Miller said the private sector of the U.S. economy is performing at a level that should create strong, 3.7 percent annual growth – were it not for the government, which he said is creating a 1.7 percent drag, leaving the economy growing by only 2.0 percent. “We need improved government policy,” he said. “When you commit economic decisions to political solutions, you practically guarantee a second-best outcome. And yes, I’m talking about health care too.”
Still, he conceded that some of the positive private-sector performance is illusory. Despite the booming stock market, “below the surface it doesn’t look as pretty. Profits these days are generated by your ability to cut costs. Revenue is still weak by virtually any metric, and you can’t cut your way to prosperity.”
On the other hand, signs that the Federal Reserve is preparing to finally loosen its clamp-down on interest rates suggest an economic surge may be near. “It’s worth noting that rising interest rates are not the same as high interest rates,” Miller said. “Starting from the bottom and rising up, rising rates are a very strong economic positive. Bank lenders and borrowers start making friendly again.”
He predicted that the Fed will close down quantitative easing by the middle of 2014 and allow interest rates to rise. Mortgage rates have already risen from below 3.5 percent to just above 4.5 percent. “That’s still below the first standard deviation in what are considered low interest rates in this country,” he said. “Fed-neutral” — the point at which any further rate increases begin to harm the economy, which in mortgage-rate terms is somewhere around 8 percent — is a long way off, Miller stated.
The biggest economic risk the United States faces, he said, is that while 68 percent of the economy rests on consumer spending, consumers’ monetary resources are stagnant. “There is no wage growth in real terms,” he said. “I’m talking about real, disposable, after-inflation, after-taxes income. The long-term average for that fundamental measure of cash flow for the household sector is 3.2 percent annual growth, right about along with the overall economy. But for the past four and a half years, it’s been growing 0.2 percent. If you’re going to keep people spending, they’ve got to have continued resources.”
During the recession and the recovery since, returns on business productivity have been distributed in “a biased fashion,” Miller said — in fact, “107 percent of all the returns have gone to capital. That’s one of the reasons profitability has been so strong. But it means stagnant wages, and the labor market can’t fix that. New jobs add a small increment to the number of wage earners, but the issue is what happens next year, when even the new job-holders from this year have no growth in their resource base.”
Miller also took corporate America to task for practically ceasing its hiring of new college graduates. In the “old days,” he said, when a company began a hiring program it would take on perhaps one new senior manager, fill a few middle-management positions, “and [look] downstream for college students.” A graduate’s grade-point average got her or him a job. No longer.
“We’ve substituted experience for education,” he said. “Now employers are hiring rainmakers. They don’t want to do succession; when an opening occurs they want to hire from competitors. That means they simultaneously have low wages and high incremental labor costs. The implication is pretty clear: businesses don’t want to bear the costs of training new hires. That’s extremely nettlesome, but I don’t have a real good answer to it in my pocket.”