Not only is Washington politics already hyper-partisan, but both parties are continuing to move to even greater extremes, see here and here.
Here are two examples of extreme positions now being espoused by major elements of one or the other of the two parties:
Single payer healthcare. The failure of the GOP effort to repeal the Affordable Care Act this past summer means that (the goal of) universal healthcare is here to stay. The ACA expands access to healthcare but does nothing to control costs. Single payer, Medicare for All, would control costs but then we end up with socialized medicine. The only way to establish a cost efficient free market healthcare system is to remove, or at least limit, the tax exemption for employer provided care and to set up high deductible catastrophic care supplemented by health savings accounts to pay for routine expenses. This would compel everyone to pay close attention to the cost of their own healthcare.
Tax cuts instead of tax reform. Tax reform, i.e. lowering both corporate and individual tax rates, paid for by closing loopholes and shrinking deductions, is an excellent way to speed up economic growth and thereby create more and better paying jobs. But it is imperative to do this in a revenue neutral manner, i.e. without increasing our annual deficits. Our debt (the public part on which we pay interest) now stands at 77% of GDP, the highest it has been since the end of WWII, and is predicted by the Congressional Budget Office to keep getting larger without major changes in public policy.
Conclusion. The U.S. badly needs a more cost efficient healthcare system and a simpler and more efficient tax system. But there are right ways and wrong ways to do both of these things. Single payer healthcare and (unpaid for) tax rate cuts are the wrong way to proceed. In each case, no action at all is much better than getting it wrong.
Income inequality is a hot political issue today and I have frequently discussed it on this blog. In particular, the chart just below shows that income inequality is only slightly worse since 1979, after government transfers and federal taxes are taken into account.
The AEI scholar, Mark Perry, has analyzed the 2016 annual report from the Census Bureau on “Income and Poverty in the United States” and points out the very strong correlation between income inequality and household demographics.
The mean number of earners per household increases steadily from a low of .43 in the lowest income households to 2.04 in the top income households.
The marital status of householders. The share of married-couple households is only 17.3% in the bottom income quintile and then increases steadily to 76.5% for the top income quintile.
The age of householders. In the lowest income quintile only 42.4% of households included individuals in the prime earning years of ages 35-64, while 69.9% of households in the top quintile include individuals in this group.
The work status of householders. Only 18% of the lowest earning quintile households included an adult who was working full time, as compared to 77.7% of top earning households.
The education of householders. Only 14.6% of lowest earning households had a family member with a college degree and this percentage rose steadily to 64% for top earning households.
Conclusion. Household demographics are very highly correlated with household income. Specifically, high-income households have a greater average number of income-earners than households in the lower-income quintiles. Individuals in high-income quintiles are far more likely to be well-educated, married, working full-time and in their prime working years. It is also true that individuals and households can and do move up and down the income quintiles as these key demographic variables change.
As I have discussed previously, the evidence for global warming is overwhelming. I had hoped that President Trump would publicly recognize this scientific reality and decide to stay in the Paris Climate Agreement. Nevertheless, it will take more than three years for the U.S. to completely withdraw.
But in or out of the Paris Agreement, the best way for the U.S. to show leadership on this critical issue is to adopt a (revenue neutral) carbon tax. The American Enterprise Institute has just issued a comprehensive report on the desirability and feasibility of doing this.
Here is the gist of the AEI argument:
$40 per ton is often taken to be the social cost of carbon in the atmosphere. A carbon tax at this level would raise the cost of gasoline by 36 cents per gallon.
A carbon tax is a consumption tax. Taxing consumption rather than income promotes economic growth. The revenue neutral offset would likely be an income tax such as the payroll tax or corporate income tax.
A carbon tax need not disadvantage the U.S. globally since a border adjustment tax could be imposed on imports from countries without a carbon price regime.
Replacing arbitrary regulations. The primary carbon-reduction regulations currently in effect are the 1) Corporate Average Fuel Economy (CAFE) standards for vehicles and 2) Clean Power Plan which limits power-sector carbon emissions at the state level. Leaving carbon abatement decisions to carbon producers is far more efficient than leaving it up to regulators.
Growing public acceptance. 84% of registered voters, including 72% of Republicans, support actions to accelerate the development and use of clean energy. Even 49% of conservative Republicans say that “Americans will make major changes to their way of life to address climate change.”
Conclusion. For the U.S. to adopt a carbon tax would be an even stronger statement of world leadership than participating in the Paris Agreement.
The Affordable Care Act expands healthcare access in the U.S. but does nothing to control its costs. With its current majorities in Congress as well as holding the presidency, the GOP now owns the healthcare insurance crisis. If the GOP doesn’t get it fixed right, it is almost inevitable that we’ll eventually end up with a single-payer system such as universal Medicare.
I have previously discussed one good way to fix the bill recently passed by the Republican House of Representatives. But today I will take a more general approach proposed by Thomas Miller from the American Enterprise Institute. Mr. Miller says that a replacement for the ACA should emphasize:
Private markets rather than a bureaucratic system.
Positive incentives to obtain and maintain affordable coverage instead of mandates and ever-growing regulations to buy what you don’t want.
Decentralized decision making by patients, their representatives and state and local officials.
Lower taxes, higher value choices and clearer rewards for performing better, working harder and acting more responsibly.
Better targeted subsidies that will ensure generous protection of our most vulnerable Americans.
General principles such as these will end both the individual and employer mandates and allow average Americans a greater choice in how they want to spend their resources to protect and enhance their health.
Conclusion. The ACA has taken us closer to the goal of universal healthcare for all Americans and there can be no retreat from this standard. But much better cost control can be achieved and this is what fixing the ACA should focus on. A free market system for healthcare will work if it is set up in a fair and responsible manner.
Donald Trump was elected President because of strong support from blue-collar workers in the battleground states such as Wisconsin, Michigan, Pennsylvania and Ohio. The American Enterprise Institute scholar, Nicholas Eberstadt, has explained clearly why this happened. It is largely a result of a slowdown in economic growth in recent years which has hit blue-collar workers especially hard.
Can this recent slow growth trend be reversed? The economist, Edward Lazear, has a positive answer to this question in today’s Wall Street Journal. According to Mr. Lazear:
3% growth is the long term norm. The annual growth rate in the 30 years preceding the 2007 recession was 3.1%. It has averaged just 2% annually since the end of the recession in June 2009.
GDP growth is the sum of two components: growth in productivity and in labor hours. Historically productivity has grown at a rate of about 2% per year and labor at about 1%.
Nonfarm labor productivity rose by a total of 7% between 2009 and 2016 which amounts to only 1% per year. It rose 18% between 2001 and 2008 or 2.3% per year.
Both President Trump and the House Republicans advocate business expensing (immediate tax write-offs for new investment) as an important part of tax reform. It has been estimated that just this one change in policy will induce an increase in GDP of from 5% to 9% over ten years. This would raise GDP from the current 2% annual growth to between 2.5% and 2.9% annually.
The Social Security Administration predicts no increase in the U.S. population age 20 to age 64 between 2020 and 2030.
But note that the labor participation rate fell during the recession by 2% among Americans between ages 25 and 54, the prime working age. Two drivers of this loss of workers are: 1) a large increase of the disability rolls and 2) the fact that the ACA will likely reduce the number of hours worked by about 2% between 2017 and 2024.
Eliminating burdensome business regulations will also help significantly.
Conclusion. There is clearly much that can be done to speed up both labor productivity and the number of hours worked by Americans. President Trump and the Republican Congress have a good shot at increasing economic growth to 3% annually.
The American Enterprise Institute’s Nicholas Eberstadt has performed a valuable national service with two recent publications: “Men without Work” and “Our Miserable 21st Century” These works lay out in great detail what has gone wrong in our country in the past 16 years:
Overall household wealth has doubled as a result of a surging stock market fed by the Federal Reserve policy of quantitative easing.
The recovery from the crash of 2008 has been singularly slow and weak compared to the 1947 – 2007 trend line.
The work rate for Americans aged 20 and older has declined by 4% from 66% to 62%.
Half of all prime working age male labor-force dropouts take opioid medication on a daily basis paid for by Medicaid. 57% of this population class is collecting disability benefits.
17 million male ex-prisoners and convicted felons are now in our midst and largely unable to find the employment which would lead to productive lives.
Here is Mr. Eberstadt’s initial prescription for addressing this very serious social problem:
Revitalize American business and its job-generating capacities. According to the Brooking Institution’s Ian Hathaway and Robert Litan, “business deaths now exceed business births for the first time in the thirty-plus-year history of our data.”
Reducing the immense and perverse disincentives against male work embedded in our social welfare programs. For example, U.S. disability programs are subject to widespread abuse and gaming. Social welfare programs should emphasize a “work first” principle emphasizing training and education, job placement, and tax credits, etc.
Drawing men with a criminal record back into productive work life. Note that the huge increase in America’s ex-prisoner and ex-felon population in recent years coincides with a dramatic drop in rates for both violent crime and property crime. This suggests that former criminals do not pose a continuing danger to society.
Conclusion. For the future prosperity and social cohesion of our country addressing this problem should be a very high priority. Let’s hope that President Trump gets the message.
Everyone is trying to figure out what Donald Trump is all about and I am no exception. My last two posts, here and here, compare his positives and negatives and what he is doing well so far and also not so well.
The American Enterprise Institute’s political economist, Nicholas Eberstadt, has an article in the current issue of Commentary, “Our Miserable 21st Century,” describing very cogently the economic and social conditions which have led to the election of Donald Trump as President of the United States. Says Mr. Eberstadt:
The year 2000 marks a grim historical milestone for our nation. The warning lights have been flashing for 15 years and now these signals are impossible to ignore.
First of all, the estimated net worth of American households has more than doubled between 2000 and 2016, from $44 trillion to $88 trillion (see below).
At the same time the recovery from the crash of 2008 has been singularly slow and weak. By late 2016 per capita output was just 4% higher than in late 2007. In effect the American economy has suffered something close to a lost decade (see below).
Then there is the employment situation. Between 2000 and 2016 the work rate for Americans aged 20 and older declined by 4% from 66% to 62%. To put this in different words: if our nation’s work rate today were back up to its start-of-the-century highs, 10 million more Americans would currently have paying jobs (see below).
Half of all prime working-age male labor-force dropouts (totaling 7 million men) take opioid medication on a daily basis, typically paid for by Medicaid. In fact, 53% of prime-age males not in the labor force are enrolled in Medicaid.
Of the entire un-working prime-age male Anglo population in 2013, 57% were collecting disability benefits.
Currently 17 million men in America have a felony conviction somewhere in there past. This amounts to one of every eight adult males in the country. It is difficult for felons to find work and therefore to become productive members of society.
Concludes Mr. Eberstadt, “The abstraction of inequality doesn’t matter a lot to ordinary Americans. The reality of economic insecurity does. The Great American Escalator is broken – and it badly needs to be fixed. With the election of 2016, Americans within the bubble (of affluence) finally learned that the 21st century has gotten off to a very bad start in America. Welcome to the reality. We have a lot of work to do together to turn this around.”