In the political theater that is Washington, D.C., great performances are never too far away. President Barack Obama’s State of the Union address and the Republican response were two such performances.
In a speech of bluster, bravado, and self-congratulation, Obama outlined his achievements, proposed tax cuts for the middle class, and threatened to use his veto power during his State of the Union address. Republicans, who are caught in a bind now that they are in a majority in both houses, had a folksy response that termed Obama’s health care law the product of a “stale mindset.”
Both sides aimed for the jugular and co-opted the middle class into their speeches. “The verdict is clear. Middle-class economics works,” said Obama. “More taxes, More government and more of the same approach that has failed middle class families,” responded Speaker of the House John Boehner, after Obama’s address.
However, both parties avoided the two words that are uppermost on the minds of most middle class Americans: wage stagnation.
What is wage stagnation?
Wage stagnation is an economic condition characterized by constant wages, despite economic growth. There are a number of reasons for wage stagnation and most of them are structural (related to the inherent way that an economy is structured) rather than cyclical (related to the typical boom and bust cycles that characterize an economy). For example, shifting of jobs overseas to cheaper workforces and labor automation can cause wage stagnation. Consequently, the ability of workers to negotiate for wage increases is adversely affected. In turn, power shifts away from workers to executives. Similarly, family structure, such as rise of two-income families, where the bread-earning members get less pay individually but more cumulatively, can also result in stagnation of wages. The condition can have devastating economic consequences. For example, unchanged wages can lead to a cycle of low consumer spending and economic decline.
Wage stagnation has affected western economies for more than a decade. Japan, where wage stagnation coupled with deflation has choked growth, is the most famous example. Europe is not far behind. The American middle class, which was at one time the richest in the world, is no longer the richest; Canada has surpassed America.
Obama has attempted to frame the conversation about wage stagnation around inequality and wealth redistribution. Of course, this is an act of political opportunism because wage stagnation has been around for more than two decades in the American economy.
A recent study of economies that have successfully tackled wage stagnation shows that a combination of education (which retooled workers for higher-paying jobs) and expansion of social services. Obama’s tax cuts are part of the prescriptive cure.
Tackling wage stagnation
Tax cuts for the middle class are designed to promote spending. At the same time, increased taxes for the rich will shrink income gap. Free community college will improve overall competitiveness of the workforce. Technology, which seems to be fast becoming the lynchpin of American efforts to transform its economy, will automate machines and lifestyles. Effectively, a re-energized workforce will enter a changed American economy.
Theoretically, the proposals make sense. (Their chances of being passed through Republican-controlled houses is another matter altogether, though.)
But there might be a couple of problems along the way.
First, at least another proposal in Obama’s SOTU undercuts his attempts to revive wages. Specifically, his calls for expansion for trade with other countries is a double-edged sword. This is because trade is a bilateral process. Even as new economies are opened up to American businessmen, there is a danger that cheap goods and services from these economies will flood the American market (and, thereby, reduce American competitiveness and adversely affect the middle class). It has happened with Japan and China before where cheap labor and efficient practices enabled the Asian superpowers to supercharge their economies while inequalities in America were exacerbated. And, there is a danger that it might happen again.
Second, success of the plan relies on productivity gains across all sectors of the American economy. This is easier said than done because certain sectors of the economy, such as the service sector, are characterized by inefficiency and bad pay. Tax cuts will only act as a temporary panacea to deep-rooted problems in the industry. The problem becomes even more acute when you consider that the service sector accounts for roughly two-thirds of the economy. Tax cuts should be accompanied by substantial productivity gains and wage increases across all sectors to make economic sense.