Economic Growth and Economic Justice II. What Needs to Happen

 

In today’s fractious political climate, it is at least widely recognized that skilled blue-collar workers are often suffering from stagnant income growth and/or job loss. Unfortunately, the political parties often disagree on how to address this major problem.  There are several different perspectives from which to view the overall situation:

  • Slow economic growth, averaging only 2% per year since the end of the Great Recession in June 2009. From 1950 – 2000 the economy grew at over 3% per year and produced a prosperous American middle class. Now, with strong headwinds from globalization and constantly improving technology, we badly need faster overall economic growth to provide more and better paying middle class jobs.
  • Income inequality. There is increasing income inequality in the U.S. even though the top 25% or so are doing very well. But raising taxes on the wealthy could slow down economic growth by discouraging new investment. In addition, redistribution of tax revenue to lower income Americans will not give them much of a boost.

  • Income insecurity. This is a huge problem for the many blue-collar workers who are struggling to make ends meet. There are a number of specific government actions which could alleviate this enormous societal problem.
  • Economic justice. Poverty in the U.S. is widely distributed geographically, with almost as much in rural and small town areas as in big cities. This could provide an opportunity for Republicans and Democrats to work together to address a very challenging problem.

Conclusion. Our country has very serious economic and fiscal problems which are not being addressed because of severe partisan infighting in Congress. But slow economic growth, income insecurity and poverty affect a wide variety of people with different political outlooks.  It’s inexcusable to allow partisan bickering to get in the way of finding workable solutions.

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The Need for Regulatory Reform

 

One of my favorite topics is the need for faster economic growth in order to create more jobs and better paying jobs and also to bring in more tax revenue to help shrink our rapidly accumulating national debt.
My last post discusses vivid evidence from the economist John Taylor that slow productivity growth is one of the main culprits holding back our economy.  He suggests several ways of speeding up productivity growth, one of which is regulatory reform.

capture74Two previous posts, here and here, show the increasing size of the regulatory burden as well as how it could be eased significantly for main street banks, for example, by simplifying the Dodd-Frank Act.
A recent study from the Mercatus Center at George Mason University gives a good overall summary of the economic costs of excessive regulation.  In particular:

  • Deterring growth. By distorting the investment choices that lead to innovation, regulation has caused a considerable drag on the economy, amounting to an average reduction of 0.8% in the annual growth rate of the US GDP. This has resulted in an economy which is $4 trillion smaller in 2012 than it could have been without such regulatory accumulation.
  • Increasing prices. Increases in the total volume of regulations are strongly associated with higher prices. This affects lower-income households harder than higher-income households.
  • Distortion of labor market. Regulation adds to costs, increasing prices for regulated goods and services and therefore reducing the amounts being bought and sold. As production declines, so does the demand for workers engaged in production. In addition, more regulation leads to a shift of workers from production to regulatory compliance, reducing overall economic efficiency.
  • Decline in competition. Existing firms benefit from regulation because it deters new market entrants, thereby reducing the number of small firms, which are responsible for most new hiring.

Conclusion. Federal regulations have accumulated over many decades, resulting in a system of duplicative, obsolete, conflicting and even contradictory rules. The consequences to the workers, consumers and job creators who drive economic growth and prosperity are considerable.

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How to Get Our Country Back On Track

 

In my last two posts, here and here, I have said that I like some of Donald Trump’s policy ideas but he is too personally repugnant for me to support and vote for.  Hillary Clinton is morally less objectionable than Mr. Trump but her economic policy proposals are unlikely to have much success.
capture66The best hope for our country is to keep the Republicans in control of the House of Representatives.  They have put together an excellent plan, “A Better Way,” for reviving the American economy and boosting the American spirit.  Its main principles are:

  • Poverty. Every capable person is expected to work or prepare for work. Poverty fighting programs will be directed to get people back on their feet. The poor will have more opportunities to succeed at every stage.
  • National Security. It is a top priority to defeat radical Islamic extremism. We must restore American influence, advance free enterprise and expand the community of free nations.
  • The Economy. We need to take a smarter approach that cuts down on needless regulations while making the rules we do need more efficient, especially for our small businesses.
  • The Constitution. Agencies and bureaucracies should be subject to more scrutiny from Congress. Give Congress more say – and the final word – over what is being spent and why it is being spent.
  • Health Care. Individuals should have more control and more choices in order to improve quality and lower costs. No one should have to worry about having coverage taken away regardless of age, income or medical conditions.
  • Tax Reform. The tax code should be simpler, fairer and flatter while remaining progressive. It should be constructed to create jobs, raise wages and expand opportunity for all Americans.

Conclusion. These principles are widely supported by almost all Republicans in Congress and are more important than specific differences on immigration, trade, or entitlement policy.  Their serious consideration depends upon returning a Republican controlled House in 2017.

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Why Slow Economic Growth Is So Dangerous

 

In my last post I said that Donald Trump won the first presidential debate, in spite of his uneven temperament, because he was more correct on the issues.
One of the biggest problems our country faces is slow economic growth, averaging only 2% per year since the end of the Great Recession in June 2009.  This compares with an average rate of growth of 3.5% from 1950 – 2000.
In fact, even the recent job growth we have seen is now leveling off.
capture65Such slow growth is very dangerous long term for many reasons:

  • Massive Debt. Our public debt, on which we pay interest, is now 75% of GDP, the highest it has been since right after WWII. CBO predicts that this percentage will keep getting steadily worse without major policy changes. Faster growth means more tax revenue and therefore smaller annual deficits. It is imperative to put our accumulating debt on a downward path.
  • The Need for More Jobs and Better Paying Jobs. The best way to achieve broad based prosperity, and minimize populist disruption, is to create a tight job market where employers have to compete for employees. This is accomplished by making the economy grow faster.
  • Keeping Ahead of China. In 2009 China’s economy was 1/3 the size of ours; now it is 60% as big. In other words, China will soon surpass us economically if we are unable to grow faster. This would risk losing our worldwide lead in such crucial areas as new technology and financial depth, as well as our superpower status.
  • Reducing Student Loan Debt. The best way we can help former students pay off their college debt is to have good jobs waiting for them when they leave school. The faster our economic growth, the better we can do this.

Conclusion. Both our own individual success in life as well as the overall status of our nation depends upon the availability of opportunity. This is why economic growth is so important and why it is dangerous to let it lag.

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Rising Prosperity around the World

 

My last post responds to a reader who is pessimistic about the future of our country and in fact of the whole world.  He thinks that the environment is deteriorating, that rapid economic growth is unsustainable and that there is too much income inequality between high and low wage earners.
My response to him is to refer to the recent book, “The Rational Optimist: how prosperity evolves” by Matt Ridley.  Mr. Ridley persuasively argues that not only has the human race made huge strides in recent times but that this progress is intrinsic to evolved human nature and is likely to continue indefinitely:

  • Since 1800 the population of the world has multiplied six times, yet average life expectancy has more than doubled and real income has risen more than nine times.
  • Between 1955 and 2005, the average human on earth earned nearly three times as much money (adjusted for inflation), ate one-third more calories of food, and could expect to live one-third longer, all this while world population doubled.
  • The rich have got richer but the poor have done even better. For example, the Chinese are ten times as rich, one-third as fecund, and 28 years longer-lived than fifty years ago. (Also see the above chart).
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  • The spread of IQ scores has been shrinking steadily – because the low scores have been catching up with the high ones. This is known as the Flynn effect.
  • The four most basic human needs – food, clothing, fuel and shelter – have grown markedly cheaper during the past two centuries.
  • The most notorious robber barons of the late 19th century: Cornelius Vanderbilt, John D. Rockefeller, and Andrew Carnegie, got rich by making things cheaper.
  • Exchange and specialization, not self-sufficiency, is the route to prosperity.

Conclusion. As long as human beings are free to engage in exchange (trade) and specialization (acquisition of skills), prosperity will continue to evolve and human life will become better and better.

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What Should Brexit Mean for the U.S.?

 

My two main sources of information for this blog are the New York Times and the Wall Street Journal. In particular I am always eager to read Eduardo Porter’s weekly column, Economic Scene, in the NYT.  He frames the issues very well, even though I often disagree with him on the details.
Capture17Yesterday’s column, “In Brexit and Trump, a Populist Farewell to Laissez-Faire Capitalism,” points out the similarities in the white working class support for both Brexit and for Donald Trump.  It then goes on to advocate for what the economist Larry Summers refers to vaguely as “responsible nationalism.”
I couldn’t agree more with Mr. Porter and Mr. Summers that we need policies to boost the fortunes of blue collar workers, and here are some good ways to do it:

  • Tax reform to put more disposable income in the pockets of middle- and lower-income workers, to support job creators, and to provide a big incentive for American multinational companies to bring their earnings back home for reinvestment.
  • Immigration Reform. The key here is a rigorous Guest Worker Visa program to provide immigrant employees for businesses who are unable to hire enough qualified domestic workers. At the same time, a strict eVerify enforcement system would also be established to catch illegal immigrants and deport them.
  • Free and Fair Trade. Free trade among nations has lifted hundreds of millions of people out of poverty worldwide, as well as benefitting all Americans with lower prices. What we have failed to do is to adequately help displaced workers retrain for the millions of high skilled jobs available in the U.S. which go unfilled for lack of qualified applicants.

Conclusion. Our country faces severe problems. If we don’t get deficit spending under greater control, we risk a new and more severe financial crisis.  If we can’t create more and better paying jobs for the modestly educated, we will be faced with Trump-like demagogic candidates for president every four years. It will be a huge challenge for us to extricate ourselves from this mess in a peaceful manner.

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How to End America’s Slow-Growth Tailspin

 

My last three posts, here, here, and here address America’s slow economic growth for the past 15 years and why it is such a serious problem.  Today I begin to discuss how we can turn this around.
In today’s Wall Street Journal, the economist John Cochrane has a very informative Op Ed, “Ending America’s Slow-Growth Tailspin” which describes a clear path to speed up economic growth.  Says Mr. Cochrane:

  • From 1950 – 2000 the U.S. economy grew at an average rate of 3.5% annually. Since 2000 it has grown at only half this rate, 1.76% annually. By 2008 the average American was more than three times better off than in 1952. Real GDP per person grew from $16,000 to $49,000 during this time period.
  • There are three main theories as to why growth is slowing down.
  1. We’ve run out of new ideas.  Get used to it and start fighting over the shrinking pie.
  2. The culprit is “secular stagnation” which the Federal Reserve is unsuccessfully trying to overcome with low interest rates and quantitative easing. The only other solution is vast new stimulus spending.
  3. The U.S. economy is overrun by an out-of-control and increasingly politicized regulatory state. America is middle-aged and overweight. The solution is to eat better and exercise.
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  • The first two camps are doubtful that better policies will produce faster growth. But the examples of North Korea vs South Korea and East Germany vs West Germany show that government policy matters for economic growth. In fact Mr. Cochrane’s chart (above) shows how a country’s “ease of doing business” score, compiled by the World Bank, correlates with increased average income. Even though the U.S. is near the top by this measure, there is still plenty of room for improvement.

In my next post I will delineate specifically how to streamline our oversized regulatory state. In the meantime, take a look at Mr. Cochrane’s article in today’s WSJ.

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