Category Archives: Economy

Is Voucher Really a Dirty Word?

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The current issue (May 25, 2013) of the Economist has an excellent article “Entitlements in America”, which tackles the broad issues of entitlement spending and health care inflation in America.  There are many aspects of this whole problem but let’s focus here on “Medicare, the hardest part of the budget”, as the Economist says and with which I totally agree.  We cannot get government spending under control, i.e. deficits on a steep downward path, until we figure out how to control the cost of Medicare.
The Economist makes some standard recommendations, such as increasing the eligibility age from 65 to 67 (as for Social Security) and raising premiums on the well-to-do (means testing).  These are good ideas but not large enough in scope to make a significant dent on the problem.  Somehow or other we need to convert Medicare from a defined benefit program (with no cap on expenses) to the same kind of limited defined contribution program which everyone else has through private insurance.  But how can we accomplish this within our political process?  Republican House Budget Chair Paul Ryan has taken an enormous amount of heat for proposing to make this switch with a premium support or “voucher” plan.  It is much too easy for Democrats to accuse him of trying to destroy Medicare when he’s really just trying to save it by making it financially sound.
The Economist proposes converting the Federal Employee Health Benefits program into a voucher system as an experiment to see if it saves money.  Right now FEHB offers unlimited benefits with federal employees paying 35% of the cost.  This makes FEHB open ended with no constraint on overall spending, which is exactly the problem with Medicare.  Each federal employee would have an annual health benefit amount and would have to decide on what kind of health insurance benefit to purchase with the fixed amount, supplementing with personal funds if desired.  If a voucher program for federal employees saves money for the federal government, as it undoubtedly would, then we could confidently convert Medicare to a similarly system.
We have to make big changes in our current Medicare program and here is an excellent suggestion for one possible way to do it!

Are Low Interest Rates Hurting the Economy?

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The former Chairwoman of the Federal Deposit Insurance Corporation, Sheila Bair, has recently stated that “Low interest rates are hurting, not helping, the economy”.  According to Ms. Bair, historically low interest rates have helped the housing market recover but are hindering business lending, which holds the key to the overall recovery.  “Very low interest rates on your (the banks) balance sheet … is not good for business lending”, says Bair.  She would like the Fed to start increasing rates in a gradual and methodical manner so that the market can adjust.
Even the WSJ’s conventional economics columnist, David Wessel, admits that “big companies continue to build an enormous cash hoard as if they are preparing for catastrophe”.  He says that “Ben Bernanke sees the exit, he just doesn’t know how to get there”.
Current policies for fixing the economy are clearly not working and may be doing grave damage.  There are lots of policy measures which might help, and certainly won’t hurt, such as broad-based tax reform, loosening regulation of small business, aggressively pursuing new trade agreements, visa reform, targeted job training, etc..  Concentrating on implementing such measures is what our national leaders should be doing!

Is Faster Growth Under Our Control?

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In today’s Wall Street Journal, columnist David Wessel declares that “Faster growth relies on a bump free road”.  Mr. Wessel cites a new forecast from the International Monetary Fund that sees a “three speed recovery” with the U.S. lagging behind emerging markets and developing economies but doing much better than the no-growth Euro zone.  According to Mr. Wessel our own economic growth is so closely tied in with the rest of the world, and especially Europe’s floundering economy, that the best we can do is to avoid “overly strong deficit reduction” and hope that there are no major bumps in the road.
It is pessimistic indeed to assume that there is little if anything we can do to boost economic output.  We can lower both individual and corporate tax rates, offset by eliminating deductions and closing loopholes, in order to stimulate more private investment.  We can help small businesses grow by removing the huge burden of having to provide health insurance to their employees (this can be accomplished by changing the tax treatment of health care insurance).  We can encourage more entrepreneurial activity with targeted (but temporary) tax exemptions. Immigration reform, hopefully now in the works, will boost the productivity of our 11,000,000 illegal immigrants by giving them more economic freedom.
Twenty million U.S. citizens are either unemployed or underemployed.  Our national leaders should consider it to be their moral duty to adopt measures to put more of them back to productive employment.  In addition, as the strongest economy in the world by far, we will boost the entire world economy if we can speed up our own growth.  The benefits of faster growth are so obvious that it should be the first priority of Congress and the President to work together to get this done!

What are the Economic Effects of Immigration Reform?

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Mr Argeo Cellucci and Stephen Kelly have recently (WSJ on March 10, 2013) made a very interesting proposal for immigration reform: “Taking a Nafta Approach to Immigration”.  The North American Free Trade Agreement, starting in 1994, has boosted trade between Canada, Mexico and the United States by over 400%.  Their proposal is to give unrestricted visas to all American, Canadian and Mexican citizens to live and work anywhere within the borders of our three countries.

Enacting such a plan would mostly solve our long simmering immigration problem overnight.  It does not offer citizenship for illegals in the U.S. and therefore is not amnesty.  Our current illegals with Mexican citizenship would attain legal status with visas but would still have to apply for, and wait for, citizenship through ordinary channels.

But the main reason for making such a change in immigration policy is economic, rather than to ease law enforcement or border control problems.  The scholar Raul Hinojosa-Ojeda has recently demonstrated in “The Economic Benefits of Comprehensive Immigration Reform”  the huge benefits that would ensue from such a policy change.  It would boost U.S. GDP by at least .84% annually which means that our slow recovery from the recession of about 2% GDP growth per year would increase by 50%.

Faster economic growth is the elixir our country badly needs to not only provide more jobs but to enable us to rapidly shrink deficit spending at the federal level and restore our national government to sound fiscal health.  Here’s how we can do it!

The Connection between Business Investment and Unemployment

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The Stanford economist, John Taylor, has pointed out in the February 4, 2013 entry of his blog, Economics One, the strikingly close correlation between business investment and the national unemployment rate. His graph shows that since 1990, whenever business investment increases, then the unemployment rate starts to fall with only a short time lag.  And, vice-versa, when business investment starts to fall, then the unemployment rate starts to increase.

It seems like plain common sense, then, that a very good way to boost the economy and thereby create more jobs, is to figure out how to motivate businesses to increase their rates of investment.  One way to accomplish this is to let businesses speed up their tax deductions for capital investment.  Of course, the best way of all would be to completely eliminate the corporate income tax.

Approximately 10% of federal tax revenue comes from the corporate income tax.  This amounts to roughly $250 billion per year.  Such a loss of federal revenue could easily be balanced by closing loopholes and deductions for high income taxpayers.  Such a shift in federal taxation would provide an enormous boost to the economy.

Making our economy grow faster is the key to solving both our very serious economic (putting people back to work) and fiscal (shrinking our federal deficit) problems.  Any and all ways to get this done should be the top priority of our national political leaders.

Is inequality Holding Back the Recovery?

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The Nobel prize-winning Keynesian economist, Joseph Stiglitz, claims in the January 20, 2013 New York Times, that “Inequality is holding back the recovery”.  He says that the most important reason is because the middle class is too weak to support the consumer spending we need.  And that the weakness of the middle class is holding back tax receipts.  And that we are squandering our young who are increasingly unable to get an education without borrowing huge sums of money.

Many liberals deplore the slow rate of economic growth since the recession ended in June 2009 and all of the problems it creates and exacerbates such as high unemployment and lower tax revenue to support public services.  What these liberals amazingly fail to understand is that there are tried and true methods to promote economic growth.  What we need to do is to lower tax rates (offset by eliminating tax deductions and loopholes), remove or diminish the enormous new regulatory burdens which have recently been placed on the economy, boost domestic energy production and aggressively, rather than halfheartedly, pursue new trade agreements to lower the barriers to free trade.

Powerful trends such as globalization and computer technology are driving economic progress and causing the inequality which Stiglitz and many others deplore.  We need to embrace these trends and use them to our advantage.  The way to boost the middle class is to boost our stagnant economy in the tried and true ways which have worked in the past.  The way to boost postsecondary education is to recognize that there are many high quality and low cost schools all over the country.  And that it is not necessary to borrow lots of money to get a good education. 

In short, the solution to the urgent and critical economic and fiscal problems we are now facing lies entirely under our control.  All we need are national leaders who have the vision, capability and fortitude to lead the way.

Avoiding the cliff and restoring confidence

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New York Mayor Michael Bloomberg has proposed a sensible way forward with an Op Ed column, “Avoid the ‘Cliff,’ Restore the Confidence” in the December 12, 2012 edition of the Washington Post . His thesis is that businesses took on too much risk in the run up to the 2008 crash but now they are sitting on hordes of cash because they lack confidence that our political leaders can come up with a serious, credible plan to reduce the deficit and put our country on a sustainable path to economic growth and fiscal health.

His proposal for accomplishing this task is remarkably similar to that outlined by David Walker and discussed in my previous post on December 10, 2012.  That is, we should adopt the Simpson-Bowles framework, including tax increases and spending cuts.  At least a significant down payment on this plan should be agreed to before the end of the year.  The agreement would include a commitment to enact broader-based tax reform and entitlement reforms in 2013.

With trillion dollar deficits for four years in a row, now going on five, we definitely need more tax revenue as well as large spending cuts.  The biggest challenge in implementing this general framework is to figure out how to raise tax revenue in the least damaging way to the economy.

The tradeoff here is between raising tax rates versus eliminating tax deductions and loopholes.  Democrats (apparently) prefer raising tax rates rather than eliminating deductions.  This is unfortunate since it is well established in economic theory, as well as plain common sense, that the lowest possible marginal tax rates will provide the greatest stimulus to private risk taking and investment. This is the only sound way to create more jobs.

Democrats may have the strongest political position in the current negotiations but the Republicans have the soundest basic economic principles.  If the Republicans are able to keep the focus on the fundamentals, we will succeed in finding the way out of our current predicament.

What do we need to do to avoid the fiscal cliff?

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Although Republicans need to be prepared to jump off the cliff, at the same time they also need to make every reasonable effort to avoid taking this drastic action.  Mr. David Walker, the CEO of Comeback America and former Comptroller General of the United States, has described very clearly, on the Politico website, what kind of deal the Republican House of Representatives should be looking for.

In return for raising taxes on the wealthy, the House should insist on two concessions from the President and the Senate.  First of all, there must be an immediate and significant down payment on the spending cuts required by the sequester.  Comprehensive tax and social insurance reforms, a so-called Grand Bargain, would be deferred until a set date in 2013, to give the new Congress time for careful deliberation.  The debt ceiling limit would be raised just enough to get by until the new deadline next year.   A fail-safe hammer would be put in place to kick in if the deadline is not met.

Mr. Walker suggests that the long term goal, say by 2024, should be to reduce debt to 60% of the economy.  This will require an approximately $4 trillion combination of revenue increases and spending cuts over the next ten years.  There would be appropriate interim milestones set up to be met along the way.  My personal preference is to hold out for a balanced budget by a date certain but the main thing is to negotiate an ironclad agreement to put our fiscal policy on a sustainable path.  Anything less will lead to a dangerous fiscal crisis in the very near future, far worse than the present danger of going off the cliff.