Category Archives: economic opportunity

Economic Growth and Economic Justice II. What Needs to Happen

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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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How to Get Our Country Back On Track

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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

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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

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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).
    Capture31
  • 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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“A Better Way” for Donald Trump to Make His Case

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In my last post, “Donald Trump’s Best Chance to Win in November,” I said that the best way for Mr. Trump to broaden his appeal beyond working-class whites and to have any chance of winning the presidential election is for him to endorse the reform plan, “A Better Way,”  recently developed by the Republican House of Representatives.
Capture9Here is a brief and positive summary of the Trump platform so far:

 

  • His tax plan is highly pro-growth and will not cost nearly as much as the previously advertised $10 trillion over a decade.
  • He supports legal immigration and simply wants to solve the illegal immigration problem, one way or another.
  • He is not opposed to foreign trade per se but wants to negotiate, from a position of strength, with countries that manipulate their currencies, steal intellectual property or compel companies to disclose trade secrets as a condition of entering their markets.

His policy proposals so described are completely compatible with the House’s “A Better Way” reform plan whose planks are:

 

  • Poverty. Reward work. Tailor benefits to people’s needs. Improve skills and schools. Demand results.
  • National Security. Defeat the terrorists. Protect the homeland. Defend freedom.
  • The economy. Regulate smarter. End bailouts and cronyism. Put students and workers first.
  • The constitution. Make government more accountable and more representative. Restore constitutional checks on spending.
  • Health Care. More choices and lower costs. Real protections and peace of mind. Cutting edge cures and treatments. A stronger Medicare.
  • Tax reform. Simplicity and fairness. Jobs and growth.

 

These guiding principles are being fleshed out into complete policy documents. They do indeed represent a better way forward for our national government.  Donald Trump could do far worse than to endorse this comprehensive reform plan developed by the House Republicans.  It would show that he is serious about “Making America Great Again.”

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Can the U.S. Economy Do Better VI. Does the President Matter?

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My last five posts have discussed several different aspects of the question, “Can the U.S. Economy Do Better?”  Our economy has been doing especially poorly since the end of the Great Recession seven years ago (see the chart below).  Many people claim that the President doesn’t really have all that much control over the economy.
Capture6 Here is what the2016 presidential candidates are saying on economic policy so far:

  • Hillary Clinton. She wants national paid family leave, a national minimum wage increase and more government spending on infrastructure projects. She would raise taxes by about $100 billion per year to pay for these initiatives. She is opposed to the Trans Pacific Partnership to expand trade with 11 other Pacific Rim countries.
  • Donald Trump. His top priorities are trade and immigration policy. Would he be able to successfully address China’s currency manipulation without starting a trade war? How would he be able to round up and deport millions of illegal immigrants without destroying millions of jobs and thereby crippling many businesses? His plan to slash tax rates would boost the economy but also add trillions of dollars to the debt.

As I have discussed over and over again on this blog, see, for example, here and here,  there are several fundamental policy changes needed to make our economy grow faster and create more and better paying jobs.  We need to:

  • Make it easier to start a small business by simplifying regulations at all levels.
  • Lower tax rates and simplify the tax code, paid for by shrinking deductions and closing loopholes.
  • Respond to globalization and new technology by helping its victims rather than blocking progress.

Our two presidential candidates are appealing to the fears of the voters rather than to their hopes and aspirations. Neither of them is espousing policies which will help the economy really grow in a healthy way.

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Can the U.S. Economy Do Better? III. Yes, and Here’s How

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Almost everyone agrees that faster economic growth would be beneficial. It would provide more new jobs as well as bigger raises for the already employed.  It would also bring in more tax revenue which would help greatly to shrink our large annual spending deficits.
My last two posts, here and here, present first an optimistic and then a very pessimistic view about the chances of speeding up growth.  In particular, the banker Satyajit Das, thinks that even the fairly anemic 2.1% average growth of the past few years will be impossible to maintain in the years ahead.
My next few posts will focus on exploring several specific ways in which growth could be speeded up.  First of all, I refer to a report from Babson College, “The State of Small Business 2016” which is the basis of a recent article in USA Today by Warren Buffett and others, “To grow the economy, grow small business.”
Capture1Key points are:

  • Capital. Securing financing remains a major barrier to growth. Small business owners overwhelmingly rely on banks for funding but banks face more stringent regulatory requirements. The median funding request for small businesses is $100,000 but businesses typically secure jus $40,500.
  • Regulation. The typical small business owner spends 200 hours per year on regulatory compliance. Streamlining approval processes would help immensely.
  • Skills. 70% of small businesses find it difficult to hire qualified employees. Furthermore there are currently 5.8 million job openings in the U.S. This reflects a mismatch between company needs and applicants’ skills. School districts and community colleges could help alleviate this problem.
  • Technology. Accessing better technology is perceived as costly and requires skills that many businesses lack. Cybersecurity and protecting intellectual property are two significant areas of exposure for small business, which 40% are ill-prepared to address.

Small businesses create over 60% of net new private-sector jobs. Helping them expand is one of the best ways to support economic growth.

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Why Is the U.S. Economy Growing So Slowly?

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The U.S. economy has only been growing at the rate of 2.1% since the end of the Great Recession in June 2009, almost seven years ago. Such a slow rate of growth means millions of unemployed and underemployed workers and only small salary raises for tens of millions of others.
Capture5The New York Times economic journalist, Eduardo Porter, observes that we have “A Growth Rate Weighted Down by Inaction.”  He points out that:

  • Our economy is adversely affected by the gradual shrinkage of the work force as a share of population as baby boomers retire and the one time surge of women into the workforce in the 20th century has ended.
  • A second factor is a persistent decline in productivity growth over the last dozen years.
  • A pessimistic forecast by the Economic Cycle Research Institute foresees growth of only 1% per year for the next five years. The Congressional Budget Office projects more optimistic productivity growth at 1.5% per year, which added to workforce growth of .5% per year, would amount to total growth of 2% per year for the next ten years.

Mr. Porter goes on to say that there are concrete reasons why productivity growth is so slow:

  • Hiring is growing faster than capital investment. This is because most job growth in the last decade has been in (low productivity) services instead of (high productivity) manufacturing.
  • Too many restrictions on educated immigrants. Relaxing these restrictions would increase entrepreneurship.
  • Too many onerous regulations.
  • Under training of skilled workers. We need more vocational and career education.

Many people, including myself, have pointed out ways to alleviate these problems and speed up economic growth, for example see here. It is most unfortunate that our dysfunctional national leadership cannot figure out how to work together to get this done.

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Five Ways to Destroy the U.S. Economy

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For seven years following the end of the Great Recession in June 2009 our economy has been plodding along at an average growth rate of 2.1% per year, much more slowly than after a typical recession. Instead of talking about how to fix the mess we are in, most of the presidential candidates are proposing measures which will make things even worse.
Capture0The economists Glenn Hubbard and Tim Kane, writing in the Weekly Standard, take a novel approach.  Rather than suggesting ways of speeding up economic growth, which may no longer be of interest to voters in primary elections, they list their “Top Five Ways to Destroy the U.S. Economy” which are to:

  • Restrict Trade. Free exchange is the cornerstone of a growing economy. Raising tariffs will restrict imports, cause inflation and harm American consumers. Killing the Trans Pacific Partnership, stopping the Keystone Pipeline, and curtailing legal immigration would just be a start.
  • Make Work Illegal. Raising the minimum wage to $15 per hour will do lasting harm to underprivileged teenagers who are denied a first job. In the U.S. today over 30% of jobs require a government license compared to only 5% in the 1950s. This creeping need for permission keeps untold millions out of the labor force.
  • Tax People More Unequally. Why should the tax code be riddled with exemptions, deductions and credits which primarily benefit the wealthy? Why do we insist on taxing corporations at 35% when all other advanced economies are competing to lower their corporate taxes? This simply drives jobs overseas.
  • Stop Innovation. Why does Washington continue to favor big banks and bail out old established industries? A generation ago 1 in 6 companies were startups: today 1 in 12 are.
  • Increase the Debt. Debt has more than doubled in the past decade, yet interest payments in 2015 were the same as in 2006, because rates are artificially low. How long can this last? A sure path to a slow growth future is this kind of fiscal profligacy. Just call it investment and hope that most people will ignore the problem.

As Mr. Hubbard and Mr. Kane conclude, “The good news about this policy agenda is that it requires no sacrifices. If Washington just stays on course we will reap the whirlwind.”

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Inequality and Growth

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In my opinion the two most serious problems facing the U.S. at the present time are 1) stagnant growth and 2) massive debt. As discussed by William Galston in yesterday’s Wall Street Journal, the U.S. presidential campaign is now beginning to address the first of these issues.  For example:

  • Bernie Sanders rejects “growth for the sake of growth” and says that “our economic goals have to be redistributing a significant amount back from the top 1%.”
  • Hillary Clinton says that we have to build a “growth and fairness” economy. “We can’t create enough jobs and new businesses without more growth, and we can’t build strong families and support our consumer economy without more fairness.”
  • Jeb Bush argues that there is nothing wrong with household incomes that 4% growth wouldn’t solve.

The readers of this blog will have little difficulty figuring out where I stand on this continuum of economic values. My view is illustrated by the chart just below from the World Bank which shows that countries with the fastest growing economies also have the least amount of inequality.
CaptureLet’s be more specific. Mrs. Clinton would achieve more fairness by:

  • Raising the minimum wage.
  • Guaranteeing child care and other family friendly policies.
  • Encouraging profit sharing.
  • Encouraging more innovation by increasing public investment in infrastructure, broadband, energy and scientific research.

These are attractive goals but how do we achieve them? The best way to raise wages is to get the economy growing so much faster that it creates a labor shortage. Then businesses will be competing for labor and wages will go up. This is exactly what is happening in Omaha NE where I live and the unemployment rate is down to 2.9% (2.6% in Nebraska as a whole).
Furthermore, in a tight labor market, businesses will automatically try harder to keep good employees by providing extra benefits such as childcare and profit sharing.
Public investment in infrastructure, etc. will be more easily affordable with the higher tax revenue generated by a faster growing economy.
Conclusion: faster growth is the best way to create a more fair and equal society!