Economist: Business investment spending is key to wage growth

UA Walton College economist Mervin Jebaraj said that the GOP tax cuts passed last December were expected to trigger business investment, and that will lead to wage growth for workers. Jebaraj said it’s still too early to gauge if that scenario will play out.

Appearing on this week’s edition of Talk Business & Politics, Jebaraj said that so far there are positives and negatives in the economy from the tax cuts, but investments by businesses in their infrastructure, equipment and expansions have been lagging.

“The big impetus for the corporate tax cuts from 35% to 21% …was to spur business investment spending. It was lower in the first quarter than it had been in the second half of 2017, and that pace slowed down even more in the second half of 2018, so that piece was definitely not good news,” said Jebaraj, the director of the Center for Business and Economic Research at UA.

“We want to see businesses use these tax cuts and increase investment spending. So, we’re not sure if they’re worried about the domestic economy, worried about all the effects of the tariffs and retaliatory tariffs and there’s a lot of uncertainty there… So, we haven’t seen the business investment go up. If that doesn’t happen, [then] workers don’t get more productive, workers don’t get more wages.”

The tax cuts have led to fatter wallets for consumers and their spending has been the major component leading to strong GDP growth of a revised 4.2% in the second quarter of 2018 and a buoyant economy for now.

“When we look at what really generated all of that growth, it’s down to just pretty much one thing, and that’s consumer expenditures. It’s people like you and me and all of our viewers going out and spending more on goods and services in this economy,” Jebaraj said.

“… [T]hey really had a monster quarter in terms of spending. So, what that tells me going forward is I’ve got to ask whether consumers can really sustain this pace of growth going forward, because when you look at how much consumers spent in the first quarter, it was much lower than what they did in the second quarter. But given that huge jump, you have to wonder if consumers have spent as much as they could possibly spend to stimulate this economic growth.”

The announcement by President Donald Trump that a trade agreement with Mexico has been reached, which could replace the North American Free Trade Agreement (NAFTA), could be beneficial for American manufacturers, particularly in the auto industry. Jebaraj warned that details are still sketchy and Canada hasn’t agreed to any deal yet.

“We’ll have to see what the final draft is before we pass any judgments on what this means,” he said.

You can watch Jebaraj’s full interview in the video below.