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How to Stimulate Growth Without New Government Spending

David Callahan

A main obstacle to economic growth is that consumers don't have much money to spend, which is why the U.S. government needs to engage in more stimulus spending -- an imperative that was dramatically underscored by last Friday's bleak job numbers.

Of course, though, such new spending is a heavy -- perhaps impossible -- lift right now thanks to a relentless campaign to paint past stimulus efforts as a failure. Elected leaders who care about pulling the economy out of a ditch shouldn't stop pushing for new spending, particularly on infrastructure, but they also need to give more attention to other options that don't involve new outlays or losses in tax revenue.

One obvious option is to raise wages, putting more money in the hands of Americans who are likely to spend it immediately. Congress could do this by increasing the minimum wage, as proposed just yesterday by Jesse Jackson, Jr., and a group of House Democrats, who introduced a bill called the "Catching Up to 1968 Act,"  or H.R. 5901. The bill would raise the minimum wage to $10 an hour, which is roughly where that wage would be today if it had kept pace with inflation since 1968. What's more, this increase would take effect immediately, as opposed to being phased in over time -- increasing its stimulative effects. And it would index the minimum wage to inflation, so that the wage doesn't keep falling behind as Congress dawdles (with the help of business lobbyists.)

The fairness case for raising the minimum wage is well known. This wage, which Congress has only raised three times in the past 30 years, is absurdly low. A full-time worker making minimum wage pulls in just $15,000 a year, which doesn't get you very far. It is impossible to afford a two-bedroom apartment on this money anywhere in the United States, much less a studio apartment in most cities. Even two full-time workers making a few dollars above the minimum wage and living together are looking at serious hardship in most places. That's not right in a country that valorizes work and believes this virtue should be rewarded.

But the stimulus case for raising the minimum wage is also compelling. A study by the Federal Reserve Bank of Chicago found that:

Following a minimum wage hike, household income rises on average by about $250 per quarter and spending by roughly $700 per quarter for households with minimum wage workers. Most of the spending response is caused by a small number of households who purchase vehicles.

This makes sense. Low-income workers live on the edge, spending every dollar that comes to them (in contrast to rich people who tend to use tax breaks to simply save more), and many are driving older, unreliable vehicles. Give these households a wage boost, and they'll not only spend it immediately, but feel confident borrowing more to spend beyond their wage increase and buy a better car. The borrowing part is not necessarily a great thing, but it helps growth.

A study by the Economic Policy Institute in 2009 found that if President Obama fulfilled his campaign promise to raise the minimum wage to $9.50 an hour by 2011, this step would have generated $60 billion in stimulus over two years. Not only would existing workers be doing better, but all their new spending would help create jobs for others.

Another way the government could raise wages is by changing contracting rules, and mandating that any company that does business with the federal government provide better wages -- so-called "high-road" contracting. At the least, the government could give bidding preference to high-road contractors, a proposal that the White House has considered at times.

A move to high-road contracting would be big, since hundreds of thousands of companies do business with the federal government. The SEIU and other labor unions are strong proponents of this idea, which could be enacted by executive order and bypass an obstructionist Congress.

A final idea to stimulate growth without new spending is to enable millions of underwater home owners to take advantage of historic low interest rates, reducing their monthly payments and freeing up billions in spending money. These homeowners can't do this right now because banks won't deal with them, but proposals exist for helping them -- all we need now is the political will. (More about this in a later post.)

Friday's job numbers should put the topic of stimulus squarely back on the table in Washington. And if policymakers look at a broader menu of options, just maybe something will happen.