Newly minted Federal Reserve Chairman Ben Bernanke testified this week on the condition of the U.S. economy before the House Financial Services Committee. As usually happens at these things, a few partisan committee members used the occasion to present their views on the U.S. economy. Democrats, Republicans, and even an independent chimed in, providing much entertainment, a few laughs, and some painful moments for this economist.
Obviously, the out-of-power Democrats on the committee see the glass as half full, so one would have expected them to focus on the less successful economic statistics that characterize this economy. They didn’t disappoint, although their rendering of economic data once again proved they have no idea what they’re talking about.
In any economic environment, good or bad, there will always be pockets of weakness. For example, during the last national election, the Democrats complained about a slow recovery in employment. Today, with unemployment near record lows of 4.7 percent, they are complaining that “average” real wages haven’t increased over the past two years. But is this a valid measure of the progress of American workers?
Democratic representatives Barney Frank and Carolyn Maloney stressed the stagnancy of “average” real wages over the last two years. But in this time the U.S. economy has also experienced a surge in employment with more than 2 million new jobs being added to the workforce. And what usually happens when new jobs are added to the workforce is that they tend to be at the lower end of the pay scale. So the important point is that when a large number of low-wage entrants are combined with established higher-wage earners, the “average” wage is lowered.
This reminds of back when I was in high school and my math teacher introduced me to the vagaries of using statistics to prove a point: Can a six-foot-tall man drown in a pond that “averages” three feet in depth? You bet.
Then there’s independent Rep. Bernard Sanders of Vermont, who appeared somewhat testy over the minimum wage as well as U.S. trade policy. Chairman Bernanke did an excellent job of dispelling Sanders postulate that raising the standard wage helps poor people and that our trade policies are throwing millions of workers out of their jobs. Bernanke admitted that there is extensive debate over the concept of a minimum wage, but pointed out that an increase in the minimum wage helps workers who already have jobs but hurts those who do not have jobs as employers prefer to control costs by not hiring individuals when mandated labor costs are increasing. One example of labor-mandated minimum wages shows up in both the auto and airline industries where high-cost labor is essentially bankrupting companies. Bernanke’s point was to avoid instituting government policies designed to help employment that actually forces unemployment higher, not lower.
Another focus of committee members was the budget deficit. There appeared to be agreement, from the left to the right, that the deficit is a problem and that we don’t want to burden our children with all that debt. Even Bernanke agreed — and I get concerned when the head of the Fed agrees with politicians on both sides of the aisle on anything.
We have lived with budget deficits of substantial magnitude since the early days of the Reagan administration, moving only into surplus for a couple of years under President Clinton. Incidentally, the budget surplus existed concurrently with the bursting of the tech-bubble, the stock market bust, and the onset of a recession. Indeed, economists admit that a budget deficit acts as a stimulus to economic growth and that a budget surplus acts as a constraint. Like tight or easy monetary policy, fiscal policy (i.e., government spending and taxing) can be stimulative or contractionary to an economy.
How can politicians address this deficit problem? They can raise additional tax revenues and/or reduce spending. But if a policy to lower the budget deficit reduces economic activity, more people will lose their jobs, unemployment payments will rise, and national wealth will slow if not decline.
Additional growth in today’s economy is in part attributable to the budget deficit, and it’s this growth that will provide for a higher level of national wealth that will benefit our children and their children. Given our history of large budget deficits coinciding with a rising standard of living and national wealth, I’m not sure politicians and economists should rush in to solve this problem. As an alternative, perhaps we could follow the advice of that well-known economist Dennis Miller who recently said of the budget deficit: “Hey, you can just not pay it!”
– Thomas E. Nugent is executive vice president and chief investment officer of PlanMember Advisors, Inc. and principal of Victoria Capital Management, Inc.