WASHINGTON, July 29, 2016 — The Bureau of Economic Analysis has just released figures for economic growth for the second quarter of 2016. The economy grew at a 1.2 percent rate. First-quarter growth was revised downward to 0.8 percent. At a time when the economy needs 4 percent or better growth, the policies of President Obama and Hillary Clinton continue to cause stagnation.
For the last year, economic growth has averaged just above 1 percent, barely enough to keep pace with population growth. After seven years of the worst recovery from a recession since the 1930s, America’s current non-existent recovery, such as it is, appears to be grinding to a halt. Another recession, beginning as early as the end of this year, is a real possibility.
The policies suggested by Obama/Clinton, which are geared to cure perceived social injustices and not the economy, will only serve to slow economic growth. Recently Clinton has claimed she knows how to grow the economy. She says she will increase government spending on infrastructure and social programs.
These actions, which are precisely the same as those taken by President Obama over the past seven years, will once again result in massive increases in the annual deficit and the public debt. During President Bush’s last year in office, the annual deficit was approximately $480 billion. In Obama’s first year, the deficit ballooned to $1.4 trillion.
Obama claims to have cut the annual deficit by more than 50 percent. If true, that would mean that the government’s FY 2016 deficit will come in at around $500 billion, a figure that is still higher than deficits incurred under any other president in our history. While current interest rates are low, the interest payments on this debt are tolerable. But eventually, when interest rates do finally start to rise toward traditional average levels, interest expenses on the federal debt will become a considerable problem.
During one recent speech, Clinton claimed the American economy will grow once wages grow. “It’s really simple,” she said at a speech in Ohio in June. “Higher wages lead to more demand, which leads to more jobs, which lead to higher wages.”
At an appearance in North Carolina, she said, “When your paycheck grows, America grows.”
While she is correct with that analysis, the Obama/Clinton policy approach to increasing wages is wrong. For instance, both believe that if the minimum wage is raised to $15 per hour, this action alone would start the growth cycle. The truth is that raising the minimum wage will slow economic growth.
Suppose the increase in the minimum wage means an unskilled worker sees $300 gain in weekly pay. After paying 10 percent in added federal income tax and 6.3 percent Social Security tax, the worker would have about $251. Clinton says that will lead to an increase in demand which will jump-start growth.
However, where does that $300 come from?
Walmart’s profit margin is about 4½ percent. That margin yields enough profit to finance growth and pay dividends to stockholders. Walmart cannot allow its profit margins to fall or it would not be able to grow or attract new capital. Therefore, it must recover $319 ($300 paid to the minimum wage worker plus the $19 Walmart has to pay for its portion of the worker’s Social Security) by raising prices.
While admittedly this will not cause a substantial increase in the overall inflation rate, the $319 price increase means consumers have $319 less to spend on other goods and services, which in turn lowers overall demand. The bottom line is that a $251 for the company’s minimum wage workers is effectively $319 decrease for all other consumers, yielding a negative impact on demand and growth.
Artificially raising wages without any corresponding increase in worker productivity will slow growth not increase it. In fact, all the suggestions Obama/Clinton offer to increase growth will do exactly the opposite, which is why the economy under Obama has averaged about a 2 percent growth over the last seven years—the worst performance by any president after a recession.
Every problem Obama and Clinton claim they want to solve could easily be solved by economic growth. Income inequality would be reduced, because high rates of economic growth lead to greater demand for labor, which increases the number of jobs available and increases in the wages paid for those jobs.
Economic growth would reduce government spending on social programs like food stamps and welfare, increase tax revenue due to the contributions from newly hired workers, provide opportunity for well-prepared entrepreneurial Americans, begin to reduce crime and other social problems and ultimately minimize the need for increasing safety net programs.
The simple solution to increasing growth is for the federal government to cut taxes substantially for all Americans to increase demand for goods and services that consumers really want. In addition, a concurrent reduction in capital gains taxes will encourage much-needed capital investment. Finally, the government must reduce significantly the volumes of burdensome regulations that increasingly stifle growth, investment and innovation. Presidents Reagan and Bill Clinton did just that during their presidencies and the economy swiftly responded by shifting into a long-term growth pattern.
All we have to do is look at the past and learn from it to forge a better future.
*Cartoon by Branco. Reproduced with permission and by arrangement with LegalInsurrection.