Author Archives: jackheidel

Real Financial Sector Reform

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My blog, It Does Not Add Up, addresses fiscal and economic issues facing the United States at the present time.  I am concerned about our slow economic growth which deprives many middle- and lower-income workers of their proper share of our nation’s increasing prosperity.  I am also concerned about our large and rapidly increasing national debt which will create a huge cost burden on society when interest rates resume their normal historical levels.
Capture11Another critical problem, left over from the Great Recession of 2008 – 2009, is how to properly reform our financial system to avoid another meltdown as occurred in 2007 – 2008.  To me this is a more complex issue than slow growth and huge debt and therefore harder to figure out what to do about it.  I am always looking for new sources of information on this topic and feel that I have just discovered a good one.  It is a new book, “Five Easy Theses”, by James Stone, the founder and CEO of the Plymouth Rock Insurance Group and former chairman of the U.S. Commodity Futures Trading Commission (1979 – 1983).
According to Mr. Stone the Dodd-Frank Act of 2010 is too weak in certain respects and three additional reforms are badly needed to avoid a new crisis:

  • The scale and risk profile of large banks should be reduced by having the Federal Reserve impose progressively steeper capital requirements as they grow larger.
  • Hedge funds should be regulated like mutual funds under the Investment Company Act of 1940.
  • The leverage of derivative markets should be reduced decisively with meaningful reserve requirements (which do not net opposite positions to zero).

Mr. Stone emphasizes that he is offering “best” solutions, not constrained by political reality. The financial sector’s share of GDP is now at an all-time high of about 8%.  The enormous wealth enjoyed by those at the pinnacle of finance will make them powerful opponents of meaningful reform.
But it always helps to know in what direction we need to go.

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Economic Freedom and Economic Growth

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I have written several posts recently, here and here, about America’s current very slow rate of economic growth.  In fact:

  • From 1970 – 2000 our economy grew on average at the rate of 3.5%.
  • Since 2000 it has grown at only half this rate, 1.76% annually.Capture4

The economics journalist, Gene Epstein, writing in Barron’s, “The Real Reason Behind Slowing U.S. Growth,” points out the very strong correlation between our rate of GDP growth and the Fraser Institute’s Index of Economic Freedom in the U.S. This index is based on ratings in the five categories:

  • Size of Government.
  • Legal System and Security of Property Rights.
  • Soundness of Money.
  • Freedom to Trade Internationally.
  • Regulation of Credit, Labor and Business.

    Capture5

As shown in the chart above, the biggest reductions have occurred in the (2nd) Legal System, (4th) International Trade and (5th) Regulation areas.  Examples of freedom declines in the Legal System area are:

  • Judicial Independence: political interference in the bankruptcy proceedings of GM and Chrysler.
  • Impartial Courts: expanded use of Foreign Intelligence Surveillance Courts (FISA) where government requests are rubber stamped.
  • Property Rights: eminent domain made easier by the Supreme Court’s Kelo vs City of New London decision in 2005. The expanded use of civil asset forfeiture.
  • Military Interference in the Political Process: local police officers using excess military equipment.

According to the Fraser Institute, ”The effects of the Reagan and Thatcher political revolutions … led to increases in economic freedom and convergence among OECD nations. The so-called Washington Consensus of lower taxes, lower trade barriers, privatization and deregulation is quite evident in the data in the EF index.  The last decade has not been as kind to the cause of economic freedom.”
Such a huge correlation between the rise and decline of economic freedom and the concurrent rise and decline of economic growth is unlikely to be a coincidence.  Government policies strongly effect economic growth.  To ignore this self-evident truth is to invite economic decline.

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Thank God for the Republican House of Representatives

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It is now almost certain that Hillary Clinton will be the Democratic nominee for President and that Donald Trump will be the Republican nominee. The two biggest problems facing our country today are:

  • Slow economic growth, averaging just 2.1% since the end of the recession in June 2009, seven years ago. Even though unemployment is down to 5%, stagnant wages for the middle class have not nearly recovered from their pre-recession high.
  • Massive debt. The public debt (on which we pay interest) is now at 74% of GDP and rising. When interest rates go up, as they surely will eventually, debt payment will rise by hundreds of billions of dollars per year and be a huge drain on government revenues.

The likely Presidential nominees are not adequately addressing these problems:

  • Hillary Clinton wants to increase government spending by about $100 billion per year to be spent on various new programs and raise the top tax rate to 45% to pay for them. This will do nothing to either grow the economy faster or shrink our already sizable deficit.
  • Donald Trump has promised to keep entitlements as they are and spend more on infrastructure and defense. He also sees debt as useful. “I probably understand debt better than anybody” he has stated. His tax plan (which he says is negotiable) will create massive new debt.

If Clinton is elected, she may pull the Senate Democratic along with her. But either way the House of Representatives will likely remain Republican with Speaker Paul Ryan.
Capture3Since the Republicans took over the House in 2010, they have consistently proposed budgets each year to shrink the deficit and produced a balanced budget within ten years.  The new President, either Clinton or Trump, will have to negotiate their own ideas on spending and taxes with a fiscally conservative House.
The country is indeed very fortunate for this circumstance.

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Black Lives Matter

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I describe myself as a fiscal conservative with a social conscience. Most of the time I discuss issues like slow economic growth and excessive national debt.  But occasionally, like today, I deal with related issues such as social inequality.
Capture11Last fall I had a post entitled, “Why Racism Exists in America” in which I made the case that it’s not just our different skin color which divides blacks and whites, but also the large degree of social inequality between the two races, such as disparities in family structure and education levels as well as for income levels.
Capture10Today I am pleased to refer to an article in yesterday’s New York Times, “Black Americans See Gains in Life Expectancy.”  In fact, the black-white life expectancy gap has dropped from 7 years in 1990 to 3.4 years today.  This is for a multitude of reasons:

  • The suicide rate for black men has declined from 1999 to 2014, the only racial group to show such a drop.
  • Births to black teenage mothers, who tend to have higher infant mortality rates, have dropped by 64% since 1995, faster than for whites.
  • The rate of deaths by homicide for blacks decreased by 40% from 1995 to 2013, compared with a 28% drop for whites.
  • The death rate from cancer fell by 29% for blacks over the same period, compared with 20% for whites.
  • Smoking has declined faster for blacks than whites and, in fact, blacks now have lower smoking rates than whites.
  • The decline in black deaths from AIDS accounts for a fifth of the narrowing of the mortality gap with whites from 1995 to 2013.

One way that black lives matter is that blacks are living longer! This offers hope that blacks can and will make progress on other fronts as well.

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Ten Thousand Commandments 2016

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I have written several posts recently, here and here, about the need for faster economic growth in the U.S. and how to achieve it. Part of the problem is the huge size of the federal bureaucracy and the enormous and rapidly growing number of rules which they issue each year.
Capture3The magnitude of this problem is clearly shown in the above chart included in the latest annual report of the Competitive Enterprise Institute.  According to the CEI:

  • Federal regulatory cost reached $1.885 trillion in 2015, which averages out to $15,000 per U.S. household for just one year. This exceeds the $1.82 trillion which the IRS is expected to collect in both individual and corporate income taxes in 2015.
  • In 2015, 114 laws were enacted by Congress while 3,410 rules were issued by agencies, 30 rules for each law enacted.
  • Some 60 federal departments, agencies and commissions have 3,297 regulations in development at various stages in the pipeline.
  • The 2015 Federal Register contains 80,260 pages, the third highest page count in history.
  • The George W. Bush administration averaged 62 major (having an economic impact exceeding $100 million) regulations annually, while the Obama administration has averaged 81 major regulations annually over seven years.

One way to do something about out-of-control regulation is a recently proposed Regulation Freedom Amendment to the U.S. Constitution:

  • “Whenever one quarter of the Members of the U.S. House of Representatives or the U.S. Senate transmit to the President their written declaration of opposition to a proposed federal regulation, it shall require a majority vote of both the House and Senate to adopt that regulation.”

Another intriguing approach to attacking regulatory overkill is given by Charles Murray in his new book, “By the People, rebuilding liberty without permission.”  The point is that there are measures which can be taken to address this particular aspect of our slow growth problem.

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Ending America’s Slow Growth Tailspin II. What It Will Take.

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One of the biggest problems facing the U.S. today is the slow growth of our economy, averaging just 2.1% per year since the end of the Great Recession seven years ago, well below the 3.5% average from 1950 – 2000.
Capture11My last post introduced an excellent Wall Street Journal Op Ed by the Hoover Institution economist John Cochrane.  He says that “the U.S. economy needs a dramatic legal and regulatory simplification.”  In particular:

  • Tax reform. Instead of arguing over tax rates, what’s really needed is deep tax reform, cleaning out the insane complexity and cronyism.
  • Social programs. Rather than arguing over whether to increase or cut spending, what’s needed is a thorough overhaul of the programs’ pernicious incentives. For example, Social Security disability (almost 9 million beneficiaries in March 2016) needs to remove its disincentives to work, move or change careers.
  • Education spending. Rather than arguing about the level of public spending, America needs the better schools that come from increased choice and competition.
  • Over-regulation. Most of all the country needs a dramatic legal and regulatory simplification. Middle-aged America is living in a hoarder’s house of a legal system, including state and local impediments such as excessive occupational licensing.
  • Growth-oriented policies will be resisted. Growth comes from productivity which comes from new technology and new companies. These displace the profits of old companies, and the hefty pay and settled lives of their managers and workers.
  • The presidential frontrunners are not championing economic growth. But the House of Representatives, under Speaker Paul Ryan, is doing exactly this. Perhaps economic policy leadership can be transferred from the Presidency to Congress.

After two disappointing presidencies our economy is lagging far behind where it could and should be. This is the reason for the rise of Bernie Sanders and Donald Trump.  Regardless of the outcome of the 2016 presidential election, there is hope for better days ahead!

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How to End America’s Slow-Growth Tailspin

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My last three posts, here, here, and here address America’s slow economic growth for the past 15 years and why it is such a serious problem.  Today I begin to discuss how we can turn this around.
In today’s Wall Street Journal, the economist John Cochrane has a very informative Op Ed, “Ending America’s Slow-Growth Tailspin” which describes a clear path to speed up economic growth.  Says Mr. Cochrane:

  • From 1950 – 2000 the U.S. economy grew at an average rate of 3.5% annually. Since 2000 it has grown at only half this rate, 1.76% annually. By 2008 the average American was more than three times better off than in 1952. Real GDP per person grew from $16,000 to $49,000 during this time period.
  • There are three main theories as to why growth is slowing down.
  1. We’ve run out of new ideas.  Get used to it and start fighting over the shrinking pie.
  2. The culprit is “secular stagnation” which the Federal Reserve is unsuccessfully trying to overcome with low interest rates and quantitative easing. The only other solution is vast new stimulus spending.
  3. The U.S. economy is overrun by an out-of-control and increasingly politicized regulatory state. America is middle-aged and overweight. The solution is to eat better and exercise.
    Capture3
  • The first two camps are doubtful that better policies will produce faster growth. But the examples of North Korea vs South Korea and East Germany vs West Germany show that government policy matters for economic growth. In fact Mr. Cochrane’s chart (above) shows how a country’s “ease of doing business” score, compiled by the World Bank, correlates with increased average income. Even though the U.S. is near the top by this measure, there is still plenty of room for improvement.

In my next post I will delineate specifically how to streamline our oversized regulatory state. In the meantime, take a look at Mr. Cochrane’s article in today’s WSJ.

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Why Faster Economic Growth Is So Important III. Speeding Up Anemic Wage Growth

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The U.S. economy is in a peculiar and potentially perilous situation:

  • On the one hand, overall economic growth has averaged only 2.1% since the end of the Great Recession in June 2009.
  • On the other hand, the unemployment rate has dropped from 8% in early 2012 to 5% today.
  • But wages and salaries have grown by only 2% in the past year and near that rate for the past four years.

What explains our relatively low, and steadily dropping, unemployment rate when overall economic growth, and wage growth in particular, are so slow?
Capture2It is low productivity growth as the New York Times’ Neil Irwin, has recently pointed out: here  and here.

  • GDP is up 1.9% in the past year. But the number of hours worked by Americans is also up 1.9% in the past year. This means no increase in labor productivity in the past year.
  • For the past five years labor productivity has only advanced by .4% annually, far below the 2.3% average annual growth since the 1950s.
  • Most job growth in the last decade has been in (low productivity) services rather than (high productivity) manufacturing.

We do not have to accept low productivity growth as immutable. As I have recently discussed here, and here, better government policies can boost labor productivity and therefore boost economic growth as well.  Here is a brief summary of what needs to be done:

  • Decrease regulation: the Dodd-Frank Act and Affordable Care Act, for example, are hampering growth by increasing the inefficiency of the financial and healthcare sectors of the economy.
  • Reform taxation: growth oriented taxation would have the lowest possible rates paid for by shrinking deductions.
  • Reform immigration: giving legal status to millions of illegal immigrants would turn them into far more productive citizens.

In other words, our severe slow growth predicament can be greatly ameliorated if we would adopt more sensible economic policies. It is a shame that this is so hard to do!

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Why Faster Economic Growth Is So Important II. Replacing Factory Jobs

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Populists such as Bernie Sanders and Donald Trump are doing so well in the 2016 presidential primaries because the middle class is suffering from the slow economic growth of the past 15 years.
Capture2My last post is based on the report of a typical victim.   Today’s post is based on an article by Eduardo Porter in yesterday’s New York Times discussing the loss of U.S. manufacturing jobs.  Says Mr. Porter:

  • Fifty years ago, 45,000 workers were employed in California to harvest 2.2 million tons of tomatoes. Now, with mechanization, it only requires 5000 workers to harvest 12 million tons.
  • In 1950, 24% of nonfarm jobs in the U.S. were in manufacturing. Today only 8.5% of nonfarm jobs are in manufacturing.
  • The same thing is true worldwide. Global employment in manufacturing is going down because productivity increases are exceeding increases in demand by significant amounts. The likelihood that we will get a manufacturing recovery is close to nil.
  • The U.S. has a trade surplus in manufacturing with the 20 countries with which it has trade agreements (which does not include China). We have an overall annual trade surplus in services of more than $200 billion.

In other words, an attempt to recover or save manufacturing jobs with smarter trade policies is simply impractical and will likely do more harm than good. What should be done instead is to:

  • Definitely do a better job of helping displaced manufacturing workers with Trade Adjustment Assistance and smarter job retraining programs.
  • Adopt policies to speed up overall economic growth from the anemic 2.1% annual growth rate since the end of the Great Recession in June 2009. Faster growth such as the 3.5% annual average from 1971 – 2001 will do wonders in creating more jobs and better paying jobs. For how to do this see an earlier post.

Our very serious economic problems can be solved if policy makers (and presidential candidates) would only get serious about it!

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Why Faster Economic Growth Is So Important

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The main topic of this blog is addressing America’s two biggest problems which are:

  • Slow economic growth, averaging 2.1% since the end of the Great Recession in June 2009, and
  • Massive public (on which we pay interest) debt, now 74% of GDP and growing, the highest it has been since right after WWII.

In a recent post, “Is America’s Middle Class Really Shrinking?” I showed that middle-income households did very well from 1971 – 2001, while our economy was growing on average at a rate of 3.5% per year.  Middle-income households then stood still from 2001 – 2008, and have lost ground since.
Capture2A vivid example of what has happened in the last 15 years is provided in the article, “My Secret Shame” in the current issue of the Atlantic magazine.  The author describes his own financial hardships supplemented with pertinent data from several sources:

  • In 2013, 47% of Americans responded to a survey that they would have great difficulty coming up with $400 to handle an emergency.
  • The inflation-adjusted net worth of a typical (median level) household in 2003 was $87,992. By 2013 it had declined to $54,500, a 38% drop.
  • A family headed by someone of prime working age, between 24 and 55 years old, and with an income of $50,000, could continue to self-fund its current consumption, if the family were to lose its current income, presuming the liquidation of all financial assets except home equity, for only six days!

As this data clearly shows, many Americans are in a precarious financial situation! The solution to this very serious problem is to speed up the growth of the American economy.  I have discussed how to do this over and over again in previous posts, i.e. here and here.
It is both surprising and disturbing that the presidential candidates are either ignoring this problem or making unserious proposals for how to solve it.

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