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Economic growth hampered by ever decreasing spending power

by internationalbanker

By Elizabeth Frasier-Nelson – elizabethfnelson@internationalbanker.com

While we’ve seen some growth in home prices, the long term forecast is expected to remain poor. About a fourth of all US home mortgages remain under water, which will guarantee a large inventory of homes for a long time. Much of the growth in home prices has been fueled artificially by corporations buying homes.

While corporate purchases equaled only three percent on a national level, such purchases accounted for over five percent of all home purchases last year in Arizona and eight percent in Nevada, according the Wall Street Journal. Where can this inventory be unloaded?

The days of easy sales are over, and with inventory of underwater homes already high, overall price levels will remain weak. Furthermore, lending rules continue to become stricter. Uneasy home owners who are holding underwater mortgages could decide to unload their properties quickly, which could negatively impact the overall market. Banks that held real estate got pummeled in the great recession, so will any investors if there is another bubble. If there is no bubble, growth will be too slow for a good return on investment.

Weak wage growth will hobble consumer spending

The vast majority of the jobs created since the economy pulled out of the recession have been low-wage jobs that give the worker little or no buying power. According to study by the National Employment Law Project, “mid-wage” jobs-one which pay between 13.84 and 21 dollars per hour continue to be replaced by low-wage jobs that pay 13.83 per hour or less. 

Since 2010, the economy lost four mid-wage jobs for everyone that it gained, while the number of low-wage jobs doubled. Numerous studies show few workers in the low-wage sector have any buying power at all and, therefore, those who become re-employed at a low wage won’t contribute at all to consumer spending. Federal studies show that Washington and various state governments dole out public assistance at a rate of over $400,000 for each Walmart store open in the US.

A study conducted by the government of Wisconsin showed each Walmart store accounts for over $900,000 in public assistance doled out to workers who can’t make it on their paychecks. These low wage workers can’t buy big-ticket items such as cars or appliances; they postpone any purchase that isn’t absolutely necessary and therefore can’t contribute to economic growth. Walmart is the nation’s largest single employer.

The National Employment Law Project study showed that low-wage jobs accounted for a staggering 58 percent of all job growth in the current economic recovery. The study also showed that the vast majority of those jobs have wages well below the high end of the range. The median wage for retail workers is under $11.00 per hour, while the median hourly for food service workers is just over $9.00.

In the high-wage sector, jobs have also been lost to the recession that aren’t returning. The high wage sector jobs, with an average hourly wage of between 21 and 54 dollars per hour, also took a big tumble. For every five of those jobs lost in the Great Recession, only four have been replaced in the recovery.

In addition to the unfavorable wage scale in much of the private sector, state and local governments also continue to slash jobs. The pressure on governments to cut jobs in order to balance budgets and keep taxes from rising, especially as the costs of health care rise along with the demand for more public assistance from low-wage workers, will cause a continued loss of mid-wage jobs.

International implications

The low-wage model continues to become a more-popular method of economic management elsewhere in the world. In November, The Economist blamed the low-wage model for denting Britain’s recovery in an article entitled “All work and low pay”. Japan’s economy continues to shift to an ever-larger sector of low-wage jobs as an answer to high unemployment caused by a maturing industrial economy. But the international issue goes beyond the service sector.

The shift away from social safety nets has most of Western Europe reeling and unable to foster growth. In Spain, the overall unemployment rate hovers at 20 percent, while the unemployment rate for young adults is even higher. They continue to live at home and many have given up on the prospect of finding work. In Japan, even those younger people who are employed are putting off moving out, buying cars and other big-ticket items they would buy if they were living on their own.

Social minimalists might be glad to see less consumption, and so might environmentalists, but the impact of less consumer spending is huge. Those who don’t move out don’t buy those items and those sales are lost forever. Weak sales eventually have to impact manufacturers and retailers. Furthermore, European money policies are expected to remain tight, with less capital available for business lending.

Voluntary unemployment is a US issue as well

Economists agree that economic sluggishness is worsened when would-be productive laborers don’t look for a job. It has yet to be determined how much of America’s unemployment rate is due to people choosing not look for work, but experts agree that only about 63 percent of Americans who are employable are looking. If companies can’t hire the people they need, the growth fueled by the work those people do can’t start to happen.

The social pressures to go out on one’s own and prove himself to society are not what they used to be, and likely never will be. For over 20 years, students have avoided making payments on undergraduate loans by going to grad school. That means they don’t go to work, and they borrow yet even more money to avoid doing so. When these students eventually do graduate, their new earnings will go to payments instead of into the economy.

Washington’s lax approach toward student loans won’t help the situation. Stop gap measures may have reduced interest rate, but there is little or no control over who gets what aid and the government could be left to foot the bill for many unpaid loans. In the meantime, lenders continue to get more lax on how student borrowers spend their money. Students can now have their loan money put on a debit MasterCard, and with no restriction on how it is spent. If student spends the funds on pizza and beer, that may be the only boost the economy gets any time soon.

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