Peter Morici

Over and over we hear, slow growing wages and increasing inequality are holding up the recovery. It’s not so simple.

To the untrained ear these nostrums sound plausible. After all, giving the average American more to spend should boost demand, production and growth.

Progressive politicians and labor leaders use this line to argue raising the minimum wage would push the economy into high gear. If that were so, then increasing the federal minimum to $10.10 an hour, as President Obama happily campaigns, would not kill 500,000 jobs, as the nonpartisan Congressional Budget Office predicts.

What the president and the unions fail to mention is that businesses can’t print money to cover higher wages. They must charge higher prices, slash profit margins and reduce dividend payments to stockholders.

The latter are often middle-class workers with IRAs, and the elderly, who will spend just about every dollar they get as they draw down from those nest eggs. Those folks spend too, and in fact many of them buy more domestic products and fewer imports at Walmart, because older folks spend more on health care and other services, which are made in America, not China.

Much the same applies to wealthy Americans—they are more likely to spend their dividends at home.

That calculus has given rise to the myth that higher wages will boost growth. That's another misperception about demand. Americans really are spending again but not enough of those dollars stay at home to create jobs.

Thanks to oil imports and the rising tide of Chinese manufacturers—made artificially cheap by the Middle Kingdom’s purposeful undervaluation of the yuan, subsidies and steep barriers to foreign products—U.S. imports have been rising faster than exports and that is sending a lot of consumer dollars abroad.

The root causes are well catalogued but ignored by a president who spends his time campaigning for a $10.10 minimum wage, playing diplomat with a Vladimir Putin (who is really playing war), and scheming about ways to avoid legal and constitutional restrictions to do as he pleases without the inconvenience of Congressional ascent.

The president opposes drilling for oil off the Atlantic and Pacific Coasts. He has severely limited drilling in Alaska and the Gulf—and is blocking pipeline projects, too. All of which adds to the cost of transporting onshore oil and the environmental risks of rail shipments.


Peter Morici

Professor Peter Morici is a recognized expert on economic policy and international economics. He has lectured and offered executive programs at more than 100 institutions including Columbia University, the Harvard Business School and Oxford University.
TOWNHALL FINANCE DAILY

Get the best of Townhall Finance Daily delivered straight to your inbox

Follow Townhall Finance!