead. Rising assets in other areas including and especially real estate help some people feel richer, but provide little boost to wages and actively harm the ability of those not already invested to put a roof over their heads.
Why should wages naturally rise in this environment? The Great Recession created the longest in a unbroken chain of jobless recoveries since the 1980s. Job growth has only seen an uptick recently, but most of the jobs created since the Great Recession have been low-wage McJobs, brutally enforced across much of the country by Republican-enacted “right to work” policies. And, of course, we have the new findings from Thomas Piketty that the return on capital inevitably exceeds the rate of overall growth absent major traumatic events or specific legislation to counteract it.
Most mainstream investors and economists are wrong about how the economy works. They’re still living a supply-side fantasy where GDP and asset growth will lead to a stronger middle class with higher wages. There’s no objective reason to believe that. A strong middle class is the direct product of the very government intervention that neoclassical economists consider “distortions.” In reality, a distortion-free unfettered market is great for the investor class (at least temporarily), terrible for workers, and destructive to the health of the middle class.