In a recent online essay for Medium titled “The Coming Economic Crash - And How to Stop It,” Democratic presidential hopeful Sen. Elizabeth Warren warns of an imminent “economic downturn.” As one warning sign, Warren says Americans are saddled with excessive household debt due to a “generation of stagnant wages and rising costs.” Her argument is so 2016.
As talk of a looming recession has picked up steam this month, and as Warren’s poll numbers have jumped, it’s worth taking a closer look at her message about wages and costs.
The Bureau of Economic Analysis on July 30 published its annual revisions to personal income data. Following meager growth in employee compensation of 2.7 percent in 2016 and 2.9 percent in 2015, the revisions show significant increases of 4.5 percent in 2017 and 5 percent in 2018. To put those numbers in context, in President Donald Trump’s first two years, employee compensation increased by $672 billion more than it did during President Barack Obama’s last two, for a whopping 42 percent improvement. In June, wages and salaries grew at an annual rate of 5.4 percent, with inflation at 1.4 percent, well below the Federal Reserve’s 2 percent target.
Thanks to a U.S. economic surge over the past two years fueled by Trump’s tax cuts and deregulation, Americans’ incomes have increased dramatically, while costs - reflected in the low inflation rate - have gone up quite modestly.
Rather than continuing to pursue this obviously successful approach, Warren, of Massachusetts, proposes increasing wages with a federally mandated $15 per hour minimum wage - up from $7.25. But in a report that came out two weeks before Warren’s July 22 essay, the Congressional Budget Office found that a proposed $15 minimum wage would actually reduce household income by $8.7 billion in the year it took effect (after a gradual annual increase). Keep in mind, that loss is for one year.
How could an increase in the minimum wage undermine incomes? According to the CBO’s median estimate, the increase would have the effect of killing 1.3 million jobs, increasing consumer prices and reducing economic growth. In effect, $8.7 billion in family income would simply disappear into the progressive economic ether. A proposal that would reduce household income for everyone by $8.7 billion as a means to increase wages for some Americans is absurd.
Warren’s assertion that household debt is a harbinger of doom also withers under scrutiny. She cites a Federal Reserve Bank of New York report for the fourth quarter of 2018 showing increases in auto loans, credit card balances and student loan debt. Warren curiously failed to cite the New York Fed’s more recent report for the first quarter of 2019.
The more current report found “a small increase in auto loan balances.” The increase is no mystery. The Pew Research Center recently found that 55 percent of the public say national economic conditions are excellent or good, and 71 percent say they think their finances will improve next year. That optimistic Americans are buying new cars is neither a surprise nor a sign of economic distress.
As for rising credit card debt, with wages increasing and tax cuts putting more money in workers’ pockets, even the New York Fed report that Warren cites found that credit inquiries - an indicator of consumer credit demand - are at “the lowest level seen in the history of the data.” The more recent report found that those inquiries declined even further, to yet another historic low - while account closings were at their highest level since 2010 and new bankruptcy filings were at a historic low.
Even more encouraging, the Bureau of Economic Analysis report found that Americans’ personal savings rate was above 8 percent in each of the first two quarters of this year, for the first time since 2012. These are signs of improving financial circumstances, not an approaching economic calamity.
The increase in student loan debt is worrisome, but it is primarily due to the Obama administration’s 2008 effort to cut costs by removing banks from the student loan decision-making process. Absent the banks’ input, the government turned on the loan spigot, and student debt skyrocketed as colleges raised tuition, often simply to hire more administrators. Warren’s solution is simply to cancel much of this student debt, ironically foisting the burden onto taxpayers, many of whom chose not to attend college, some because of the cost.
She also proposes free - meaning government-funded - child care, early education and college tuition. Like seemingly everyone in Washington today, she is all too willing to increase government debt - debt that will ultimately be paid for by taxpayers, an indirect form of the household debt she touts as an economic threat. Her essay should have been called “The Current Economic Boom - and How to Kill It.” She might like “The Coming Economic Crash” as a campaign slogan, but she’d mean it differently than I would.
Andy Puzder is the former chief executive of CKE Restaurants and the author of “The Capitalist Comeback.”