The Federal Reserve Cannot Revive the Economy by Itself

Posted on July 21, 2014 by jackheidel

The Great Recession caused by the financial crisis ended in June 2009. In the intervening five years the U.S. economy has grown at the anemic annual rate of 2.2%. In an attempt to speed up growth the Fed has injected $4 trillion into the economy and kept short term interest rates near zero during this time period. Fed Chair Janet Yellen recently gave her semiannual report to Congress and, according to the American Enterprise Institute’s John Makin, “Fed Chair Yellen puts on a brave face.” She said that “If economy performance is disappointing, then the future path of interest rates likely would be more accommodative than currently anticipated.”
Mr. Makin adds that “Eventually the realization will dawn that the only way to get the economy moving again is to work on the supply side. Specifically, that means undertaking measures to boost investment and produce a rising capital stock which will boost labor productivity, hiring, and GDP growth without inflation.” He suggests that three measures to boost capital spending are:

Enactment of accelerated depreciation provisions and investment tax credits.
A sharp reduction in the corporate tax rate from 35 to 15 percent to induce corporations to repatriate the $1.59 trillion in accumulated profits being held abroad.
A concerted White House-led effort to set a clear, less burdensome path for healthcare and other regulatory measures as a means to reduce investment dampening uncertainty.

I would add a fourth measure:

An across the board lowering of individual tax rates (offset by closing loopholes and deductions which primarily benefit the wealthy) in order to boost personal consumption which has been highly depressed due to stagnant wage growth and high unemployment.

In other words there are clear and straightforward measures which our national leaders can take to speed up the economy. ‘If there is a will, there’s a way’ and incumbents should be held responsible for inaction come the elections in November!

Does Economic Growth Depend on Healthcare Expansion?

Posted on June 30, 2014 by jackheidel

Even though economic growth is much too slow, it has been steadily increasing since the end of the Great Recession at a rate of about 2.2% per year. But our economy actually shrunk at a 2.9% rate in the first quarter of 2014. Healthcare spending decreased by 6.9% in the first quarter and therefore contributed to this overall drop in GNP.
The New York Times’ economic reporter, Neil Irwin, discusses the connection, ”Our Economic Growth Is a Mystery. Obamacare is the Reason.” in yesterday’s paper. Since healthcare makes up one-sixth of the economy, and the implementation of Obamacare is expanding the healthcare sector, it is not surprising that the economy stumbles if Obamacare stumbles.
But he continues “The United States also has the most expensive healthcare system in the world, without producing better health outcomes. If the nation succeeds in reducing health care costs while also getting coverage for more people, it would be a huge win for the country’s long term competitiveness. Overtime the dollars that aren’t being spent on overpriced or unneeded health services can go to other stuff which makes life better: houses, college education, restaurant meals and the like.”
Conclusion: we need to try all the harder to figure out how to grow the economy faster. The best single thing we can do about this is to implement fundamental tax reform whereby individual tax rates are cut across the board, paid for by closing many of the loopholes and deductions which primarily benefit the rich. The two thirds of taxpayers who do not itemize deductions will automatically receive a tax reduction in this way. Since they are middle and lower income wage earners, with largely stagnant incomes, they will tend to spend their tax savings, thereby boosting the economy.
The loopholes enjoyed by the wealthy are example of crony capitalism which both liberals and conservatives complain about. Closing these loopholes and other deductions is a very good way to lessen income inequality. Our leaders should be able to work together in this direction!

A Scarred U.S. Economy

Posted on June 12, 2014 by jackheidel

Today’s New York Times has an article “U.S. Economic Recovery Looks Distant as Growth Stalls”, summarizing the predominant view of economic experts that annual growth of the U.S. economy in the future is now expected to be only 2.1%, about two-thirds of the historical rate of 3%.
This is, of course, disappointing since it means continued stagnation of household incomes as well as high unemployment. Much of the projected decline in GDP growth is attributed to structural factors such as:

The number of Americans receiving disability benefits has increased significantly in recent years. Few of these people will ever return to work.
Fewer immigrants are arriving. There are now two million fewer people over the age of 16 than had been projected in 2007.
The birth rate has declined each year from 2007.
Government spending on public investment has fallen by 8% since the recession started. Corporate investment has been lackluster.
Fewer businesses are being created and existing businesses are spending less on research and development.
Rising income inequality results in “secular stagnation” whereby there is insufficient consumer spending to stimulate economic growth.

There are lots of head winds slowing down the economy. As the NYT article says, “for more than a century the pace of growth was reliably resilient, bouncing back after recessions like a car returning to its cruising speed after a roadblock.” Treasury Secretary Jacob Lew says that the government now expects annual growth to be permanently slower.
Should we resign ourselves to this pessimistic attitude or should we consider whether or not there is any practical and feasible alternative?
There is, in fact, an easy way to speed up growth. Broad-based tax reform would do it. By this I mean lowering tax rates across the board paid for by closing loopholes and shrinking the deductions which primarily benefit the wealthy. This would place more income in the hands of the two-thirds of taxpayers who do not itemize deductions. These are typically middle and lower income folks with stagnant incomes. They would spend their tax savings, thereby giving the economy a big boost.
This would also amount to redistribution from the rich to the poor, making us a more equal society in the process. It’s a win-win for our economy and for social harmony. What’s holding us back?

Raising America’s Pay II. How Can We Do It?

Posted on June 10, 2014 by jackheidel

My last post “Raising America’s Pay” addresses a new report from the Economic Policy Institute, “Raising America’s Pay: Why It’s Our Central Economic Policy Challenge”. Its starting point is the now generally accepted view that wages for the typical American worker have been flat ever since the early 1970s even though labor productivity has continued to rise steadily.
The EPI authors recognize that globalization and the growth of technology have contributed to wage stagnation even though they blame malign policy decisions as well. I do agree with them that the resulting increase in economic inequality is detrimental to America. I also agree with them that the way to address inequality is for wages to go up. The best way to accomplish this is to lower unemployment by increasing economic growth. This will happen when large numbers of consumers start spending more money, thereby increasing demand. Does this sound like a vicious circle? It need not be!
The above chart from the Wall Street Journal shows that the net worth of U.S. households has now more than recovered from the Great Recession. The problem is that most of this new wealth has gone to the people with the highest incomes who are more likely to save it. What we need to do is “redistribute” (gasp!) some of this vast sum of new wealth back to middle and lower income people who would be much more likely to spend it.
There is a straightforward way to do this. Broad based tax reform! Lower everyone’s tax rates paid for by closing loopholes and shrinking deductions which primarily benefit the wealthy. This will be a pure gain in income for the two thirds of Americans, about 80 million, who pay income taxes but do not itemize deductions, most of whom are in the lower and middle income brackets. These people are likely to spend most of their new income, thus giving the economy the big boost that it needs!
Our leaders in Washington should be able to figure this out!

Raising America’s Pay

Posted on June 8, 2014 by jackheidel

The Economic Policy Institute has just issued a provocative new report, “Raising America’s Pay: Why It’s Our Central Economic Policy Challenge”. It is based on the now widely accepted view, as summarized in the chart below, that wages for the typical (i.e. median, not average) American worker have been stagnant since the early 1970’s, even though productivity has continued to increase at its historical rate.
First of all, the authors make reasonable arguments that:

The slumping of hourly wage growth for the vast majority explains the overall trends in income inequality.
Wage stagnation stalls progress in reducing poverty.
Wages are the root of economic security for the vast majority. This includes the fact that Social Security benefits depend upon wage earnings before retirement.

Then they ask: “Why has wage growth faltered for the vast majority, and what can be done?” Here is where the report becomes controversial!

The authors do agree that globalization of markets and technological change have contributed to the wage growth slowdown but argue that this overlooks the impact of labor market and tax policy and business practices as follows:
Falling top tax rates have increased the income share of the top 1 percent.
The Federal Reserve has prioritized low rates of inflation over low rates of unemployment in recent decades and high unemployment suppresses wage growth.
The erosion of the inflation adjusted minimum wage and the share of the workforce represented by a union explain much of the entire rise of wage inequality over this time period.

The authors are completely correct that stagnant wages for American workers is a critical, even “central,” problem facing the economy at the present time. The question, of course, is how to address this problem most effectively. In my opinion, the authors have completely neglected to take into account how a faster rate of economic growth would contribute to a solution of the problem and how this could be accomplished. I will address this question in my next post in a couple of days.
They conclude by saying that this report is only the first in a multiyear research and public education initiative of the EPI. We have a lot to look forward to!

A Strong Country Requires a Strong Economy

Posted on June 3, 2014 by jackheidel

“Ukraine is a wake-up call for what a post-American world would look like” declares the foreign affairs expert Walter Russell Mead in an article “Putin Did Americans a Favor” (http://online.wsj.com/articles/walter-russell-mead-putin-did-americans-a-favor-1401662270) in yesterday’s Wall Street Journal.
“For those willing to see, the signs of what a post-American world would look like are easy to discern. We can look at Bashar Assad’s murderous campaign in Syria to see how Iran thinks power should be used. To see what Saudi Arabia thinks about human rights and liberal values, follow events in Egypt and Pakistan. China would become more aggressive in a post American world, and the chances of Sino-Japanese conflict would increase. … In Europe, only power keeps or can keep Russia from rebuilding its old empire.”
“Those who think American decline is inevitable must face a tragic truth: The eclipse of American power will be a disaster for our economic interests, for the values we cherish and, in the end, for our security at home. What stability, peace and legality now exist in the international system are there because the U.S., with important help from allies and partners, made great sacrifices to build and secure them.”
America’s decline is not inevitable but neither is our continued success. As much as anything else, it depends on the strength of our economic system. We need to give much more attention to making our economy grow faster. This will create more jobs and better jobs and thereby boost national morale. It will bring in more tax revenue for paying our bills. In addition, projecting national power is very expensive. We can and should continue to insist that our defense budget be lean and efficient. But there is a limit as to how far we can go in this direction. Ultimately defense spending will have to increase as a percentage of GNP. This can only be accomplished with a robust economy.
As I have repeated many times in my blog posts, the best strategy for making the economy grow faster is to encourage more consumer spending by lowering individual tax rates and to encourage more entrepreneurial activity by reducing tax rates on small business. Such tax changes can easily be paid for by closing loopholes and shrinking tax deductions for the wealthy. But there has to be a political will to do this.
Can this be accomplished? I don’t know but our future as a free and prosperous nation depends on it!

Immigration Reform Will Benefit Nebraska

Posted on June 1, 2014 by jackheidel

Today’s Omaha World Herald has an excellent article, “A Window on Immigration.” It points out that 2.46% of Nebraska residents as of the 2010 census were illegal immigrants. This works out to about 45,000 illegal immigrants in Nebraska today compared to just 3,000 as recently as 1980. This is really a shocking figure. It is roughly the same as the population of Nebraska’s fourth largest city (Grand Island) or Nebraska’s fifth largest county (Buffalo). Nebraska’s unemployment rate of 3.9% is really a labor shortage. It needs these 45,000 illegal immigrant workers!
Why is it so difficult for our national leaders to solve this problem? It’s crazy to think that we are going to round up 11 million illegals throughout the country and dump them into Mexico unless they are willing to “self-deport.” Amnesty and citizenship are bogus side issues. Here is the outline of a simple plan which would solve the problem:

Give all businesses a limited time period, perhaps six months or a year, to present a list of their current employees who are illegal. Everyone on this list without a criminal record would receive a guest worker visa along with all necessary legal papers. These papers would belong to the individual worker who could use them to change employment from one business to another.
Going forward, businesses would be authorized to hire additional foreign workers as needed who would automatically qualify for guest worker visas. Such visas would be granted in the country of origin thereby avoiding the need for illegal entry into the U.S.
As of a certain date in the near future, all businesses would be required to periodically demonstrate the legal status of all workers on their payroll. Penalties for non-compliance would be severe.
Guest workers would be eligible to apply for citizenship after a relatively lengthy period of time, perhaps five years or ten years.

Once an adequate guest worker visa program has been set up and is operating efficiently, allowing all businesses to hire as many foreign workers as they need, security on our southern border with Mexico would be no more of a problem than is security on our northern border with Canada.
In other words, illegal immigration is an economic problem, not a law enforcement problem. The way to solve this problem is to address it correctly!

Redistribution, Inequality and Growth

Posted on May 22, 2014 by jackheidel

Most people agree that income inequality and wealth inequality are increasing in the U.S. Likewise anyone who’s paying attention is aware of our slow rate of GDP growth, averaging 2.2% per year, since the end of the recession five years ago. Is there a connection between inequality and slow growth? Maybe!
First of all, it is important to note that income inequality in the past 30 years has been greatly offset by federal taxes and transfer programs as shown in the October 2011 chart (above) from the Congressional Budget Office.
Secondly, the Economist discusses this situation in the article “Inequality v growth”. The economists Jonathan Ostry, Andrew Berg and Charalambos Tasangarides have shown (see above chart) that a large amount of redistribution affects growth more negatively than a smaller amount of redistribution.
Economists generally agree that the recovery has been slowed down by a lack of demand by consumers for more goods. So the recovery should speed up as less affluent consumers feel secure enough to spend more money. Two things, to start with, can make this happen. One is a restoration of the housing market so that homeowners have more equity (which can be borrowed and spent). Another way to accomplish this is with government redistribution programs, such as food stamps and Medicaid, for low income people.
But there is an even better way to put money in the hands of people who will spend it, and at no cost to the government. I am talking about broad based tax reform, whereby tax rates are lowered for everyone, offset by closing tax loopholes and shrinking deductions, which primarily benefit the wealthy. For the two-thirds of taxpayers who do not itemize deductions, and who tend to be the less affluent, such a tax rate cut will put money in their pockets, most of which they will spend.
Such a tax program as this would be a direct shift of resources from the wealthy to everyone else, thereby lessening inequality. It would stimulate the economy, creating millions of new and higher paying jobs, and thereby increasing tax revenue and lowering the deficit. Win, win, win, win!

What Is the Best Way to Boost the Economy and Create More Jobs?

Posted on May 20, 2014 by jackheidel

The publication of two new books is causing a reevaluation of the financial rescue and its aftermath, e.g. “The Case Against the Bernanke-Obama Financial Rescue”. The two books are “Stress Test” by Timothy Geithner, former Treasury Secretary, and “House of Debt” by the economists Atif Mian and Amir Sufi.
Mr. Mian and Mr. Sufi maintain that the government’s response to the financial crisis should have focused less on saving the banking system and more on the problem of excessive household debt. They discovered in their research that, during the housing bubble, less affluent people were spending as much as 25 – 30 cents for every dollar of increase in housing equity. When the bubble burst, and housing prices started to fall, these borrowers cut way back on spending which caused many businesses to lay off employees. The authors propose setting up a government program to help borrowers decrease what they owe in underwater mortgages.
Five years after the end of the Great Recession it would still be very helpful to speed up our lagging economy. Here are three different possible ways to do this:

The Keynesians say the best way to stimulate the economy is with more government (deficit) spending. For example, spending several hundred billion dollars a year on infra-structure would create hundreds of thousands, if not millions, of new construction jobs. I think this is a good idea, but only if it’s paid for with a new tax (e.g. a carbon tax or a wealth tax).
The Mian/Sufi plan, as described above, would alleviate mortgage debt problems for millions of middle class homeowners who are still under water, encouraging them to spend more money which would in turn boost the economy. The problem is that the M/S plan creates a moral hazard for mortgage holders unless it’s paid for by mortgage insurance which would raise costs for borrowers.
Broad-based tax reform, with lower tax rates for everyone, paid for by closing loopholes and limiting tax deductions for the wealthy, would automatically put more income in the hands of the two-thirds of tax payers who do not itemize deductions. These middle class wage earners would tend to spend this extra money thereby boosting the economy.

The point is that there very definitely are ways to boost the economy, some better than others, and it should be a top priority of Congress and the President to get this done.

A Rescue That Worked But Left a Troubled Economy

Posted on May 13, 2014 by jackheidel

The occasion of the publication of Timothy Geithner’s book “Stress Test,” giving his version of the financial crisis, has led to a number of newspaper articles looking back at the Great Recession and its aftermath. The New York Times’ economics reporter David Leonhardt has such an analysis “A Rescue That Worked, But Left a Troubled Economy” in today’s NYT.
“The Great Depression created much of modern American government and reversed decades of rising inequality. Today, by contrast, incomes are rising at the top again, while still stagnant for most Americans. Wall Street is flourishing again.”
“The financial crisis offered an opportunity to change this dynamic. But the (Dodd-Frank) law seems unlikely to transform Wall Street, and the debate over finance’s huge role in today’s economy will now fall to others. Should the banks be broken up? Should the government tax wealth? Should the banks face higher taxes?”
In my opinion, the real problem is not our financial system but the strong headwinds which are slowing down the economy.

Globalization of markets which creates huge pressure for low operating costs.
Labor saving technology which also puts downward pressure on wages.
Women and immigrants having entered the labor market in huge numbers, and therefore greatly increasing the labor supply.

The loss of wealth in the Great Recession also means that even people with good jobs have less money to spend. What we sorely need is faster economic growth to create more jobs and higher paying jobs. How do we accomplish this?

The best way to boost the economy is with broad-based tax reform to achieve the lowest possible tax rates to put more money in the hands of the working people who are the most likely to spend it. Such lower rates can be offset by closing the myriad tax loopholes and at least shrinking, if not completely eliminating, tax deductions which primarily benefit the wealthy.
Lowering corporate tax rates, again offset by eliminating deductions, providing a huge incentive for American multinational companies to bring their profits back home for reinvestment or redistribution.

With millions of unemployed and underemployed workers, reviving our economy with a faster rate of growth should be one of the very top priorities of Congress and the President. Survey after survey show that this is what voters want. Why isn’t it happening?

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility

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