U.S. wages aren’t keeping up with inflation, and this could become a big issue in the 2024 presidential election.
Until the COVID pandemic in 2020, President Donald Trump’s tax cuts and deregulation had boosted GDP growth well-above the rates accomplished by Presidents George W. Bush and Barack Obama. Americans’ real wages increased during this expansion by 12.6%. Low income, minority and blue-collar workers did particularly well.
European pandemic policies placed greater emphasis on subsidizing businesses to keep workers on payrolls, and that supported real wages. But as economies reopened, inflation took off and real wages dropped dramatically in 2022. In the U.S., the current recovery appears unlikely to generate the same robust pace of growth, and real wages are down more than 7% since they peaked.
The convergence of the United States with European real wage malaise cannot be blamed on businesses with pricing power or the wealthy grabbing a bigger share of the economic pie. Readers who grocery shop may be puzzled by that statement. For example, shortages have given large food processors opportunities to boost operating margins: Nestle
NESN,
to 17.1%; Kraft-Heinz
KHC,
and Procter & Gamble
PG,
to 22.4%, and Coca-Cola
KO,
to 27.4%.
But overall, America’s largest companies are suffering. Average profit margins of S&P 500
SPX,
companies have declined each quarter since inflation stoked up in early 2021. In 2022 this dragged down stock prices.
During the current recovery, wealthy and upper income Americans have not fared as well as low-wage workers. Their nominal wages have not risen as much and their wealth — thanks to lower prices for stocks and real estate — has declined.
Inflation and debt
The real problem lies in the inflationary consequences of the federal deficits getting out of control. The federal government is spending more on defense, health insurance subsidies, infrastructure, publicly funded-R&D and industrial policies that promote investments in computer chips, EVs, batteries and other green energy activities. Consequently, federal spending has increased to $6.2 trillion in 2023 from $4.4 trillion in 2019, while the federal deficit has jumped to $1.41 trillion from $984 billion.
The federal budget gap is now 5.4% of GDP. According to the Congressional Budget Office, it will hit 7.3% by 2033. The national debt will jump another $21 trillion, and those are likely conservative estimates.
Over the coming decade, U.S. debt service could exceed nominal GDP growth, and interest rates would rise dramatically. This would pressure painful cuts in Social Security, Medicare and other entitlements, or hit defense spending and other basic functions of government.
When the federal government issues new Treasury securities, the Federal Reserve buys those and monetarizes the debt or those bonds become a worthy substitute for cash, because the average maturity of the federal debt is less than seven years.
On corporate balance sheets, when bond holdings are properly structured by maturity and hedged, Treasurys become interest-bearing liquidity — near money.
At full employment, more liquidity creates more inflation. Wages can’t keep up with inflation because the real economy can’t get any bigger. If businesses bow to worker demands for wages that meet or exceed recent price increases, inflation accelerates. This happened in the 1970s, when more expensive imported oil juiced inflation.
To substantially increase the share of the economic pie spent by the federal government, Washington can raise taxes on household incomes directly, through income, payroll and excise taxes, or indirectly through higher corporate taxes. But at full employment, government can’t create a bigger economic pie, and bigger deficits, more liquidity and inflation are an alternative to raising taxes.
The latter is essentially happening now — inflation by exceeding the pace of wage increases is financing a larger federal deficit.
Other federal policies don’t help either. President Joe Biden’s global trade and foreign investment policies have a decidedly protectionist bent. With globalization peaking and perhaps in retreat, foreign investors — new computer-chip factories notwithstanding — are shunning the United States, and U.S. investment abroad is slowing.
That is bad news for American workers, because the U.S. affiliates of foreign companies pay wages above the average for the overall U.S. economy and the affiliates of U.S. companies abroad pay less.
In laymen’s terms, foreign investment creates high-wage jobs in America and exports low-wage jobs. Biden’s anti-free-trade policies discourage that beneficial swap.
U.S. trade and investment policies now have a decidedly protectionist bent.
Getty Images
Curtailing domestic oil production also is contributing to large trade deficits, and federal policies to push the adoption of EVs and green energy faster than market forces would require instigates less efficient uses for capital.
Those programs reduce the size of the economic pie. As do social justice set asides and union preferences in Biden’s infrastructure and industrial policies by reducing competition and price discipline.
Overall, it’s not the war in the Ukraine, monopolies or greedy corporations that are making ordinary Americans feel poorer. It’s too much unfunded government spending and meddling in the marketplace.
Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
Also read: America’s most powerful weapon to beat China and Russia in Cold War 2.0 is free trade
This post was originally published on Market Watch
