How to “End Economic Inequality, Grow the Middle Class, and Heal the Nation”

“Solving inequality in earnest will require dramatic changes. … It will take vision, wisdom, creativity, patience, courage, and will to fully change our current inequalities.  But we can start with urgency in the business arena.  We can change the dynamic of our precarious current state.  We can change the dialogue and turn the crisis into a discussion of constructive possibilities.  With caring and compassion our attitudes will shift.  The good people will multiply and their efforts will be transformational.  Progress and success will beget more of the same.” 

These are the closing words of retired CEO Peter Georgescu in his new book, “Capitalists, ARISE: end economic inequality, grow the middle class, heal the nation.”  According to Mr. Georgescu, this can all happen if business CEOs will stop worrying so much about the return on investment to their stockholders and instead give more concern to the welfare of their employees.

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But it is not necessary for CEOs to act altruistically for these good things to happen.  In 2018 our economy grew at a rate of almost 3% and the unemployment rate is now down to 3.8%.  Such a low unemployment rate means we have a nationwide labor shortage!

In fact wages are now rising at a fairly rapid clip, faster than 3% per year (see second chart).    Many big companies, such as Amazon, Home Depot and Walmart, are individually raising their minimum wages in order to be able to attract the large numbers of workers they need to operate their businesses.

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Summary.  In other words, the best way to achieve Mr. Georescu’s laudable goals, is to keep the unemployment rate as low as possible, at least under the 4% benchmark.  This will accomplish far more economic good for the average worker than acts of altruism by individual or groups of CEOs.  And by and large it is faster economic growth which lowers the unemployment rate.

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The Stupidity of Modern Monetary Theory

Modern Monetary Theory says that deficits don’t matter, unless inflation increases a lot, because the U.S. can always just print new money to pay off its debts.  The idea being that if inflation does increase then the Federal Reserve would respond by increasing interest rates which would in turn drive up interest payments on the debt.
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Another way to say it is that we are okay with huge deficits, adding each year to our already large debt, as long as inflation remains low.  Yes, it is true that that right now, interest rates are so low that our huge almost $22 trillion debt is almost free money, costing us “only” about $300 billion per year in interest payments.

The problem is, of course, that this currently happy low inflation era will eventually end and the Federal Reserve will be forced to raise interest rates, perhaps dramatically.  The longer this takes to occur, the more our debt will have accumulated in the meantime.  Right now debt is 78% of GDP (for the public part on which we pay interest), and is predicted by the Congressional Budget Office to keep growing steadily worse without major changes in policy.

I find it shocking that many financially experienced people take MMT seriously.  They should know better.  The very simple logic that inflation, and therefore interest rates and interest payments on the debt, will significantly increase, sooner or later, should be easy to understand.  The longer this takes to happen, the more severe will be the eventual problem and therefore the more traumatic will be the necessary fiscal adjustments to make at that time.

Summary.   It is depressing to clearly foresee the awful fiscal hole that our nation is gradually sinking into and be unable to do anything to stop it.

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Tax Policy and the Wealthy

Most of the Democratic candidates for President want to raise tax revenue to pay for new programs of various sorts.  Senator Elizabeth Warren of Massachusetts has in fact suggested creating a new wealth tax, 2% annually on wealth over $50 million and an additional 1% on wealth over $1 billion.
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Is a wealth tax a good idea?

Normally I am skeptical of the economic ideas of Harvard University’s Larry Summers.  He has stated many times that slow economic growth may be the new normal.  He has also said quite recently that we should stop worrying about trillion dollar budget deficits.  These are both very dangerous ideas. (here and here)

But he has two recent columns in the Boston Globe about wealth taxes which make a lot of sense.  First of all, he points out the many problems in trying to tax wealth rather than income.  Secondly, he identifies several ways to broaden the income tax base and close loopholes which would raise significant amounts of new money.
For example:

  • Auditing the tax returns of even just 25% of million dollar earners could greatly increase the compliance rate and likely raise $400 billion over ten years.
  • Closing corporate tax shelters would raise $360 billion over ten years.
  • Closing individual tax shelters would raise $420 billion over ten years.
  • Eliminating the stepped up basis for unrealized capital gains on inheritances would raise $250 billion over ten years.

Just these four tax revenue enhancements alone would more than pay for the $1 trillion cost of the Trump tax cuts passed in December 2017.

Summary.  The Democrats want a variety of new government programs which will have to be paid for.  And the trillion dollar annual deficits already projected for the future are totally unacceptable and need to be greatly decreased.  Broadening the tax base and closing loopholes, as suggested by Larry Summers, will meet both of these needs.

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Two Cheers for the Senate Budget Proposal

My last post has faint praise for the Trump 2020 budget proposal because it makes no effort to control overall federal spending even though it does suggest a few relatively small curtailments in both discretionary and Medicare and Medicaid spending.

Now the Senate Budget Committee has come up with a much better proposal.  It reduces deficits by $538 billion over five years (see first chart) thereby keeping annual deficits under $1 trillion going forward.
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Under the Senate proposal the federal debt (i.e. the public part on which interest is paid) would still rise to 83% of GDP in 2024 compared to 78% of GDP today (see second chart).  Under the Trump budget, the debt would be 86% of GDP in 2024.
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I emphasize that the Senate Budget proposal is better than the Trump proposal, not that the Senate plan is really adequate.  As the third chart clearly shows, it is mandatory (entitlement) spending which is the driver of our increasingly serious debt situation.  In fact, it is even more specific than this.  Social Security can be fixed with some relatively small tweaks but Medicare and Medicaid need major changes.

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The basic problem is that the cost of healthcare in the U.S. is way too high, almost twice as expensive as in all other developed countries.  All three sectors of healthcare are to blame: hospitals, providers (i.e. doctors) and drugs.

Furthermore, it is unlikely that the free market can fix this problem.  Healthcare overall is just too complicated for individual healthcare consumers to understand in sufficient detail to be able to effectively compare prices.  It is likely that strict government controls will be needed.

One specific reform which would help out immensely is to let Medicare negotiate with drug companies over the cost of individual drugs.  Right now this is prohibited by Congress so the law would have to be changed.  Other measures to control the costs of both hospitals and doctors will also be needed.

Summary.  At the present time there is general public awareness that our national debt is out of control but not nearly enough interest by individual members of Congress to seriously address this critical problem.

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One Cheer for the Trump Budget Proposal

As the readers of this blog are well aware, I believe that the rapidly accumulating national debt is by far the biggest long term problem our country faces.  While I am in general optimistic about the future of our country, I am pessimistic that our debt crisis can be solved in a planned and rational manner without going through another huge financial crisis.

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Simply put, fixing a debt problem requires a bipartisan solution, and, at the present time, our broken political system makes it all but impossible to find any kind of consensus short of having a national crisis.  The only way to fix the debt is to get entitlement spending under control (see the first chart).

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The Trump budget for 2020 projects a deficit of $1.1 trillion or 4.9% of GDP which is way too large.  Nevertheless it does at least make some attempt to control both Medicare and Medicaid spending as the second chart shows.
The budget also takes a whack at various governmental departments and agencies (see third chart).  Such whacks at discretionary spending do little to reduce the annual deficit (which will still amount to $1.1 trillion) but are beneficial to force the federal government to operate more efficiently.

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Unfortunately the final budget for 2020, after approval by Congress, is likely to project an even larger deficit than the $1.1 trillion projected by Trump.  This is because Congress is likely to insist on more discretionary spending than Trump proposes.

Summary: The Trump budget proposal at least takes a few small steps towards controlling entitlement spending as well as making cuts in discretionary spending.  Unfortunately even these relatively modest spending curtailments are unlikely to survive Congressional action.

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Why It Will Be So Difficult To Fix Our National Debt

This blog deals primarily with fiscal and economic issues.  Overall I am a political moderate but I am a hardcore conservative on our national debt.  It is in very bad shape as I have said over and over again:

  • First of all, our debt is now at 78% of GDP (for the public part on which we pay interest), the highest it has been since right after WWII and is predicted by the Congressional Budget Office to keep getting worse. Right now interest rates are so low that it is almost free money.  But when interest rates go up, as they will eventually, interest payments on the debt will skyrocket and create a huge fiscal burden for the United States.  The longer this takes to happen, the greater our debt will likely become, and so the eventual interest payment problem will have gotten that much worse in the meantime.
  • The only way to fix the debt is to either raise taxes and/or curtail spending on entitlements, by far the biggest and fastest growing budget item. Either of these approaches requires sacrifice by large numbers of people and therefore is difficult to achieve politically in the best of circumstances.                                  Capture9
  • And now we have the worst of circumstances! Our political system is deadlocked  with both sides trying to destroy the other side.  Any move by either party to either raise taxes and/or curtail entitlement spending will be strongly attacked by the other side.  The attached graph shows that polarization and debt level go hand in hand.  In other words, our rapidly worsening debt level is a symptom of our ever increasing political polarization.

Summary.  Our large and rapidly growing national debt is a very serious and urgent problem.  It requires a bipartisan solution which will be very hard to achieve in our current deadlocked political system.  It is difficult to be optimistic about addressing this problem effectively in the current environment.

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Why Our Country Is So Starkly Divided

Although Donald Trump’s election as President in 2016 was a fluke in the sense that the three purple states of Wisconsin, Michigan and Pennsylvania barely carried him over the finish line with a total three state margin of just 77,000 votes, it also reveals the stark division of our country into red and blue pieces (see first map):
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  • As of the November 2018 national elections, 30 states (see second map) now have both legislative chambers controlled by Republicans, 19 states have both controlled by Democrats and only one state – Minnesota – has a split legislature. (Nebraska, the only state with a unicameral legislature, is in the Republican group.)
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  • We’ve known for some time that the red–blue divide is to a large extent rural–urban, with minorities, who usually vote Democratic, packed into cities while Republicans are more evenly spread out and thus dominate the rural areas.
  • Would you rather drive a Prius or a pickup truck? Would you rather eat meatloaf and mashed potatoes or chicken curry and vegetable biryani?  According to the authors of Prius or Pickup, how you answer these questions reveals a lot about how you vote!
  • The political analyst, Christopher DeMuth, distinguishes between the elite “anywheres” who are not especially tied down to any one particular geographical location and the less educated “somewheres” who are more likely to live where they grew up. The “anywheres” are well educated, articulate and mobile and well positioned to influence the administrative state and the judiciary.  The “somewheres” are more beholden to their congressional representatives for political support.  As the federal government grows ever bigger and more complicated, and Congress willingly forfeits more of its power to the administrative state, the influence of the elite “anywheres” is strengthened at the expense of the non-elite “somewheres”.

The less educated, more rural “somewheres” are revolting and have, for example, demanded restrictions on immigration and foreign trade which they see as threats to their traditional way of life.  This has turned them into avid supporters of Donald Trump who has adopted their wishes as a major part of his agenda.

Summary.  The nationalism springing up all around the free, democratic world is a natural reaction by the non-elites to the increasing complexity of modern society and the growth of government to deal with this increasing complexity.

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