Economic Development and Higher Education

Outlook: Economic growth may be masking concerns

University professor points to low labor force participation as a problem.

October 31, 2014
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Is there cause for concern amid the national economy’s continued growth?

A new report from Northwood University that evaluated the declining purchasing power of the U.S. dollar and increasing inflation would seem to suggest that is the case, especially when it comes to low labor force participation.

Timothy Nash, vice president for strategic and corporate alliances and the Fry Endowed Professor in Free Market Economics at NU, said although the United States is still the largest economy in the world today, there are symptoms and signals emerging that may require reform so it can become more competitive in a global economy.

“The United States needs to be looking at things it can do to become more competitive. The United States needs to look at a more competitive tax rate; it needs to make certain the purchasing power of the dollar is held more constant,” said Nash. “We have the highest corporate income tax in the industrialized world. It affects our ability to compete; it affects our corporations’ ability to compete internationally.”

Citing West Michigan companies such as Whirlpool, Amway and Kellogg, Nash said global companies are in a sense handcuffed by higher, less competitive tax rates than the average rates in Europe or China.

The economic outlook noted although the national economy continues to show signs of growth and the unemployment rate dropped to 5.9 percent during September, the U.S. labor force participation rate dropped to 62.7 percent, the worst rate since 1978.

Nash said it suggests Americans are frustrated and leaving the job market.

“We are taking a look at the fact that one of the things people don’t really see is the purchasing power of the U.S. dollar has declined over time. If you look at the U.S. dollar, it has substantially lower purchasing power than it did in 1938,” said Nash, who wrote the economic outlook.

“Based on the CPI, we say the U.S. government’s official index of inflation notes the dollar buys 1/17th of what it bought in 1938.”

To illustrate how inflation has led to consumer frustration, Nash compared data from 1938 to current data to show how the U.S. dollar has lost value in the last 76 years. Looking at the cost of key items as a percent of average household income in 1938 to 2014, the study noted the average price of a new home was 2.25 to 1 relative to income in 1938, while it is approximately 5.3 to 1 in the current economic environment.

“A stronger dollar means stronger, better purchasing power, and that dollar simply means if wages don’t go up at the rate of inflation, then people’s purchasing power declines,” said Nash.

“Wages have not kept up with inflation. In fact, for the fourth year in a row, average household income in America did not keep up with inflation, and that affects businesses and people’s ability to buy things, pay for products, or to have a higher standard of living.”

The NU outlook does note that comparing the relative cost of goods and average household income from 1938 to 2014 is not a pure measure of inflation, since arguments can be made about the average home being larger and nicer today and the same point can be made for automobiles.

George Erickcek, senior regional analyst at the W.E. Upjohn Institute, said it is extremely difficult to measure inflation over long periods of time due to product improvements.

“If you look at the rate of inflation over the past five to 10 years, it has been extremely low. In fact, I am more worried that we are looking at a deflationary situation where people are holding back on purchases today because they are waiting for better deals in the future,” said Erickcek. “Indeed, the Federal Reserve wants inflation, general price increases, to be at 2 percent per year, and we are currently below that target.”

Noting stagnant wage growth during the last 10 years, Erickcek said he thinks it has held back consumer expenditures.

“This is an important difference: If you believe that inflation is the problem, then you would argue for a tighter money supply, higher interest rates and slower economic growth in the short term to promote — hopefully — stronger long-term growth,” said Erickcek.

“If you believe wage stagnation is the problem, then you would promote expansionary policies that would increase the demand for labor and push wages higher.”

Although the outlook took a national perspective, Nash said if inflation in relative terms is not a problem, then it should not necessarily adversely impact a state or even national economy. With Michigan’s gross domestic product growth and overall economic growth outpacing many other states, Nash said it was one of the top-performing economies in the U.S. last year.

“Michigan was the 20th most rapidly growing economy based on GDP last year. In fact, if you look at the Grand Rapids area, it was one of the top growth metropolitan regions in the Great Lakes region. It outperformed Chicago, it outperformed Indianapolis, and it outperformed Detroit,” said Nash.

“The declining value of the dollar is something that, when you look at any economy, you would like your currency to be stable to hold its purchasing power.”

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