Making the World Safe for Democracy

 

One hundred years ago, in 1917, President Woodrow Wilson asked Congress to declare war on Germany “to make the world safe for democracy.”  Pax Americana, the relative peace and stability which has lasted since the end of WWII, is due to the overwhelming economic and military strength of the United States.
The Chinese population at 1.3 billion is four times as large as the U.S. population.  Its economy is growing much faster than ours and will surpass ours in 10 or 15 years.  There is little, if anything, the U.S. can do to prevent this from happening.


China is a non-free, non-democratic, totalitarian state.  We hope that it will remain peaceful towards the U.S. as its economic strength, and eventually also its military strength, surpasses our own, but it would be risky to assume this for sure.
What then should we do to prepare for the day when we are no longer the dominant power on earth?  In my opinion, our best preparation for this inevitable day is to make democracy as strong as possible around the world.


In this respect, look at the latest report from Freedom House which measures the state of freedom around the world on an annual basis.

  • In the past 30 years the percentage of free countries has increased from 34% to 45% and the percentage of non-free countries has declined from 32% to 25%.
  • In the past 10 years, the number of free countries has declined from 47% to 45% while the number of non-free countries has increased from 23% to 25%. In other words democratic progress has been stagnant for the past ten years.

Conclusion.  Democracies rarely go to war against one another.  Other democratic countries are our best friends and so we want more of them.  But there is nothing simple or obvious in figuring out how to accomplish this.

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The Origins of Trumpism IV. The White Working Class

 

The U.S. political and cultural establishment is constantly bemoaning the election of Donald Trump as President and is convinced that it will hurt our country. He was elected because of his strong support from blue-collar workers.
I’m not so much afraid that he’ll be a disaster as that he will be ineffective in addressing our country’s many urgent problems.  Primarily I am trying to understand, here and here, why he was elected and what this means for the future.


Here is another clue.  The book “White Working Class: overcoming class cluelessness in America,” by Joan Williams, describes clearly who constitutes the white working class (WWC) and how it differs fundamentally from the class of professional and managerial elites (PME). Here is a brief outline of her argument:

  • Definitions. The top 1% (in income) are the wealthy, the top 20% are PME, the next 50% are the working class and the bottom 30% are the poor. The median income of a working class family is $75,000 while the median income of a poor family is $22,500.
  • The PME are order givers and value sophistication, boundary breaking and creativity. The WWC are order takers and value stability and dependability.
  • Why does the working class resent the poor? The poor get welfare benefits while the working-class may have rigid, highly supervised jobs which are often boring and repetitive which makes their work psychologically challenging. They do not receive welfare.
  • Why does the working class resent professionals? Elites seek out novelty, irony and polish while the working class seeks out stability and sincerity. The WWC often see the PMC as phony.
  • Is the working class sexist? For working class women becoming a homemaker signals a rise in status. For PME women this entails a fall in status.
  • Don’t they understand that manufacturing jobs aren’t coming back? This is more or less true but too pessimistic. There is a severe shortage for Americans trained for middle-skill jobs requiring some post-secondary education but not a four year college degree.

Conclusion.  This description should be understood as a general overview of the differences between the WWC and the PME (with many individual and particular exceptions). As such it helps in explaining why Donald Trump received such a large share of the WWC vote.  

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The Democrats and the Economy

 

The Democratic Party is starting to wake up. Donald Trump was elected President because he was able to appeal to blue-collar workers who feel left behind in today’s high tech global economy.
Yesterday the Democratic Congressional leadership held a rally in rural Berryville, Virginia to lay out an economic program to try to appeal to these very same Trump voters.


Such a program, would, for example:

  • Increase people’s pay by lifting the national minimum wage to $15 per hour and also creating jobs with a $1 trillion infrastructure plan.
  • Reduce their everyday expenses by providing paid family and sick leave as well as breaking up large monopolies which can raise prices without restraint. Also empowering Medicare to negotiate lower drug prices for older Americans.
  • Provide workers with the tools they need for the 21st century economy by giving employers, especially small businesses, a large tax credit to train workers for unfilled jobs.

Unfortunately, there are problems with most of these ideas. In Seattle even a $13 per hour minimum wage has significantly reduced minimum wage work. The national minimum wage should be raised but to a more modest level.
There is no demonstrated need for a large-scale publicly funded infrastructure program and it would add hugely to the national debt.
A jobs program to maintain the employment rate for prime-age workers without a bachelor’s degree at the 2000 level of 79% and at a living wage of $15 per hour plus benefits would cost $158 billion per year.


Conclusion. Yes, blue-collar workers are hurting.  Yes, some of the ideas suggested above would help them get ahead.  But many would also increase already large deficit spending and therefore add dramatically to the national debt.  What is needed is a combination of free market initiatives and carefully targeted government programs.  Stay tuned!

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Can Economic Prospects for the Middle Class Be Improved?

 

Donald Trump was elected President last fall because of his surprising and unexpected strength with blue-collar workers. These folks have had a rough time in the 21st century economy: high unemployment, unstable marriages, opioid addition, lower longevity, etc.

My last post discusses a new book by Richard Reeves which makes the case that the real inequality in the U.S. is between the top 20% (the upper middle class) and the lower 80%.  The upper middle class are mostly the well-educated professionals who benefit from the modern high-tech global economy.  Mr. Reeves believes that this elite group is so entrenched with privileges as to be self-perpetuating. His response to this situation is to try to expand opportunity more widely by, for example:

  • Reducing unintended pregnancies through better contraception by making LARCs (long-acting reversible contraceptives) more widely available to free more young women from the burden of unwanted children.
  • Expanding access to early childhood education including home visitation to give a big preschool boost especially to kids from low-income families.
  • Getting better teachers for unlucky kids by giving teachers a substantial bonus to teach in high poverty schools. This will attract better teachers to the more challenging schools.
  • Funding college more fairly. Free college is a terrible idea. It would just be yet another boondoggle for the upper middle class. All student debt repayment should be income-based. The status of vocational postsecondary learning (at community colleges) should be elevated.

Conclusion. The idea here is not to pull down those who are well off but rather to give more people the opportunity to succeed in the modern economy. Of course, faster economic growth is another way to create more and better paying jobs.  But faster economic growth has its own limitations and, at any rate, is difficult to achieve with a rapidly aging population.  I will return to this topic soon!

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Is the U.S. Military Big Enough?

 

An Op Ed in the Wall Street Journal recently by former vice president Dick Cheney and his daughter Liz, “Congress and Obama Depleted the Military,” argues that the Trump budget request of $603 billion for Defense for the 2017 – 2018 FY is not nearly enough to build an adequate U.S. military force.  Furthermore, the Cheneys argue that the Budget Control Act of 2011, which set up the ten year sequestration plan for discretionary budget items, should be repealed.
According to the Cheneys, “Providing for the defense of America is the most sacred constitutional obligation of the U.S. Congress.  If Congress fails in this, no balanced budget, no health-care reform, no tax reform, no entitlement reform will matter.”


The Cheneys are correct that the defense of America is the highest priority of our federal government.  But fiscal responsibility is also a high priority, especially when our public debt (on which we pay interest) now stands at 77% of GDP, the largest it has been since the end of WWII, and rising.
So the real question is: how large should our defense budget be to provide for a secure defense of our national interests?  A recent article in the New York Times  points out that:

  • Our current defense budget of $596 billion is more than the total of the next seven highest defense budgets combined.
  • We have 1.3 million active duty troops with 200,000 deployed in more than 170 countries.
  • The U.S. has 2,200 fighter jets, 193 of which are fifth generation, F-35 Lightening II aircraft.
  • The U.S. Navy has 275 surface ships and submarines, including 11 aircraft carriers, far more than any other single country.

Conclusion. The current U.S. military force is large and diversified. In fact there is strong evidence that it could operate more efficiently.  It is more than adequate to defend our crucial national interests.

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The Urgent Need to Lower the Cost of American Healthcare

 

Our country faces many serious problems (terrorism, global warming, income inequality, etc.) but the most serious of all in the long run is our rapidly growing national debt and the inability (unwillingness?) of our national leaders to address it.
Furthermore, the fundamental driver of our debt problem is the cost of healthcare, public and private.  The Affordable Care Act, established in 2010, expands access to healthcare but does not address the cost problem (see chart below).


I have previously discussed how to repair the ACA to make it more cost efficient, by, for example, repealing both the individual and employer mandates, establishing a universal (and refundable) tax credit for catastrophic care, migrating Medicare and Medicaid to the new universal system, etc.
But there are lots of other things, less political contentious, that we can do as well.  I have just read an astonishing new book, “An American Sickness” by Elizabeth Rosenthal, an MD who works as a healthcare journalist, which provides a vivid and compelling description of our overly expensive and dysfunctional healthcare system. According to Ms. Rosenthal here are a few of the things we could do collectively to get costs under much better control:

  • Reform malpractice insurance to place limits on noneconomic damages.
  • Breakup oversize hospital conglomerates so that hospitals don’t have such huge monopoly pricing power.
  • State insurance regulators could do a much better job of enforcing transparency and accuracy for provider directories, in-network and out-network fees, etc.
  • Insurance companies could do a better job on reference (i.e. standardized) pricing, encouraging bundling of services, tying the size of co-payments to a procedure’s medical worth and urgency, etc.
  • Congress should permit Medicare to negotiate national drug prices.

Conclusion. Repairing the ACA, as is now being done in Congress, will go a long way towards much better cost control of healthcare. But there are many other common sense steps which can also be taken towards this goal.

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What Should the Federal Government Do about Infrastructure?

 

President Trump has proposed spending $1 trillion over the next decade on public and private investment in infrastructure. The CATO Institute’s Ryan Bourne has just published an excellent analysis of the whole issue.  Here are the highlights:

  • Any new federal spending must take into account that federal public debt now stands at 77% of GDP and is likely to keep rising given the demographic pressures on entitlement spending. This means that the long-term outlook for public finances is dire.
  • With a current low unemployment rate of 4.4% and a high of 6 million job openings, the economy does not need more government stimulus at the present time.

  • Bridge quality has improved substantially since 1990 (see chart) although roadway congestion has become more acute (second chart). Rail and transit systems appear to be the main areas with observable deterioration.

  • The difference between state highways (which are in good condition), local roads (which are in fair condition) and transit systems (which are in poor condition) is simple: state road maintenance is paid almost entirely out of user fees (gasoline taxes), local road maintenance is paid for by a combination of taxes and user fees (motor vehicle registrations and parking meters) while transit maintenance is paid for almost entirely out of taxes.

The above indicates that the following policy framework should be followed:

  • Privatize areas where government is not needed such as airports, air traffic control systems and railways (Amtrak).
  • Localize decision making as far as possible such as decentralizing responsibility for transportation infrastructure back to the states.
  • Remove payment barriers for charging users. This could reduce the cost of capital investment required for highway systems by 30%.
  • Level the playing field for private sector funding. Currently interest income received for investing in municipal bonds is tax free which is not the case for private debt.

Conclusion. “Rather than imposing further costs on taxpayers, the Trump Administration should prioritize localizing decision making, removing regulatory barriers to private investment, encouraging use of user fees and removing tax exemptions for public investment.”

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The Growing Skills Gap

 

Donald Trump was elected President because of strong blue-collar support. Many blue collar workers feel left out of the American dream because of stagnant incomes and/or job loss.
At the same time there is a huge national focus on the high cost of college and the associated huge student loan debt.  But student loan debt is a fixable problem and is not what is holding our economy back.
Take a look at the two charts below from recent issues of the Wall Street Journal, here  and here.


The first chart shows the last four growth cycles and how wages eventually tick up as unemployment continues to fall.  Missing this time is hardly any growth in wages towards the end of the cycle (Of course, the current cycle won’t be over until we have the next recession).


The second chart shows that there are now more job openings (6 million) than job hires for the first time since 2001.  Furthermore there were only a low of 138,000 jobs added in May with an average of 121,000 per month for the past three months.  This suggests that employers are having a hard time finding qualified workers.
Obviously, what is badly needed is a renewed emphasis on workforce training.  Interestingly enough, the Business Roundtable has just issued an extensive report  detailing what many major corporations are doing to close America’s skills gap.

Conclusion. Lots of people, certainly including President Trump and the Republican Congress, would like to see faster economic growth.  Clearly there are practical and useful ways to achieve this and many people are already trying to make it happen.

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Why the U.S. Should Adopt a (Revenue Neutral) Carbon Tax

 

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.

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An Emerging Democratic Agenda

 

I am just as personally embarrassed by President Donald Trump as most other people I know. He is rude towards other world leaders and especially our own allies.  His destructive behavior endangers even his own policy initiatives.  He was elected by blue-collar workers who feel left behind in today’s global economy.  But how can he possibly lead others in implementing policies to help even his most avid supporters?


What is the Democratic Party doing about this?  First of all, they are trying to stop acting so elitist toward the working class.  But more fundamentally a new progressive social agenda apparently is emerging, here and here.  It has many attractive features but there is one big thing missing, namely fiscal responsibility:

  • A “public apprenticeship” jobs program. The idea here is to maintain the employment rate for prime-age workers without a bachelor’s degree at the 2000 level of 79%. This would require the creation of 4.4 million jobs, ideally at a living wage of $15 per hour plus Social Security and Medicare payroll taxes, and therefore at a wage of $36,000 per year. This would cost $158 billion per year.
  • A universal child allowance of $250 per month. This would cost $190 billion per year, although half could be offset by consolidating less-efficient existing programs. This would cut child poverty by 40%.
  • An expansion of the earned income tax credit. A family of four making $40,000 per year would get a tax credit of $6000 instead of the current credit of $2000. This would cost $1 trillion over ten years. The idea here is extra motivation to hold a job.

 

Conclusion. Who is opposed to creating millions of new living wage jobs to put the unemployed and underemployed back to work? Such a program would give our economy a huge boost.  Who is opposed to cutting child poverty in half (or doing even better)?  But how in the world would we make room for such new programs in the federal budget?  With $500 billion annual deficit spending already, we need to curtail federal spending, not increase it.

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