Thursday, January 14, 2016

The High Price of Economic Stagnation

Middle class Americans have known that something is wrong for a very long time.  Declining real take home pay happens mainly because real wages are constantly being reduced by government mandated employee benefits. Things like anti-discrimination laws, OSHA regulations, family leave, mandated health insurance, and on and on are not, in the long run, paid by companies.  In the long run these benefits are paid by reduced wages to employees.  In effect, employees don't get to decide how to spend their income.   You pay for family leave whether you need it or want it.  The same can be said of all the other workrules and government mandates.

The mirage is that these are benefits paid by employers.  In the long run, employers only care about the total cost of an employee -- not how it is sliced up among various items like social security, unemployment comp, health care insurance, etc., etc.  One number, that's all that matters.  That number is not going to rise because of government mandates.  The mandates simply reduce the take home pay, out of that number, left for the employee.

None of this was obvious when economic growth exceeded four percent, but at two percent real wages cannot keep pace with the government mandates.  Hence, the standard of living of the average American is falling.  Slow growth does not permit enough demand for labor to overcome the rising tax on employees (that's another way of describing the cost of government mandates).  Four percent growth creates a very different environment than two percent economic growth.  Recall the 1970s.

In the 1970s, an overzealous government managed to sledgehammer the American economy in ways similar to what the Obama administration has accomplished.  The Jimmy Carter malaise is not much different than the current malaise.  It took Ronald Reagan and a series of pro-free market policies to usher in the roaring economic growth of the 1980s and 1990s.

Economic growth is not low because we have the wrong monetary and/or fiscal policies -- although these policies are abysmal.  Economic growth is non-existent mainly because of micro-economic considerations -- mainly the over-regulation of everything.

In time, the victims of economic stagnation are all of us -- not just the middle class.  The Dow Jones topped 1,000 in 1964 and seventeen years later in August of 1981, the Dow Jones was 780.  Even the stock market suffers during prolonged economic stagnation.

Until the unchecked and arbitrary regulations of government -- at every level- are reversed, the American economy cannot really grow and every segment of our society will suffer economically because of this no-growth.

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