Normative Narratives

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Economic Outlook: Economics in The State of The Union Address

Economics always plays a prominent role in the State of the Union Address, particularly during times of economic turmoil. Last night’s speech was no exception.

“President Obama, seeking to put the prosperity and promise of the middle class at the heart of his second-term agenda, called on Congress on Tuesday night to raise the federal minimum wage to $9 an hour, saying that would lift millions out of poverty and energize the economy.”

Raising the minimum wage would help put more money in the pockets of America’s poorest workers. As I have pointed out in previous posts, the lower your income, the greater your MPC (marginal propensity to consume). In other words, every dollar of income that goes to a minimum wage earner has a larger multiplier effect on the economy than that same dollar in the hands of a wealthier wage payer. In light of recent evidence of a corporate cash hoarding, this policy makes sense not only from an economic equality standpoint but also for economic growth.

“Our economy is adding jobs, but too many people still can’t find full-time employment,” he said. “Corporate profits have rocketed to all-time highs, but for more than a decade, wages and incomes have barely budged.”

In addition, by raising the wage floor, everyone else wages should rise as businesses have to adjust the wages they pay to attract more talented workers. This should lead to lower spending on entitlement programs as higher wages will cause less families to qualify for government programs. How far up the wage ladder these increases will trickle is open to debate, but as this is a secondary benefit of raising the minimum wage it should be considered “icing on the cake”.

“On trade policy, the president said that the United States and the European Union were ready to begin negotiations on a comprehensive trade treaty. That came after a report submitted earlier in the day concluded that the gaps between the two sides were narrow enough to put a deal within reach.”

Greater trade openness with Europe will stimulate the economy by provide consumers with lower prices for goods (and therefore more disposable income). A Closer relationship with the E.U. will also allow for greater monetary policy and currency coordination, which is important given the similarities between the American and E.U. economies.

“Mr. Obama pledged to work with states to provide high-quality preschool to every child in America. And he recycled a proposal to help homeowners refinance their mortgages.”

Evidence suggest that early childhood is the most important time period for cognitive, emotional, and social development; investing in high quality public pre-schools ensures that all children, not just those of well off parents, have the ability to reach their full potential. Homeowners deserve more help in coping with the housing crisis; Main St. did not get anywhere near the same bailout as Wall St. did, and many families are still struggling with “underwater” mortgages. Helping families restructure their mortgages would help stimulate the economy for similar reasons as raising the minimum wage (by putting more money in the pockets of those who will spend it).

“On climate change, Mr. Obama endorsed the cap-and-trade legislation once championed by Senator John McCain, Republican of Arizona, and former Senator Joseph I. Lieberman of Connecticut, but long stalled in Congress. Though the president said he would not hesitate to use executive orders to push his own measures to reduce carbon emissions, he did not give any details.”

Cap and Trade should already be U.S. legislation. It has strong bipartisan support and makes sense from an environmental and economic point of view. It is because of special interests (lobbyists) that we do not currently have such legislation. Hopefully congress can come together and pass a bill, although recent history suggest they will not be able to. It will be interesting to see what sort of executive orders Obama has in mind to reduce carbon emissions.

In the G.O.P. rebuttal, Sen. Marco Rubio had (unsurprisingly) some choice words for President Obama:

“’I hope the president will abandon his obsession with raising taxes and instead work with us to achieve real growth in our economy,’ Rubio said in the formal Republican response to Obama’s speech.”

Isn’t it interesting that to the G.O.P., “real economic growth” cannot come from government spending? Ask the families of school teachers and police officers how “real” their wages are, ask anyone how “real” their contribution to society is. Ask local businesses (or miltinational corporations too for that matter) if they care whether a public or private sector employee buys their good or service, I guarantee you they do not. Of course the private sector has the play the dominant role in our economy, that doesn’t mean that government spending shouldn’t play any role. It is especially important to have stimulus spending when private demand is low in order to keep the economy growing (weak public sector spending is a major reason for the slow economic recovery both in the U.S. and around the world).

For his part, the President does not seem to be backing off his call for higher taxation and greater government spending:

“ Mr. Obama also signaled, however, that the era of single-minded deficit-cutting should end. He noted that the recent agreements on taxes and spending reduced the deficit by $2.5 trillion, more than halfway toward the $4 trillion in reductions that economists say would put the nation’s finances on a sustainable course.

Mr. Obama spoke darkly of the consequences of a failure to reach a budget deal, which would set off automatic spending cuts on the military and other programs. “These sudden, harsh, arbitrary cuts would jeopardize our military readiness,” he said.”

The government does have a role to play in ensuring markets function properly; government intervention is an essential component of capitalism. Obama has apparently shifted the middle of the political spectrum to the left. The G.O.P., after losing the presidential election, has taken on a “re-branding” of sorts, while the Democratic Party has doubled-down on its ideological stance (and increased the divide between the legitimacy of the two parties; one is sticking to it’s guns and has popular / scientific support, the other is re-branding itself in an attempt to maintain political relevancy).

Will the G.O.P. get on board with Obama or continue to drag its collective feet? How the G.O.P responds to democratic proposals over the next few months will go a long way in determining how many seats it will win in the 2014 congressional elections.

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