The U.S. Commerce Department just reported that December retail sales were down almost 1 percent from the previous year. Economists and pundits are wringing their hands. They blame this failure on consumer reluctance to jump on board and crank the economy and that, they insist, will continue the slow growth in the economy we have suffered for the past five years. This setback adds to the handwringing over oil price declines, the woes it inflicts on the petroleum industry and the banks that fund it. Fortunately, consumers, who, because of oil price declines are in the process of receiving the largest income increase in the past 40 years, can laugh all the way to the bank. As the energy price declines impact, the smart ones won’t change their spending habits and they will continue to benefit from what media and politicians find so troublesome.
It does make you wonder why and how some analysts, politicians and corporate media just don’t get it when it comes to income inequality. When consumers, who represent 70 percent of the economy, have had no real income improvement for 40 years, it means these folks can’t afford to become whimsical when it comes to spending a windfall. When the sum total of the economic benefits of the past five years have accrued 95 percent to the wealthy, not the middle class, there is no logic to the notion that the middle class will go on a spending spree just because of a sharp change in circumstance. This is especially true when the windfall could be temporary. Any thinking person understands that a 45 percent decline in prices at the pump needs to be spread over time in order to be truly impacting.
{mosads}But the decline in retail sales is actually good news for consumers and the news just keeps getting better. In addition to the decline in gas prices, “core inflation” (that is, living expenses other than food and fuel) was flat in December, only the second time that has happened since 2010. Protracted low prices for fuel will eventually impact core inflation. Expectations are such that economists are now expecting inflation this year to rise less than 1 percent, and may even be negative. This would be deflation and that scares the pants off policymakers. However, for a middle class that has been badgered economically, it is the best they can hope for.
With inflation at negligible levels, the Federal Reserve cannot start raising interest rates. With inflation at negligible levels, wage earners will not find themselves further behind in purchasing power. With negligible inflation, politicians will have to find ways to promote growth, not exploit it.
Most economists and politicians fear deflation because consumers will postpone purchases, expecting better prices later; financing rates that are fixed become more burdensome, prompting consumers to shun large purchases like appliances or cars; investment will slow because expectations for future growth will diminish; and business will find it “sticky” to try and lower wages for existing employees.
These low prices actually scare the economic elites. It disrupts the game, creates uncertainty and lowers the level of control they can exercise over wage earners. Even though they could resolve the problem by offering higher wages, thereby stimulating the economy, they become convinced that future demand for goods and services will fall off. But these same folks are the ones who oppose increases in minimum wages, providing day care for working parents, paid sick leave, overtime pay and insist on reductions in government social services, higher work hour thresholds to avoid health insurance coverage, restrictions to control drug price increases and special tax breaks for the wealthy. Of course, reversing their position on any of these issues would help increase consumer demand.
Politicians and economists alike will now shower us with anxieties that are simply unfounded. With middle-class increases in buying power, there is an inherent growth factor that will be in full evidence. If the consumer is selective in the use of the estimated 3 percent increase in income resulting from lower oil prices, if the consumer is smart enough to not change selective buying practices, if the consumer continues to shop around for best prices, economic expansion at a “slow growth” rate will be extended. Estimates now are that the current economic expansion can continue to beyond 2020, in which case it will become the longest period of expansion on record.
We have argued for slow growth and kept fingers crossed that the message or logic was not lost on those least able to change policy and most affected by our new era of exploitation. The rueful element of the current public pronouncements is that far too many policy and political actors are rooting for the wrong things. Not all politicians are tone deaf, and certainly the president has unleashed his progressive side over the past two years in calling for minimum wages increases and the like. The most impressive suggestion of late has come from Rep. Chris Van Hollen (D-Md.) who has proposed a $1,000 tax credit for workers that phases out as income rises, to be paid for by a transaction charge on securities trading and closing some of the tax loopholes currently allowing billionaires to pay lower tax rates than average workers.
The fact is that economic growth rates more pleasing to the wealthy and their surrogate politicians is quite readily at hand. They need only pass legislation that increases income to the middle class or simply allow business productivity increases to be shared or passed along in increased wages. It is estimated that worker productivity increased 80.1 percent from 1974 to 2011 but wages increased only 4.2 percent, whereas in the previous 25 years wage increases matched the 97 percent productivity increase almost dollar for dollar. While it is mind-boggling that greed, avarice, ideology or whatever it is drives these “leaders,” the country suffers. It suffers for those directly impacted by stagnant wages, but it also suffers over the long term by slowing growth.
This time around, however, the suffering need not be shared. If you consider that unemployment currently stands at 5.6 percent and 2014 economic growth finished with a respectable level of 2.5 percent, added to the future prospect of no inflation and increased purchasing power, the consumer is the clear winner. This is not insignificant when viewing the political and business scene, because the chances for the structural changes needed to address income inequality in a Republican-controlled legislature are essentially nonexistent.
The key will be the resolve of consumers to act in their own interest, exercise spending restraint, ignore the spending exuberance promoted by the reigning elites and recognize that the anxiety that will fill the airwaves and pronouncements of dire consequences will serve only one objective: higher spending levels without improvements to middle-class income. Let’s hope that the blather we have to listen to from Republicans about how they will address wage stagnation will be balanced by the knowledge that they have done nothing in that direction for 35 years.
Russell is managing director of Cove Hill Advisory Services.