Life in America: Opportunity or Inequality?

Posted on June 28, 2015 by jackheidel

How bad is income inequality in the U.S. and what should be done about it? This is a question of great current interest with many different points of view. The chart just below from the Congressional Budget Office shows the extent of income inequality and also shows that it has gotten somewhat worse between 1979 and 2007, just before the onset of the Great Recession. And we know that our stagnant economy has made it worse yet between 2007 and the present.
But now look at the chart (below) from the U.S. Census Bureau of the distribution of household income in the U.S. in 2012. The chart shows the median income of about $51,000 and then has a very long tail to the right. This means that there are large numbers of households making large incomes of all different sizes. It makes no particular sense to distinguish the top 1% (who make $380,000 or more) from the bottom 99%.
The point is that there is huge opportunity in the U.S. to do very well financially whether or not one makes it into the top 1%.
In an earlier post, “Growth vs Equitable Growth,” I reported on the agenda of the Washington Center for Equitable Growth, a progressive think tank. In order to achieve “equitable growth” they advocate:

Improving educational outcomes at all levels, pre-K – 12+.
Running a “high pressure” economy in order to tighten the labor market.
Expand the Earned Income Tax Credit especially for workers without children.

I couldn’t agree more. This is an excellent plan to create more prosperity for more people. It’s much more plausible in the U.S. to make poor people richer than to make rich people poorer.

Can the U.S. Economy Grow Faster?

Posted on June 25, 2015 by jackheidel

The U.S. economy has grown at the rate of only 2.2% since the end of the Great Recession in June 2009. This is much slower than the average rate of growth of 3% for the past fifty years.
The economists Glenn Hubbard and Kevin Warsh, writing in the Wall Street Journal, “How the U.S. Can Return to 4% Growth,” point out that:

After the severe recession of 1973-1975, the economy grew at a 3.6% annual real rate during the 23 quarters that followed.
After the deep recession of 1981-1982, real GDP growth averaged 4.8% in the next 23 quarters.
Recent research has shown that steep recoveries typically follow financial crises.

The economist John Taylor, also writing in the WSJ, “A Recovery Waiting to Be Liberated,” explains that the growth of the economy, i.e. growth of GDP, equals employment growth plus productivity growth. He then points out that:

Population is growing about 1% per year. However the labor-force participation rate has fallen every year of the recovery, from 66% in 2008 to 62.9% in 2014. Even turning this around slightly would increase employment growth above the 1% figure coming from population growth alone.
Although productivity growth has hovered around 1% for the past five years, this is less than half of the 2.5% average over the past 20 years.

Given the strong headwinds of globalization and ever new technology affecting the U.S. economy, we especially need new policies such as:

Fundamental tax reform directed at increasing the incentives for work and driving investment in productive assets.
Regulatory reform that balances economic benefits and costs (e.g. lightening the burdens of Obamacare and Dodd-Frank).
Trade agreements to break down barriers to open global markets.
Education policies to prepare all young people for productive careers.

In other words, rather than accepting our current situation as “the new normal” or as unalterable “secular stagnation,” we need to “give growth a chance”!

Letting Young People Drift and the Liberal Disconnect

Posted on June 23, 2015 by jackheidel

The New York Times had an excellent lead editorial on Sunday, “The Cost of Letting Young People Drift,” describing how 5.5 million young Americans, ages 16 – 24, are neither working nor in school. “At a time when the economy is requiring workers to have higher levels of skills, one in seven of America’s young adults can’t even get started.”
The NYT editorial is based on new research, “Zeroing In on Place and Race: youth disconnection in America’s cities” performed by Measure of America. The report points out that the problem has gotten much worse since the Great Recession in 2008, as shown in the chart below.
It also breaks down the youth disconnection rate by state. For example, Nebraska (7.6%), North Dakota (7.9%) and Iowa (8.8%) have the lowest percentages, while Mississippi (18.5%), West Virginia (19.6%) and Louisiana (19.8%) have the highest percentages (as shown below).
But also look at the latest “Unemployment Rates for States” published by the Bureau of Labor Statistics. There is a very close connection between a state’s unemployment rate and its youth disconnection rate, as shown below. In other words, one of the best ways to keep young people connected is to give them a better chance of finding a job.
But it requires faster economic growth to provide more jobs. Just yesterday the NYT had an editorial, “Obstacles to Economic Growth,” lamenting our very slow rate of economic growth of about 2.2% for the past six years. According to the NYT, “What’s needed most is public and private investment in the economy sufficient to support strong growth and rising productivity.” The editorial then goes on to berate Congress for being more interested in budget cuts than in new spending programs to stimulate the economy. According to the NYT, “the pathway to prosperity is clear for leaders who will dare to take it.”
The NYT thus recognizes the need for more private investment to stimulate the economy but has no apparent interest in policy measures to encourage it. How can a news organization as sophisticated as the NYT be so passionate about wanting to improve society and so clueless about the best way to do it?

Light at the End of the Tunnel

Posted on June 14, 2015 by jackheidel

The Bureau of Labor Statistics has just reported very good news in its monthly Job Openings and Labor Turnover Survey. For the first time since 2000, the number of job openings now exceeds the number of new hires, as shown in the chart just below. This means that wages will start to grow faster as employers have to compete harder for new workers.
This is an early indication that our economy will likely soon resume a faster rate of growth than its average of 2.3% since the end of the Great Recession in June of 2009. There will be many benefits. The unemployment rate should continue to keep heading downward from its current level of 5.5%. More unemployed and underemployed workers will be able to find satisfactory jobs. The labor participation rate should start to head back up from its historically low current state.
The Federal Reserve is likely to begin raising short term interest rates sooner rather than later in order to keep inflation in check before it has a chance to heat up. In other words we may be breaking out of the ambiguous state of slow-growth secular stagnation in which we have been trapped for six years.
All of this is very good news as long as Congress realizes that it is now even more urgent than ever to put our massive public debt of $13 trillion on a downward path, compared to the total economy, before interest rates begin to rise substantially and eat us alive with interest payments on this huge debt.
In this regard the Budget Plan approved by Congress just this Spring, which will lead to a balanced budget over ten years, looks very attractive indeed. It will be a mammoth job to achieve such a milestone in fiscal restraint, but doing so will lead to a more secure and prosperous future for all Americans.

What’s Wrong With U.S. Manufacturing Policy

Posted on June 7, 2015 by jackheidel

The Brookings Institution’s Martin Baily has an informative article, “what’s wrong with U.S. manufacturing policy,” in a recent issue of the Wall Street Journal.
Says Mr. Baily, “Of the 5.7 million manufacturing jobs that disappeared in the 2000s, only 870,000 have returned so far, according to the Bureau of Labor Statistics, and the claim that millions more are coming back is nothing more than a myth. … If the U.S. is serious about promoting a recovery in manufacturing, it will stop measuring success by the number of people employed in the sector and start supporting the technological advancements that are making factories more productive, competitive and innovative.”
According to Mr. Baily the technological shift taking place is powered by three developments:

The internet of things in which machines are able to communicate with each other.
Advanced manufacturing including 3-D printing, new materials and more accurate digital logistics.
Distributed innovation in which crowdsourcing is used to find solutions to technical challenges more quickly.

Such advances must be supported even if it means putting robots in place of workers. It follows that:

there will still be good jobs in manufacturing for those with big data, programming and other specialized skills
a shortage of qualified workers means we want highly qualified immigrants to stay in the U.S. instead of returning to their home countries
propping up uncompetitive jobs with tax breaks and subsidies won’t work for long and just interferes with introducing a lower corporate tax rate to drive new investment
new trade agreements strengthen U.S. manufacturing by reducing foreign barriers to U.S. goods
Displaced workers Should be supported with retraining programs especially through community colleges
Government can further help with infrastructure improvements and expedited permitting processes.

Conclusion: U.S. manufacturing will continue to thrive in a rapidly changing environment as long as it is properly supported with intelligent government policies.

Fixing the Debt: Creating a Greater Sense of Urgency

Posted on June 2, 2015 by jackheidel

As I have mentioned before, I am a volunteer for the nonpartisan Washington D.C. think tank “Fix the Debt.” As such I give presentations to civic organizations in the Omaha area about our debt problem and what we can and should do about it. I have now given four such talks and have another one coming up next week.

What is most difficult for me is to try to convey a sense of urgency about addressing this problem. Most people deplore deficit spending in a general sense but not nearly enough people think that dealing with it should take priority over current presumably pressing spending needs such as, for example, depletion of the highway trust fund, expanding military spending, or improving early childhood education, just to be specific.
So here is how I am going to try to create a greater sense of urgency. Several months ago I had a post entitled, “The Slow Growth Fiscal Trap We’re Now In” in which I said (in brief summary) that our current economic condition of

slow growth means
low inflation which leads to
low interest rates which in turn leads to
massive debt which eventually leads to a new and much more severe
fiscal crisis.

This is the predicament we’re now in. Do we consciously maintain a slow growth economy, with all the unemployment pain and stagnant wages which this entails, or do we speed things up, enabling more people to go back to work, and also deal with the higher inflation and interest rates which this will entail?
Faster growth may well eventually come on its own anyway and then we’ll be forced to fix our fiscal problems at a time when they’ll be much worse than they are now.
Isn’t it clear that it is much better to act now in a responsible manner rather than to wait and have to react hurridly later on when the problem is much worse?

Growth vs Equitable Growth

Posted on May 29, 2015 by jackheidel

There is a huge debate going on in political and policy circles between the advocates of increasing economic growth and the advocates of increasing income equality. I generally argue that the best way to increase income equality is to increase economic growth overall.
I have just come across a series of articles from the Nov/Dec 2014 issue of the American Monthly, “American Life: an investor’s guide ,” which are sponsored by the Washington Center for Equitable Growth, a progressive Think Tank. The fact that this group is focused on equitable growth, rather than the narrower goal of income equality, is of great interest to me.
They advocate a number of things that I agree with such as:

The incredible importance of early childhood healthcare and education.
Improving K-12 education, especially in low-income areas.
Providing much more vocational education and apprenticeship programs.
Running a “high pressure” economy in order to tighten the labor market. They recognize that lower unemployment leads to higher wages (see above).
Expand the Earned Income Tax Credit especially for workers without children.

The authors want to “pressurize” the economy with a more stimulative fiscal policy which means increased deficit spending, a very bad idea in my opinion. Much better ways to boost the economy are with policies such as tax reform, trade expansion, immigration reform and regulatory relaxation.
Yes, there is a high degree of income inequality and yes, it’s getting worse over time. But, as Warren Buffett says, the poor are not poor because the rich are rich. The best way to help the poor is to make them more productive. That is exactly the purpose of the policies enumerated above.

Economics Is a National Security Issue

Posted on May 27, 2015 by jackheidel

“Speak softly and carry a big stick” President Theodore Roosevelt, 1900

There are many foreign policy issues facing the U.S. at the present time:

Russia is stirring up unrest in Eastern Europe by threatening the independence of Moldova and the Ukraine as well as several NATO countries.
The Middle East is in turmoil stirred up by ISIS and the effort to prevent Iran from acquiring nuclear weapons.
China is working hard to assert dominance in East Asia.

The world is more stable when there is a single dominant power such as the U.S.. If the U.S. retreats from this role, it is inevitable that regional powers such as Russia, China and Iran will assert themselves to take up the slack. We don’t need to act as the world’s policeman every time a problem flares up around the world. But democracies are better actors on the world stage than are autocracies. Therefore the whole world benefits when the U.S. projects power and interest.
A column in today’s Wall Street Journal by Michele Flournoy and Richard Fontaine makes a very important point, namely that “Economic Growth Is a National Security Issue.” In other words, the stronger is our economy, the more influence and respect we will enjoy in our relations with other countries. Especially they recommend emphasizing:

Trade and Investment. It looks like Congress will give the President trade-promotion authority for negotiating a Trans-Pacific Partnership free-trade agreement. Indian, African and European trade agreements could then follow.
Energy. The ban on the export of crude oil and natural gas should be lifted.
International Institutions. A Chinese-led Asian Infrastructure Investment Bank will be much less of a threat to the U.S. one a TPP trade agreement goes into effect.

Ms. Flournoy and Mr. Fontaine are focused here on international economic growth. But all economic growth, domestic as well as international, will make the U.S. stronger and therefore better able to project power.
Conclusion: we need to focus more strongly on economic growth in all of its guises!

Are Economics and Social Progress Related to Each Other?

Posted on May 25, 2015 by jackheidel

“Your (last post) is one of the most active and positive that I have read of yours. You do put your time to where your values are. Those of us who see you as too economically focused and ourselves as more humanely concerned need to act as well. Thanks for your focus and attention.”
from a reader of my blog

I am a fiscal conservative and a social moderate. The primary reason I write this blog is because I am so concerned about the fiscal recklessness of our national leaders. Our national debt is much too large and still growing too fast. We need to either cut spending or raise taxes (or do both).
But I am also a social progressive. I voted in favor of Nebraska raising its minimum wage last fall. I support gay marriage as a civil right. I support having Nebraska expand Medicaid in order to cover more low-income people (where Medicaid needs to be fixed is at the federal level).
There is in fact a very close connection between having a sound economy and social progress. As the above chart shows, the U.S. ranks very high in both GDP per person and social progress. All of the countries which are most socially progressive also have sound economies. This is not a coincidence.
My last post talks about what society can do to help blacks improve their socio-economic status. This includes improving educational opportunity in the inner city. But improved educational opportunity needs to be closely directed toward improved economic opportunity. This means, for example, having good jobs available for new high school and community college graduates. But this, in turn, means having strong economic growth with intelligent tax and regulatory policies to encourage entrepreneurship and business expansion.
In short, a sound economy is essential for social progress.

Why Is U.S. Productivity Growth Declining?

Posted on May 17, 2015 by jackheidel

The economist Alan Blinder has just reported, “The Mystery of Declining Productivity Growth” that U.S. productivity growth has fallen dramatically in the last few years. “The healthy 2.6% a year from 1995-2010 has since been an anemic 0.4%. What’s scary is that we don’t know why.”
The economists Edward Prescott and Lee Ohanian believe the productivity slowdown is caused by a corresponding slowdown in new startups (as illustrated by the above chart). They point out, for example, that:

The creation rate of new businesses in 2011 was 30% lower than the average rate of the 1980s.
New startups are critical for growth since many of today’s heavyweights will decline as new businesses take their place. For example, only half of the Fortune 500 firms in 1995 remained on that list in 2010.
Startups in high technology have also declined since 2000 even though there is no slowdown in the development of new technology.

Consistent with the recommendations of James Bessen in a recent post of mine, “Learning by Doing,” Messrs. Prescott and Ohanian recommend policy changes such as:

Better training, plus immigration reform, to produce more skilled workers.
Streamlining regulations that raise cost, especially for small businesses.
Tax reform to reduce marginal tax rates.
Reforming Dodd-Frank to make it easier for small businesses to obtain loans from main street banks.

In today’s New York Times, the economist Tyler Cowen wonders whether our economy is in the midst of a “Great Reset.” “Perhaps the most crucial issue is whether economies will return to normal conditions of steady growth, or whether we are witnessing a fundamental transformation” to a less productive economy.
Here’s another way to put it: shall we attempt to adopt better pro-growth policies or shall we just give in to the status quo and accept that we can’t do any better? Are we optimists or are we pessimists?

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility

Category Archives: economic growth