Will the United States fall into the “stimulus trap”?

In response to the impact of the new crown epidemic on the economy, the United States issued nearly 4 trillion US dollars in fiscal stimulus last year. The Biden administration’s $1.9 trillion new stimulus plan has also been approved by the House of Representatives and is currently being debated and voted in the Senate.

Will the United States fall into the "stimulus trap"?

In response to the unprecedented scale of fiscal stimulus in the United States, Wei Shangjin, a professor at Columbia Business School and former chief economist of the Asian Development Bank (ADB), recently wrote that rounds of fiscal stimulus have caused the United States to fall into a “Stimulus Trap” (Stimulus Trap). To avoid this risk, the United States needs to carry out reforms in the fields of education, labor market, and financial management.

Wei Shangjin pointed out in an article published on February 26 in the Newspaper Syndicate (Project Syndicate) that the previous rounds of the US government’s stimulus plan have led to an increase in US asset prices, especially the increase in stock prices that has exceeded the increase in wages. The S&P 500 index has risen nearly 20% since the beginning of last year.

Since the rich hold more assets than the poor, the already serious gap between the rich and the poor in the United States may be further widened. In the face of the ever-widening wealth gap, the US government has worked hard to find solutions, such as raising taxes and raising minimum wages.

However, Wei Shangjin said that some measures may backfire and further expand economic inequality.

 

Taking the increase in the minimum hourly wage as an example, the Biden administration’s 1.9 trillion stimulus plan proposes to increase the federal minimum hourly wage from the current US$7.25/hour to US$15/hour. Wei Shangjin believes that the law allows employers to pay 15 US dollars/hour. The minimum standard of wages pays employees, but it cannot force employers to increase employment, nor can they force people to open more companies in low-wage economic sectors. Therefore, this measure aimed at helping the poor in the United States may actually lead to a decrease in American jobs. On the contrary, if the minimum wage is not raised, the low-tech sector in the United States may create more jobs.

Wei Shangjin said that the Biden administration’s new round of stimulus plan will undoubtedly trigger a new round of asset price increases, which will cause asset prices to rise faster than wages, thereby further widening the gap between the rich and the poor. As a result, people will further demand higher minimum wages, tax increases or increased social transfer payments, and these measures will once again reduce investment and employment growth, forcing the government to introduce a new round of fiscal stimulus measures. In this cycle, the United States may fall into a “stimulus trap.”

He believes that to avoid falling into the “stimulus trap”, the United States needs to reform in the following three areas.

The first is to reform and upgrade the education system, strengthen vocational skills training for students, and enable more people to enter the field of high-paying jobs.

Wei Shangjin pointed out that at present, the scale of the labor force occupied by the low-skilled sectors in the United States is too large, and the current education system in the United States is difficult to allow children from low-income and low-income families to stand out.

The second is to make the US labor market more flexible while ensuring that all Americans can maintain a good standard of living.

Wei Shangjin said that the United States can learn from the Danish model in this regard. In Denmark, employers can flexibly hire, dismiss employees, and adjust salaries according to market conditions. However, Denmark’s generous social security system can ensure that those who are dismissed maintain a satisfactory life.

This flexible model helps to encourage entrepreneurs to start companies and create jobs. Together with the lifelong learning program, workers have the opportunity to upgrade their skills, and the complete social security system provides livelihood security for workers in transition. The labor market Will form a virtuous circle.

The third is to encourage middle- and low-income families to increase savings. This requires these families to acquire more financial management knowledge and provide them with low-cost financial management tools.

Wei Shangjin said that the bottom 40% of Americans have almost no savings, which means that every time asset prices rise faster than wages, the relative wealth of these people will lag behind. And if they increase savings, they will increase investment after they have the appropriate wealth management knowledge and tools, thereby promoting economic growth and reducing future dependence on stimulus measures.

©Spark Global Limited Financial information & The content of the website comes from the Internet, and any infringement links will be deleted.