Our economy is chugging along at 2% annual growth of GDP, not spectacular but not awful either. The unemployment rate has dropped to 4.3%, and low-wage earners are beginning to see decent pay raises. Furthermore there are good indications that GDP growth may rise in the near future to at least 2.5%, see here and here.
As growth increases, unemployment continues to drop, and wages increase more quickly, severe labor shortages in certain job categories are likely to develop. As the New York Times economics reporter, Eduardo Porter, points out, “The Danger from Low-Skilled Immigrants: Not Having Them.”
Eight of the fifteen occupations expected to experience the fastest growth – personal care and home health aides, food preparation workers, janitors and the like – require no schooling at all.
Low-skilled immigration does not just knock less-educated Americans out of their jobs, it often leads to the creation of new jobs – at better wages.
The strawberry crop in California owes its existence to cheap immigrant pickers. They are sustaining better paid American workers in the strawberry patch to market chain who would have to find other employment if the U.S. imported the strawberries directly from Mexico.
The benefits of immigration come from occupational specialization. Immigrants concentrated in more manual jobs free up natives to specialize in more communication-intensive (English speaking) jobs.
The average American worker is more likely to lose than to gain from immigration restrictions. Halting immigration completely would reduce annual economic growth by .3%.
The Pew Research Center estimates that about 30,000 unauthorized immigrants work in Nebraska, 3.2% of Nebraska’s total labor force. They are heavily represented in a handful of industries, making up 18% of Nebraska’s construction workers, 9% of production workers, and 5% of farm laborers. With an unemployment rate hovering around 3%, the Nebraska economy would be severely stressed without these immigrant workers.
Conclusion. Both in Nebraska and nationwide, the U.S. economy has a strong need for immigrant workers. An adequate guest worker visa program is badly needed to provide legal status to these workers who are so critical to the success of the U.S. economy.
Experts across the political spectrum agree that the U.S. tax code is a huge mess and needs to be reformed as well as simplified. It is also generally accepted that lower tax rates will lead to faster economic growth.
As Congress turns its attention to tax reform, Senate Democrats have stated the basic principles which they would like to see included in any changes which are made:
Increase the wages of working families. This could be accomplished by lowering tax rates for all individuals across the board, paid for by eliminating (or at least shrinking) many of the personal deductions in the tax code. The approximately two thirds of all taxpayers who do not itemize deductions would then receive a tax cut, equivalent to a wage increase.
Promote domestic investment and improve middle class job growth. Lower tax rates will give businesses and entrepreneurs a bigger incentive to invest in business expansion and therefore grow the economy faster and create more new jobs.
Modernize our outdated business and international tax system. Our corporate tax rate at 35% is the highest in the developed world and, at the same time, produces below average revenue (see chart). Another reform would be to adopt business expensing (immediate tax write-off for new investment). Again, all such changes should be paid for by eliminating loopholes and shrinking deductions.
Any rewrite of the tax code must be deficit neutral. As important and valuable as tax reform is, it has to take into account our country’s most fundamental problem: our huge and rapidly growing national debt and therefore end up being deficit neutral overall.
Conclusion. The above principles, stated by the Senate Democrats, represent a sound approach to reforming the U.S. tax system. I hope that the Republicans are willing to recognize the validity of these proposals and include the Democrats in developing a bipartisan tax reform plan.
As I like to remind my readers from time to time, I am a non-ideological fiscal conservative. I simply want to solve our two most fundamental fiscal and economic problems:
Slow economic growth, averaging just 2.1% since the end of the Great Recession in June 2009,
Massive debt, now at 76% of GDP (for the public part on which we pay interest), the highest since the end of WWII,
by whatever means it takes.
Donald Trump won the presidential election contest because he convinced blue-collar white voters that he would do something about their declining economic prospects. But can he actually deliver for them? Yesterday’s New York Times has an excellent analysis of this problem by the economic journalist, Eduardo Porter, “Where were Trump’s votes? Where the jobs weren’t.” Mr. Porter points out that, in fact, Hispanic, Black and Asian workers have all done much better than white workers since November 2007 (see above chart). He also points out that all three of these minority groups live primarily in metropolitan areas where jobs have been growing much faster than in nonmetropolitan areas (see above chart).
He further points out that while the number of manufacturing jobs has been flat since 1978, the number of service jobs has been increasing rapidly and that most of these new service jobs are in the cities where minorities are clustered (see below). The question then is what Mr. Trump (or anyone else!) can do to help his largely rural blue-collar constituency? Mr. Porter recognizes that faster economic growth will have to come from investments in technology and human capital. But he thinks that this will happen mostly in the cities and thus help minorities proportionally more than whites. Conclusion. Helping blue-collar whites is Mr. Trump’s fundamental economic problem. Faster overall economic growth will help to some extent. Trade restrictions will not help. Immigration restrictions might help but could also hurt the overall economy if employers can’t hire enough workers. Better education and vocational training will help in the long run but not immediately. This is a very tough problem to solve!
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. Yesterday’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.
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. The 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.
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.
Populists such as Bernie Sanders and Donald Trump are doing so well in the 2016 presidential primaries because the middle class is suffering from the slow economic growth of the past 15 years. My last post is based on the report of a typical victim. Today’s post is based on an article by Eduardo Porter in yesterday’s New York Times discussing the loss of U.S. manufacturing jobs. Says Mr. Porter:
Fifty years ago, 45,000 workers were employed in California to harvest 2.2 million tons of tomatoes. Now, with mechanization, it only requires 5000 workers to harvest 12 million tons.
In 1950, 24% of nonfarm jobs in the U.S. were in manufacturing. Today only 8.5% of nonfarm jobs are in manufacturing.
The same thing is true worldwide. Global employment in manufacturing is going down because productivity increases are exceeding increases in demand by significant amounts. The likelihood that we will get a manufacturing recovery is close to nil.
The U.S. has a trade surplus in manufacturing with the 20 countries with which it has trade agreements (which does not include China). We have an overall annual trade surplus in services of more than $200 billion.
In other words, an attempt to recover or save manufacturing jobs with smarter trade policies is simply impractical and will likely do more harm than good. What should be done instead is to:
Definitely do a better job of helping displaced manufacturing workers with Trade Adjustment Assistance and smarter job retraining programs.
Adopt policies to speed up overall economic growth from the anemic 2.1% annual growth rate since the end of the Great Recession in June 2009. Faster growth such as the 3.5% annual average from 1971 – 2001 will do wonders in creating more jobs and better paying jobs. For how to do this see an earlier post.
Our very serious economic problems can be solved if policy makers (and presidential candidates) would only get serious about it!
The strangest aspect of the current presidential campaign is the staying power of the highly unconventional and controversial candidate Donald Trump. There is wide agreement that the secret of his success is his strong appeal to the members of the white working class whose incomes have been in decline for many years.
The plight of the working class is often viewed in the context of the overall increase in income inequality in the U.S. My last two posts, here and here, are part of that discussion.
Mr. Trump appeals to these disaffected voters by vowing to wall off Mexico and cut back on foreign trade. But it may be possible to “Revive the Working Class Without Building Walls” as Eduardo Porter suggests in the New York Times. According to Mr. Porter, what are needed are new government programs such as wage insurance or direct government employment. Alternatively we could meet the illegal immigration and trade protectionism problems in a much more growth oriented way as follows:
Immigration Reform. Set up an adequate Guest Worker program to serve only those businesses and industries which can demonstrate that they are unable to recruit enough local workers to meet their employment needs. Once the Guest Worker program is functioning properly, eVerify would be enforced to weed out unauthorized illegal workers and deport them back to their home countries. At the same time the number of H1-B visas would be expanded in order to retain more of the highly skilled foreigners getting advanced degrees in the U.S.
Foreign Trade. As the above chart shows, there is a close connection between world trade and world economic growth. And clearly the U.S. economy benefits from world-wide economic growth. The way to balance off job losses caused by foreign trade is with more effective trade-adjustment assistance and job retraining programs.
Whether or not Mr. Trump receives the Republican presidential nomination or is elected to be president in November, we should address the real grievances of his supporters in ways that benefit the entire economy.
The evidence for global warming is overwhelming and largely beyond dispute. On the other hand, our industrialized world is highly dependent on the fossil fuels which produce it. This is what makes global warming such a hot political potato. Yesterday the New York Times columnist Eduardo Porter described a carbon tax which has been implemented in British Columbia and has gained wide political acceptance. Its general features are:
It was introduced in 2008 by the Liberal Party which is actually quite conservative. It survived a challenge by the left-leaning New Democratic Party in 2009.
The economy in British Columbia grew faster than its neighbors even as its greenhouse gas emissions declined.
The tax rose from $10 (Canadian) per ton of carbon dioxide in 2008 to $30 (Canadian) in 2012. It raised the cost of a gallon of gasoline by 19 cents (U.S.)
Despite the price increases, voters warmed to the tax. In 2015 only 32% of British Columbians opposed it, down from 47% in 2009.
Every single carbon tax dollar is returned to families and businesses through a variety of tax breaks.
British Columbia’s experience shows that a carbon tax can work in practice. Here are a couple of reasons why such a tax should appeal to a broad political cross spectrum in the U.S.
A properly calibrated carbon price in the United States could effectively replace all the climate-related regulations businesses hate so much, including renewable fuel mandates and President Obama’s Clean Power Plan.
A carbon tax could become part of a broad fiscal overhaul, using the revenue, for example, to offset cuts in payroll taxes.
Conclusion. The rapidly changing climate and weather patterns caused by global warming are a threat to human civilization. Reasonable measures can be taken to mitigate the effects with minimal economic disruption. As the world’s strongest economy and leading superpower, the U.S. should be providing more leadership towards addressing this very serious problem.
One of my favorite economics journalists, Eduardo Porter, has a column which appears each Wednesday in The New York Times. His column this week, “Imagining a World Without Growth,” shows that economic growth took off consistently around the world only about 200 years ago and that two things powered it: innovation and lots of carbon-based energy from fossil fuels. The United Nations climate conference, meeting this week in Paris, is asking all countries to greatly cut back on their use of fossil fuels. Mr. Porter, in an earlier column, described what severe cutbacks in fossil-fuel energy could look like:
In order to meet the consensus goal of keeping the earth’s atmospheric temperature from rising more than 2 degrees C from preindustrial times (and we’re half way there already), CO2 emissions will have to fall to at most 1.6 tons per year for every person on earth by 2050. This is less than 1/10 of the present U.S. average and less than 1/3 of the present world average.
Within about 15 years every car sold in the U.S. will have to be electric. By midcentury more than half of the U.S. economy will run on electricity. Up to 60% of power will have to come from nuclear sources.
To meet these ambitious goals the U.S. will have to decarbonize its energy supply at an average pace of 4% per year for the next 40 years. This is 10 times faster than the Energy Information Administration’s current plan.
This is not achievable by going after low-hanging fruit such as replacing coal with natural gas in power plants. Rather, for example, carbon capture and storage will have to become widely available starting within about 10 years.
Meeting the goal of limiting the average world-wide temperature increase to 2 degrees C will thus require a severe regimen of regulatory actions which will have negative economic consequences. In fact it is difficult to image how such a strict regimen could ever be put in place or enforced without much public dissatisfaction.
We thus have two options for dealing with global warming. We can ignore it at our peril or we can introduce a market mechanism to change people’s fundamental behavior and attitude about energy use. What market mechanism? A (revenue neutral) carbon tax, of course! How else?
The projected cost of $6 billion per year is too high and the program is highly duplicative with other scholarship programs such as Pell grants.
Education is primarily a state and local responsibility, not federal.
The graduation rate at community colleges is only 21%, much lower than at other types of educational institutions.
There is a whole new marketplace of non-degree credentials such as competency-based programs and micro-certifications which often provide greater variety, quality and monetary value than community college programs.
These criticisms are largely valid and should largely be incorporated into the guidelines of the President’s proposal as they are drawn up and submitted to Congress. But they miss the larger point. Today, about 30% of young people in the U.S. graduate from a four year college. Tuition and fees at public college averages $9,000 per year while the comparable cost at private colleges is $31,000. Loan debt for college graduates averages $27,000 per year, and is much higher for many. And, according to the above chart from the New York Times, educational attainment in the U.S. lags behind the rest of the developed world.
Today’s increasingly high-tech and interconnected world puts a huge premium on educational attainment and America’s system of higher education is not meeting the challenge. It is too expensive and not educating enough people, especially minorities and those with low-incomes.
The best way to address this problem in a cost-efficient manner, which is a necessity in today’s fiscal climate, is to expand opportunities at our 1100 community colleges. Community colleges are not only incredibly low cost operations, they accept all students and start them out at whatever academic level is necessary. They provide the ideal venue to lift up large numbers of average and previously-failed students and turn them into productive members of society. Boosting community college enrollments will, in turn, give our economy a big boost.
This is the real reason why President Obama’s free tuition plan should be taken seriously. It will shine a strong light on an educational sector whose potential is greatly under-appreciated by many Americans.