Jack Heidel’s Overall Political Outlook

I have been writing this blog, It Does Not Add Up, for seven years now, beginning in November 2012, right after Barack Obama was reelected to a second four year term as President.

I am a non-ideological (registered independent) economic conservative and social moderate.  I have definite opinions about many aspects of American public policy, which I believe are supported by careful reasoning and analysis of current events as well as ordinary common sense.

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Every now and then I pause to summarize my most basic public policy views which will usually determine how I come down on specific issues:

  • The overwhelming economic and military strength of the U.S. is responsible for the relative peace and stability which the world has enjoyed ever since the end of WWII.
  • The biggest challenge to U.S. world dominance going forward is the rise of China. It would be dangerous and foolhardy to assume that China will become less autocratic in the future (as much as we hope this will happen).
  • As China’s strength continues to grow, our biggest advantage in the coming bipolar world is the great appeal of democracy. Democracies rarely go to war with each other.  We should continue to support the growth of democracy around the world as much as we reasonably can without getting bogged down in local disputes.
  • Domestically our high degree of political polarization is caused by the populist revolt to the inexorable rise of globalization and technology. The biggest unknown is what will happen after President Trump leaves office in either January 2021 or 2025.  A Democrat will almost surely follow him as President.  The big question is how the Republican Party will reconstruct itself to provide effective opposition.
  • The best way to combat populism is with faster economic growth, especially focused on maintaining a low unemployment rate (under 4%). This is the single best way to provide more and better paying jobs for those on the bottom of the economic ladder.
  • Our biggest domestic problem by far is the rapidly growing and out-of-control national debt, now sitting at 79% of GDP (for the public part on which we pay interest). It is currently being ignored by most national leaders and many economists because interest rates, and therefore interest payments on the debt, are so low.  But interest rates will inevitably rise in the future, and the longer it takes for this to happen, the greater will be the eventual new fiscal crisis, much worse than the Great Recession of 2008-2009.  It is the rapid rise of entitlement and especially healthcare spending which makes this such a difficult political issue.
  • Man-made global warming is a serious and immediate environmental threat. But public awareness about it is so large (70% in the U.S. and growing), that strong measures are already being taken both in the U.S. and around the world to combat it.

Conclusion.  The U.S. has been the leading superpower in the world since 1945 and is in a good position to continue to dominate world affairs indefinitely, if it can just exercise reasonably good judgement.  As the world better adjusts to globalization and the rise of technology, political polarization will  begin to wane and more conventional political norms will again prevail.

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Income Inequality in the U.S. III. Are Billionaires a Problem?

My last two posts, here and here, demonstrate that income inequality in the U.S. is really fairly mild, after taxes (state, local and federal) and government transfers are taken into account.  In fact, the average disposable household income of the bottom quintile is a surprisingly high $50,901. 

I also discuss several ideas for helping those in the lower echelons increase their chances of moving up to a higher level.  Equality of opportunity is an important American ideal and we can certainly do a lot better in trying to meet that ideal.

Are billionaires a problem because they create more inequality?  There are about 600 of them in the U.S. today.  But consider:

  • Innovators such as Jeff Bezos, Bill Gates or J.K. Rowling capture only about 2% of the economic value they create. The rest of it accrues to consumers.
  • The U.S. ranks 13th in the so-called Human Development Index which measures qualities of life such as longevity, amount of education and income levels for 189 different countries around the world.

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  • The countries ranking ahead of the U.S. for HDI are mostly European and especially Scandinavian.
  • Believe it or not, ten of these high HDI countries have more billionaires per capita than the U.S! including the supposedly socialistic Sweden which ranks 6th in billionaires per capita.
  • The high ranking HDI “liberal-democratic welfare-state capitalist” countries are the most desirable countries in which to live and they all have lots of billionaires.

Conclusion.  Income inequality is simply not a significant problem in the U.S. and is blown way out of proportion by the media.  Even though billionaires are sometimes viewed as the public image of rampant inequality, in reality they are the highly visible sign of a successful society.

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Income Inequality in the U.S. II. How Do We Alleviate It?

My last post points out that there is a relatively small degree of income inequality in the U.S., not nearly as bad as is commonly portrayed by the media, after taxes and government transfers are taken into account.  Nevertheless, it would represent progress if low-income people could earn higher salaries and not have to depend so much on government welfare programs to boost their disposable incomes.

How can this be accomplished?  A new book, “Unbound” by Heather Boushey makes a number of practical suggestions:

  • Increase early childhood education opportunities. “Children’s test scores at age seven can explain 4 percent to 5 percent of the variation in employment at age thirty-three.”
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  • Increase social mobility. A child is better off in an environment “less segregated by race and income, with a strong middle class, better schools, better test scores, and with fewer single parent families.”
  • Maintain full employment. “One of the best ways to create opportunity is full employment.”  This, of course, is exactly what the Trump economy has accomplished.
  • High degree of market concentration. “One metric of the effects of high market concentration on innovation is the reduction in the number of startups.”  Interestingly, another new book, “The Great Reversal: how America gave up on free markets” by the economic conservative Thomas Philipon, makes the very same case.
  • The economic cycle. “We’re learning from evidence that broad prosperity for those on the bottom and middle rungs of the economic ladder not only reduce inequality but also can create better economic outcomes.”  This is precisely what our currently generous government transfer programs and low unemployment rates are already accomplishing.

Conclusion.  It would be much better to decrease income inequality by increasing market incomes of those on the bottom rather than doing it primarily with government transfer programs. Ms. Boushey has some good ideas for accomplishing this goal, several of which are already being implemented.

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Income Inequality in the U.S. I. How Bad Is It?

Income inequality is a hot political issue in the U.S.  The 400 wealthiest Americans are each worth more than $2 billion.  The top 1% of American families have an annual household income of $422,000 or more.

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But let’s look at income inequality from a different perspective (see chart):

  • The average bottom quintile household earns only $4,908 while the average top quintile household earns $295,904 or 60 times as much. This is a huge difference but it is before taxes and government transfers.
  • The bottom quintile receives $45,389 in government transfers and $3,313 in private and charitable sources. They also pay an average of $2709 in taxes, mostly sales, property and excise, for a net household income of $50, 901.
  • The average top quintile household pays an average of $109,125 in taxes and is left, after taxes and transfer payments, with an income of $194,106.
  • This works out to a net income ratio of 3.8 as opposed to the above gross income ratio of 60. This is, of course, an enormous difference.
  • More generally, there is an annual $1.9 trillion in transfer payments to American households coming from 95 different federal programs such as Medicare, Medicaid and food stamps and dozens of state and local programs.
  • Government transfers make up 89% of resources available to the bottom quintile of households and more than 50% of resources available to the second quintile.
  • More than 80% of all taxes are paid by the top two quintiles. More than 70% of all government transfers go to the bottom two quintiles.

Conclusion.  “Antipoverty spending in the past 50 years has raised most of the households in the bottom quintile into the middle class.  … Any debate about further redistribution of resources needs to be tethered to these facts.”  Next: what more should we do to lessen income inequality?

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The Trump Economy Continues to do Well

As much as possible I try to stick to issues and stay away from personalities on this blog.  But I have occasionally criticized President Trump for various failings such as ignoring our rapidly growing national debt.

Several recent posts have pointed out that the American middle class is thriving and expanding as a proportion of the overall population, see here and here.

The latest news this week about the U.S. economy is also very good. Consider:

  • The overall unemployment rate is now 3.6%, the 20th consecutive month at or below 4%.
  • The average job growth for 2019 is now (as of November 1) 167,000 per month, amazingly good considering how low the unemployment rate is.
  • The employment ratio for prime-age workers, aged 25 to 54, is up to 80.3%, the highest since January 2007 (see chart) and the overall labor participation rate is up to 63.3% as well.Capture74
  • The unemployment rate for African/Americans is now 5.4%, the lowest since records have been kept, and the third month in a row at 5.5% or less.
  • Average hourly earnings are $28.18 per hour, 3% higher than a year ago.
  • According to the Sahm Signal (When the three month average of the jobless rate has risen .5 percentage points from its previous 12 month low, the U.S. is in recession), the U.S. has not entered a recession.Capture75

“All of this bodes well for consumer spending going forward and makes a near-term recession even more unlikely.”

Summary.  The U.S. economy is now humming along quite nicely, even if GDP has returned (as of Nov 1) to 2% annual growth.  As long as the prime-age and overall labor force participation ratios continue to grow, consumer spending should continue to be strong enough to keep the economy out of recession.

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Should the U.S. Withdraw from the Middle East?

In this blog I discuss mainly economic and fiscal issues because it is in this area where the U.S. is in the greatest long term danger.  However our national welfare depends on good policy in many other areas as well.  For example, our best friends internationally are other democracies and so the spread of democracy around the world is in our best interest.
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But more specifically what should we be doing in the Middle East which is such a big mess?  To what extent should we take sides in the ongoing wars in this part of the world?  Should we rather withdraw completely?

Here are the stakes for the U.S. in the Middle East:

  • We want Turkey to remain an ally. It is a democracy and the only majority Muslim member of NATO.  It occupies a strategic position between Europe and the Middle East.  Over three million Syrian war refugees now live in Turkey and are straining the Turkish economy. Turkey is not our enemy.
  • Russia and Iran are our enemies and, unfortunately, this will probably not change in the near future. Russia is in demographic and economic (because of low oil prices) decline and Vladimir Putin is a troublemaker.  Iran wants nuclear weapons and considers the U.S. to be the Great Satan.
  • The brave Kurdish people, spread out between Syria, Turkey, Iraq and Iran, are caught in the middle. They want their own country of Kurdistan but they are not nearly strong enough to make this happen.  Turkey President Erdogan views the Kurds as terrorists.

Something has to give.  We don’t have a stake in the Syrian conflict and we can only do so much to protect the Kurds.  By withdrawing U.S. troops from Syria, President Trump is moving in the right direction even if doing so clumsily.

Conclusion.  We should coordinate with Turkey in trying to end the Syrian war, protecting the Kurds as much as possible.  We cannot realistically completely withdraw from the Middle East.

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The Dematerialization of the American Economy

In my last post, I described several different ways in which the American economy is producing more from less: corn production has dramatically increased even as corn acreage has leveled off; the use of basic commodities in the U.S. is shrinking; U.S. water withdrawals have plateaued; carbon emissions are dropping even as GDP continues to increase.

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What causes all of this dematerialization?  Andrew McAfee makes a persuasive case that dematerialization is driven by both capitalism and technological progress.  Here are several examples:

  • Fertile Farms. In 1982, 380 million acres of the U.S. was under cultivation.  In 2015, total farm acreage had dropped by 45 million acres.
  • Thin Cans. In 1959 a Coors beer can weighed 85 grams.  By 2011 this was reduced to 12.75 grams.
  • Gone Gizmos. Today a single pocket sized iPhone contains an altimeter, atlas, barometer, calculator, camcorder. camera, clock radio, compact discs, compass, GPS device, mobile telephone, tape recorder, etc., etc.
  • Taking Stock of Rolling Stock. In the 1960s major railroads owned thousands of railcars, only 5% of which moved on any one day.  If that could have been increased to just 10% per day, only half as many rail cars would have been needed.  Today each piece of rolling stock has a radio-frequency identification tag and the country’s 450 railroads have real-time visibility over their rolling stock.

What is going on?

  • We want more all the time but not more resources. Economic growth has become decoupled from resource consumption.
  • Materials cost money that companies would rather not spend. Competition forces companies to operate as efficiently as possible.
  • Innovation is hard to foresee. Neither the fracking revolution nor the world-changing impact of the iPhone were forseen in advance.
  •  As the Second Machine Age progresses, dematerialization accelerates. The Industrial Era allowed us to overcome the limitations of muscle power.  Our current era of great progress in computing allows us to overcome the limitations of mental power.

Conclusion.  “We are now lightening our total consumption and treading more lightly on our planet.  We’re accomplishing this because of the combination of technological progress and capitalism, which let us get more from less.”

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