The Indignity of Wage Progress at 1.4%

Despite today’s nominal unemployment rate of 4.6%, median wages rose at an annual compound rate of just 1.4% between May 2008  and May 2015. In that same period, GDP grew by a compounded rate of 3.5%, partly because the period started with in a 6% growth hole.   Most workers know that they have spent almost a decade on the short end of the economic stick. Many of the recently casted votes were a response to candidate messages that promised better paying jobs fueled by higher rates of growth.  Real growth is essential to produce more income.

The economy dragged at 1.4% rate of growth in the 2nd quarter of 2016, but it leaped to 3.5% in the 3rd quarter.  If 3.5% can be sustained, it would make President elect Trump’s economic assertions easier to achieve.  Kiplinger saw the situation as follows, “We do expect GDP growth in 2018 and 2019 to be spurred by the fiscal stimulus of tax cuts and infrastructure spending,… we now look for the economy to expand by 2.5% to 3%, depending on how much of Trump’s program is actually approved and whether Congress enacts other spending cuts to reduce the deficit.”  Treasury Secretary nominee Steven Mnuchin said “I think we can absolutely get to sustained 3% to 4% GDP.  The Congressional Budget Office picked just 2% as likely.

A handful of big opportunities can noticeably accelerate the economy in the next 4 years — an adjustment in taxes that will encourage business investment, an adjustment that encourages repatriation of corporate cash parked overseas, repeal of growth and job killing regulations, infrastructure projects using some private sector equity, and an adjustment to individual taxes that leaves more money in consumers’ pockets.

There are landmines that could wreck any plan. Some of these are a spike in interest rates that apply to refinancing the massive federal debt, a botched repeal and replacement of Obamacare that allows government subsidies to grow wildly, an unbridled defense budget, and wanton spending of government money to cover shortfalls left by other stimuli.  Any combination of stepping on landmines and failure to harvest opportunities can dash consumers’ hopes for a meaningful improvement in family incomes.

There is $2 trillion in US corporate money parked overseas, lawfully avoiding US taxes as high as 35%.  With the right US tax treatment, much of the $2 trillion could be repatriated to use in the US.  Corporate tax for US operations is also slated for adjustment, probably to a maximum rate of 17%, a compromise between Congress’s favored 20% and Trump’s preferred 15%.  So-called loopholes will be removed.

The personal income tax plans reported at the Tax Foundation suggest that a middle class married couple without itemized deductions would see a yearly reduction in federal tax liability of $1,000-$2,000 under Trump’s stated plan.  A few thousand dollars will not change the lifestyle of many families, but it would allow them to save more for a child’s education, or make bigger payments on a second mortgage, or a student loan, or handle their medical out-of-pocket costs with less stress.  It would cover half the lease on a new car or a much-needed Florida vacation from winter snow.

When corporations see consumers spending their tax relief and the enactment of compelling prospects for after tax yields, they are more likely to plough their surpluses into productive projects and less likely to abandon profits into share buybacks.  Those productive projects will invest in equipment and skilled labor, creating the economic ripples and job prospects needed to boost GDP.

Repatriating cash parked overseas and removing job-killing regulations are smart initiatives with a potential of up to $3 trillion in investment stimulus that taxpayers don’t have to finance.  Three trillion should be enough to make a difference in consumer wages.  These initiatives should be the first priority on behalf of consumers.

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