Disconnect between Wall Street and Main Street Hinders Recovery

Economy improves…incomes don’t – Economy.

I have written about this before and the only reason why I touch this topic so soon again is because the Dow reached 13000 the other day. The Dow and the other market indicators tend to give a somewhat distorted view of the American economy. That is in part because many firms traded are not American and even the stock of American firms may fluctuate due to gains overseas, political news, mergers, decline of competitors, etc. In other words, the gains (or loses) may have absolutely nothing to do with what is happening in the nation.

The lacking elements in this recovery are those which affect aggregate demand. Although there is a school of thought which maintains that supply generates demand, most empirical evidence points to the contrary. Excess in supply can actually lead to deflation and consequently to job erosion. Aggregate demand, as the sum of all demands for goods and services in the economy is tremendously influenced by consumer demand. The U.S. Department of Commerce estimates that 70% of the U.S. economy is internal consumption.

A large majority of American consumers depend primarily on wages to live. Long-term stagnation of real wages is possibly among the greatest threats to the U.S. economy, greater than a break-up of the European Union or a state of general war in the Middle East following a hypothetical attack on Iran.

Since the New Jersey economy is not growing by leaps and bounds, the demand for labor is tepid. We do not have huge gains in productivity which could lead to sizable wage increases, What we have is a lot of competition. We have all the other states around us with more or less similar conditions and in fact, in the competitive ladder, New Jersey is standing on the lowest rung, looking at the backside of New York. And then there is an entire world beyond the two oceans, trying to attract U.S. capital to their shores. Lately, they have been very successful.

Without wage increases, demand remains flat. With low demand, businesses lose traction.

I have a number of proposals to reverse that situation and they are outlined in the Pages of my blog. The tax cuts proposed by both parities have very limited impact on aggregate demand, primarily because they involve too little money spread over a very long period of time. Furthermore, there is no sufficient economic growth to sustain those cuts without leveraging the State even more. The consequence of the latter is that the bill for those tax cuts will come due with accrued interest in a number of years,. The current politicians are not the first ones using the same trick to seduce the voters. Seduction is the right term.

It is very easy to make a demagogic call like “lower taxes” or “tax the rich”. Their appeal is in their simplicity. But to claim that those are solutions is fraudulent. Those steps may be part of the solution; just a small part if at all. To turn New Jersey around there are no simple solutions. If there were we would not be in trouble in the first place.

To build up a fund from which a significant injection of liquidity goes into the pockets of consumers, we have to reduce size the government the right way: By eliminating  not the teachers, or firemen, or cops, or maintenance workers who perform a real service but the political bureaucracy which feeds voraciously from the system. The best way to do so is to eliminate entire layers of government; We simply have too many government subdivisions.

The second step is to reform our tax code rewarding those who invest in New Jersey. Those who chose to invest elsewhere may continue to do so but will not receive our gratitude at tax time. We must be supportive of the New Jersey employer by eliminating their tax liability. As we support the New Jersey employer, we must support the New Jersey employee as well; that is by means of minimum wage increase – not the miser $1.25 proposed in the N.J. Assembly but up to $15 with benefits or $18 without. Employee and consumer are two words referring to the same people.

The measures above intend to reconnect Wall Street with Main Street. Along these proposals, come the elimination of property taxes for most and the abolition of the sales tax.