U.S. consumers still strapped despite rebounding shares, home prices

U.S. consumers still strapped despite rebounding shares, home prices

Consumer spending could remain modest as the economy recovers from the recession, even with steady improvement in the housing market, the White House’s top economist said.

“The economy is going through a lot of healing,” Alan Krueger, chairman of the White House Council of Economic Advisers, said in an interview with Wall Street Journal reporters and editors.

Americans lost $16 trillion in total wealth from the end 2007, when the U.S. recession started, until early 2009, he said. That amounted to about one-fourth of total U.S. wealth. It has since regained $13.5 trillion of that wealth, mostly owing to a rebound in the stock market and recent house price improvements.

“If you destroy that much wealth, people need to rebuild their retirement positions and they need to save for their children’s educations,” he said. “That is a big challenge for consumption going forward.”

He said the U.S. needs to invest more in research and development, to boost innovation, and also encourage start-up businesses, which could be one benefit from an overhaul of immigration policies.

Mr. Krueger warned that the recovery could be set back by the across-the-board federal spending cuts set to begin on March 1, cutting defense and non-defense programs. The Congressional Budget Office estimates that if the full cuts take effect economic growth would be 0.6 percentage point slower this year, leading to 750,000 fewer jobs in the economy than would exist otherwise.

“I think it’s a step in the wrong direction for where the economy is now,” he said of the spending cuts. “We’re recovering, we’re not recovered.” Experience from other countries shows that cutting government spending too early during a recovery slows economies dramatically, he said.

Republicans and Democrats are at odds over how to address the upcoming cuts.

Many Republican lawmakers say the U.S. economy can withstand the reductions — about $110 billion a year in a $3.6 trillion federal budget — for the sake of reducing the nation’s budget deficit. Republicans have said they’re willing to replace only the defense cuts with other spending reductions, but they don’t support further increases in tax revenue.

Democrats say immediate cuts are unnecessarily damaging and should be replaced with a mix of tax increases and other spending cuts to cut the deficit.

The overall spending cuts were “not structured in a wise way” because they were designed to spur lawmakers to take “more balanced” action, Mr. Krueger said. He said potential “domino effects” from the cuts could cause wider damage than anticipated. Major defense companies, for instance, use smaller contractors in vast supply chains that are similar to those in the auto industry. Many defense firms are worried about damage to their supply networks. “That’s not something that you reverse very quickly,” he said.

Mr. Krueger has been chairman of the CEA since November 2011 and previously served as a senior Treasury Department official since early 2009. He also served as chief economist of the Labor Department in the Clinton administration.

He is on leave from Princeton University, where as an academic he conducted widely cited research on labor issues including unemployment and the minimum wage. He found that increases in the minimum wage can boost overall employment. Competing studies by other researchers have found a negative effect on employment.

President Barack Obama, in his State of the Union address last week, proposed raising the federal minimum wage by 2015 to $9 an hour, from $7.25, and linking further increases to inflation. Many Republicans criticized the proposal by saying it would hurt the job market.

Mr. Krueger said there’s little question among researchers that increasing the minimum wage would raise the incomes of lower-wage workers as a group. He also cited an analysis by other researchers, aggregating a variety of competing studies on the minimum wage, which found no effect on overall employment.

Mr. Obama’s proposal would raise the minimum wage by 24%. The Clinton administration sought and won a 21% increase in the minimum wage in the 1990s, a move that Mr. Krueger credited partly for reducing income inequality during that period. The economy also saw strong employment increases during that period.

“Some people predicted back then that we’d have a recession when the minimum wage went up,” he said. “Obviously that didn’t happen.”

Though many Republicans reacted negatively to the latest proposal, Mr. Krueger said the experience from the mid-1990s showed that a minimum-wage increase could pass despite initial GOP opposition.

“You never know the way Congress works,” he said. “It’s harder to predict than the economy.”

Source: The Wall Street Journal