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.
It is well known that the cost of higher education is increasing much faster than inflation and even faster than the cost of healthcare. In turn, student debt is also rising rapidly and creating a financial burden for lots of young people.
The New York Times writer, David Leonhardt, has an article in Sunday’s paper showing that most states have reduced their funding of higher education since 2009, some quite dramatically. This is not surprising since higher ed has to compete with K-12 education, Medicaid, prison operations, public employee pensions, etc. and states have to balance their budgets. But it means that the cost of tuition will continue to rise even faster than usual.
However, except for a few specific fields such as computer programming, high school STEM teaching and nursing, there is no overall shortage of college graduates to keep our economy going. In fact there is a surplus of college graduates in many non-technical areas.
But there is a growing labor shortage more generally, first of all for construction and agriculture workers which can be filled by unskilled immigrants. Furthermore, there are now millions of job openings for middle skill workers which are going unfilled for lack of qualified applicants. Training for such jobs as emergency medical technician, robot-heavy factory worker, and wind turbine technician is where states and localities should invest more public resources.
The huge demand for middle- and high-skill blue collar workers provides an opportunity to put laid-off middle-aged (Trump voting!) factory workers back to work in high paying middle class jobs. A little ingenuity at the local and state level should be able to figure out how to do this. Conclusion. A college education is not the only path to a productive and satisfying middle class life. In fact U.S. economic growth is being held back by a lack of qualified middle- and high-skill workers.
President Trump’s budget for 2018 presents a plan to achieve a balanced federal budget in ten years, by 2027. This is a highly desirable goal but there is much skepticism about whether or not his budget is realistic, see here and here.
My thoughts on this important matter are:
Fiscal restraint is a common sense necessity, and is not austerity. Our public debt (on which we pay interest) now stands at 77% of GDP, the highest since WWII, and will continue to increase without major changes in public policy. Right now the debt is almost “free” money because interest rates are so low. As interest rates inevitably go up in the near future, interest payments on the debt will skyrocket and become a huge drain on our federal budget and make annual deficits even worse than they already are.
3% annual GDP growth, as assumed in the Trump budget, is almost certainly too optimistic. However the Trump Administration is on track to achieve significant deregulation and averaging 2.5% growth over the next ten years is doable.
Insufficient entitlement reform is a big drawback for the budget. It will be very difficult, essentially impossible, to achieve and sustain a balanced budget without modifying Social Security and Medicare to make them self-financing. Turning Medicaid into a block grant program to the states would finally put Medicaid on a sensible budget.
Requiring able-bodied welfare recipients to work is a good idea and is the basis for cutbacks in social welfare programs.
The Departments of State, Interior, Education and Justice should be able to absorb cutbacks and operate more efficiently.
Conclusion. There are many good initiatives built into the Trump budget. Unfortunately there are also some invalid assumptions and glaring omissions. It does not represent a bona fide plan to balance the budget in ten years but at least it recognizes the importance of doing so.
The newly released Trump budget for Fiscal Year 2018 claims that it will lead to a balanced budget in ten years. This is a highly desirable goal. However the projected $4.5 trillion in spending cutbacks for many popular programs, as well as the projected 3% GDP growth for the next ten years, are both unrealistically optimistic. Nevertheless, at least the Trump Administration is moving in the right direction.
Here is a good summary by Donald Marron in National Affairs of why it is so important to keep deficits and debt under control:
Prolonged deficits and mounting debt will undermine economic growth by interfering with investment in the private sector.
Prolonged deficits risk fueling inflation as the government lowers the value of the dollar by printing more of them.
High levels of debt held by foreign lenders put us at the mercy of foreign countries.
The growing debt exposes America to greater “rollover” risk with the increasing reliance on short term debt which frequently has to be rolled over.
Rising debt limits flexibility for increased spending in times of recession or other emergency. For example, when the Financial Crisis occurred in 2008, the debt level was just half of its current level. This meant the government could risk higher deficit spending in order to stimulate the economy.
Deficits have an unfortunate tendency to feed on themselves. Our current deficit level of approximately $500 billion per year is so large that it can only be significantly reduced with great pain. The only possible way to make deficit reduction politically feasible is to spread this pain widely amongst the public as shared sacrifice. This will be very hard to do.
Deficits and debt are grossly unfair to future generations who are stuck with servicing the debt and/or struggling to pay it down.
Conclusion. The Trump Administration recognizes the strong need to get deficits and debt under control. Unfortunately its current budget just submitted is not a realistic plan to get this done.
Both President Trump and the Republican Congress want the economy to grow faster than the slow 2% growth which we have experienced since the Great Recession ended in June 2009. The Congressional Budget Office predicts (see chart below) that growth will average just 1.8% over the next ten years under current policy.
Immigration reform, .3%, by increasing the number of workers.
Tax reform, .18%, if well designed. However, deficit-financed tax reform would ultimately harm growth.
Increase the Social Security retirement age by two years, .15%, by keeping people in the workforce longer.
Reduce deficits by $4 trillion over ten years, .1%. This is enough deficit reduction to put our debt on a sustainable, downward path.
Continue expanding energy production at the shale boom level, .09%.
Repeal of the Affordable Care Act, .08%, will keep more people in the workforce.
Ratifying the Trans Pacific Partnership, .01%, by increasing foreign trade.
Increasing public investment in infrastructure, education and research by $40 billion per year, .1%.
Note that all of these changes would increase growth by an estimated .83% of GDP per year. Added to the 1.8% base this yields a growth rate of 2.63%. Unfortunately, many of these reforms are unlikely to occur. On the other hand, various deregulatory actions being taken by the Trump administration are likely to increase growth by an unknown amount.
Conclusion. It is reasonable to anticipate that growth can and will be speeded up to about 2.5% of GDP per year under the Trump administration. Along with the tight labor market now developing (current unemployment rate of 4.4%), blue-collar and other middle class workers should continue to receive decent pay increases for the foreseeable future.
As I often remind the readers of this blog, the two main topics are what I consider to be America’s two biggest economic and fiscal problems:
Slow economic growth, averaging just 2% since the end of the Great Recession in June 2009. This means fewer new jobs and smaller raises.
Massive debt, now 77% of GDP for the public part on which we pay interest, the largest since the end of WWII and predicted by the CBO to keep getting worse. As interest rates rise from their currently unusually low levels, interest payments on the debt will skyrocket.
The first problem, slow growth, is being addressed by the Trump Administration with various deregulatory actions as well as likely tax reform action by Congress. Furthermore, the current low 4.4% unemployment rate means that the labor market is tightening on its own.
The second problem, massive debt, is much more worrisome for the future. Right now interest rates are so low that our entire debt is essentially “free” money. But every 1% increase will add nearly $150 billion per year in interest payments. And this continues indefinitely (and keeps getting worse with more debt) because debt is rarely if ever paid back, it is only rolled over! What are the likely outcomes of such an upward spiral in interest payments? There are two possibilities:
First, the unthinkable. We default on our debt. This would immediately end the role of the U.S. dollar as the international currency and end our superpower status. The fallout would be disastrous for world peace and stability.
Second, a huge tax increase. The only alternative to default will be a large tax increase just to keep afloat on interest payments. A likely new tax for this purpose is a consumption tax in the form of a value added tax.
Conclusion. It is extremely shortsighted to keep on delaying a necessary solution to our rapidly worsening debt problem. It’s going to be unpleasant to either cut back on spending or to raise taxes but the longer we delay action the more painful it will become in the end. Isn’t it obvious that we should get started immediately?
The annual shareholders meeting of Berkshire Hathaway Inc. was held this weekend in Omaha. More than 40,000 people attended. Yesterday CEO Warren Buffett and vice chairman Charles Munger held a five and one-half hour question and answer session for the attendees.
Says Mr. Buffett as reported by the Omaha World Herald:
“We’ve got a big appetite for wind and solar projects.” BH Energy “borrows at taxable rates and Nebraska in terms of wind is not that much different than Iowa. We’re selling electricity in Iowa at lower rates than exist in Nebraska (with public power).”
Should BH keep working with Brazilian investors 3G Capital, known for slashing jobs at companies it invests in? Replied Buffett, “The gains in this world have come from gains in productivity. … This is why we live so well. … Government can put in place policies and programs that help workers left behind by economic shifts.”
“Trade, export and import, massive trade, should be and is enormously beneficial to the U.S. and the world.”
Medical costs are the “tapeworm of American economic growth. … Corporate taxes aren’t crippling but medical costs continue to rise. … The problem seems to transcend political party.”
Conclusion. Just these few remarks, among many others from the meeting, touch on several broad economic themes which I discuss on this blog. Private enterprise is a powerful and efficient method of generating wealth for humanity. Government should intervene to help those hurt by progress. Renewable energy is profitable and here to stay. Healthcare costs have a significant effect on business growth and need to be controlled. Neither political party has a monopoly on the truth.