Business

Economists Believe They Found The Central Problem In The US Economy

(REUTERS/Lucy Nicholson (L) and Jim Urquhart/File Photos)

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Robert Donachie Capitol Hill and Health Care Reporter
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With a largely stagnant economy, numerous projection shortfalls, and failures of Fed monetary policy, experts note that the problems with the U.S. economy can be traced back to really  just a single thing: slack in the labor market.

Slack is by definition the quantity of labor and capital that could be employed, but isn’t and is otherwise inactive.

With workers in the U.S. becoming less productive and businesses spending less on the reinvestment of capital, businesses are able to hire workers at a much lower cost.

Experts note that the possible solution to this problem is for businesses to reinvest in newer and better equipment to make their workers more productive. Due to low wage growth and the slack in the labor market, it is much cheaper for businesses to hire a new worker than to reinvest in capital improvements. Couple that with the fact that U.S. workers are willing to take a lower paycheck to merely have a job, it would appear that businesses will continue to invest in cheaper labor over capital improvements.

In July, the unemployment rate was “significantly higher,” in “7 states, lower in 3 states, and stable in 40 states,” according to a recent report by the Bureau of Labor Statistics. National unemployment has remained steady at 4.9 percent.

According to a 2015 report by the St. Louis Fed, “as inflation increases, wage growth also rises.” The inverse is also true, periods of higher inflation (especially higher than 6 percent) were also periods of lower real wage growth. The report corroborated what has already been said, that such a “reduction in wage growth would be a consequence of slower growth in labor productivity or output per hour.”

With the current trend of slow wage growth (still slower than before the recession) and new workers finding employment shortly after entering the labor force, there appears to be some “room to grow,” according to Business Insider.

In a presidential election year, the question comes to mind of which candidate would do a better job of tackling this problem.

In a previous interview with Scott Greenberg, analyst with the Center for Federal Tax Policy at the Tax Foundation, told The Daily Caller News Foundation that Clinton’s tax plan would “shrink the long-run economy by about one percent,” adding that this decrease is largely because “she is discouraging labor, investment and savings among high-income individuals,” (RELATED: Which Candidate Is Better For Your Bottom Line: Trump Or Clinton?).

The Tax Foundation predicts that her tax plan would “reduce GDP by 1 percent over the long-term due to slightly higher marginal tax rates on capital and labor.” From these predictions, it would seem that with our economy shrinking under her tax plan that we would see neither employment or wage growth under a President Hillary Clinton.
On the other hand, the Tax Foundation estimates that the “Trump tax plan would grow the economy by over 10 percent, somewhere around 11 percent,” reports Greenberg. This is due to the massive tax cuts proposed by Donald Trump. He added that it would “boost incentives to work, save, and invest.”
It would appear from these projections that Trump’s plan to revamp the economy (and given the over 10 percent projected growth in the economy), that Trump’s plan would both help to spur wage growth and lower unemployment.
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