One Key Reason Why the American Economy Is Still Weak

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By Jacob Maslow

us budget tightening beltDespite the rosy unemployment figures being released by the government, the American recovery is still weak. You can’t tell this from all the action on Wall Street. After all, it seems that almost every month, Wall Street is setting a new record high. However, the pain on Main Street is very real. While a lot more Americans are working, they are working for a lot less money than before.

If you need proof of this, just look at the median household income in the United States. It is the same as the median household income in 2007. The American dream of generation after generation of upward progress and mobility in terms of income net worth is effectively flushed down the toilet. Thanks to the great financial crisis of 2008, today’s millennial generation don’t expect their children to have a better life than them. This really is a tragedy.

Part of the reason why Main Street America continues to struggle is because big American corporations are focusing on maximizing profit. Make no mistake about it. There is a big wealth gap in the United States. Indeed, according to some analysts, the wealth gap in the United States is the greatest that it has ever been. The top tenth of 1% of the population makes so much more money than the rest of the population. In fact, if you think the wealth gap between the rich and the non-rich is huge, wait till you look at the wealth gap between the hyper-rich and the merely rich.

A lot of this is due to the fact that the Federal Reserve and the central banks from all over the world have been pumping the global financial markets with cheap liquidity. People who have close relationships with, or inside knowledge of, the global financial market are the first to benefit from this essentially free money. This is the reason why stocks are setting record after record. It is not because the underlying economy is strong. It is not because people are buying stuff, getting jobs, having families, and buying homes. It is none of that. Most of the action comes from the cheap cash being printed by central bank printing presses that are flooding the global economy.

This is why Henry Blodget’s article in Yahoo Finance should spark some serious debate as to corporate America’s priorities. Corporate America is playing to Wall Street expectations. The best way they can do this is to cut costs and increase profits. This is the complete opposite of what they should be doing if they wanted to solidify America’s economic backbone. How do you do that? Pay your people more.

The CEO of Aetna (NYSE:AET), the highly profitable insurance company, is trying to set a good example. He said that he was going to give his lowest-paid staffers a raise. This raised a lot of eyebrows because the more raises an executive gives, the lower profits become. This is usually unheard of. In our current corporate culture, the focus should be on maximizing shareholder value. This means that if people are making minimum wage, they stay at minimum wage.

At Aetna, the CEO could have continued paying its lowest-paid employees $12 an hour. There are no market forces pushing him to increase wages. These people aren’t going to be poached by somebody else willing to pay them $16 an hour. Instead, he did it voluntarily because he says that the overall economy would be healthier and growing much faster if corporations paid their people better.

This is an eye-opener. Economies don’t grow just because the stock market is booming. You have to remember that only a tiny fraction of the population benefits from record-high stock prices. The rest of the population benefits only if wages go up and there are more jobs available. Hopefully, more CEOs will follow Aetna’s lead.

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