Americans are very fortunate indeed to live in such a strong, prosperous and free society. But not all of us share in this good fortune. How can we help the less fortunate among us have a better chance to succeed in life?
Here are several things we can do, in rough order of importance:
Grow the economy faster than the 2.1% growth rate which has prevailed since the end of the Great Recession in June 2009. Faster growth means more new jobs are created and higher wages are paid for existing jobs. Success in life for most people includes earning an adequate income to live comfortably without major wants. Appropriate deregulation and tax reform are the best ways to speed up growth.
Improve basic education so that more people can qualify for rewarding jobs. Right now too many kids from minority and other low-income families are not graduating from high school with the skills they need to succeed in life. Two promising solutions to this problem are more charter schools and expanded early childhood education, both targeted at kids from low-income families.
Alleviate poverty in a productive manner by emphasizing work requirements for most, if not all, welfare programs. Higher work force participation and lower poverty rates are strongly correlated. Work not only provides income but also provides dignity and purpose in life.
Promote two parent families. Two parent families are much less likely to be poor than single parent families and also more likely to be supportive of their children’s education. Federal tax policy should always encourage child raising by two parent families for this reason.
Conclusion. America will become an even stronger country than it already is if more people, especially from low-income and minority families, have the education, work training and personal qualities to make a positive contribution to society.
The American economy is in basically good shape with a low unemployment rate of 4.2% and the likelihood of somewhat faster growth in the near future.
Income inequality and poverty are real problems, see here and here, but there are reasonable and effective ways to address them.
Rapidly accumulating debtis by far our most critical unsolved problem which is all the more frightening because our polarized political system does not seem capable of addressing it.
The Bureau of Labor Statistics has just released its projections of what the U.S. economy will look like in 2026.
The highlights are:
More dominated by the service sector amid the continuing erosion of manufacturing jobs (see two charts below).
More polarized in both earnings and geography (see top and bottom charts).
More tilted towards jobs which require at least a bachelor’s degree (see bottom chart).
The BLS report has several ramifications for public policy as follows:
Improved educational outcomes are needed all along the line: K-12 basic and vocational, training programs for the many skilled jobs going begging and also more low-cost college programs.
More low-skill immigrants, not fewer, are needed to take on the expanding number of low-wage jobs, such as caring for the growing numbers of elderly, which Americans are not willing to do.
Conclusion. These economic trends towards more earnings and geographical polarization could easily make our current political polarization even worse than it already is. This means it is all the more important to make sure that we keep speeding up economic growth, better address income inequality and poverty and get our gargantuan debt problem under control.
This blog addresses America’s too biggest problems:
Slow economic growth averaging just 2% since the end of the Great Recession in June 2009. Faster growth means more jobs and better paying jobs.
Massive federal debt now 77% of GDP (for the $14 trillion public debt on which we pay interest) and predicted to continue getting worse without a change in policy. As interest rates go back up to normal historical levels the interest payments on this debt will increase greatly and be a huge drag on the federal budget.
As I have reported recently, college costs are growing much faster than healthcare costs which are growing faster than the cost of living in general. The excessive costs of education and healthcare are, in turn, holding back economic growth.
For every increased dollar of student aid, college tuition increases 60 cents.
Outstanding student loan debt has risen from $200 billion in 1996 to $1.3 trillion today.
The highest default rates on student debt occur for community college students (23%) and for-profit college students (18%).
The economist Richard Vedder has made some excellent suggestions for addressing this whole problem:
Simplify the entire federal student air system. There should be only two programs, one grant program (Pell grants) and one federal loan program (Plus loans, tuition tax credits, work study, etc.).
Give educational vouchers directly to students to empower recipients to weigh costs more closely. These would be strictly limited to low-income students and would be accompanied by modest academic expectations.
Require schools to have skin in the game. Schools with abnormally high loan delinquency rates should have to pay a tuition “tax” to the government to help cover costs.
Conclusion. “Financial aid has caused tuition to skyrocket. If we can’t abolish it, we can at least simplify it.”
I did not vote for Donald Trump because of his often crude remarks and sleazy behavior. But I am now cautiously optimistic about the prospects for his presidency based on the quality of his nominees for important government posts. Like many of his voters, I “take him seriously but not literally.”
Here is what I think he will do:
Economic Policy. He will try to speed up economic growth, well above the average 2.1% annual GDP growth of the past 7½ years. This can be accomplished with tax reform (lowering tax rates paid for by shrinking deductions), regulatory reform (including paring back Dodd-Frank and the ACA), immigration reform and tougher trade policies. Faster growth benefits the whole country and especially the blue-collar workers who voted for him.
Improving life in the inner cities. K-12 education is a disaster in many inner cities and Betsy DeVos will be a reformer in the Education Department. Ben Carson grew up in public housing and is an excellent choice for HUD.
Foreign Policy. Mr. Trump wants changes from China on currency and trade practices. He also wants more cooperation from Russia in fighting terrorism. He wants our NATO partners to bear a bigger share of their own defense. His Secretary of State designee, Rex Tillerson, supports arming Ukraine against Russia and also supports the TPP trade agreement with Asia. This all sounds good to me.
Fiscal Policy. My biggest concern at this point is our national debt, now 76% of GDP (for the public part on which we pay interest) which is historically high and steadily getting worse. The House Republicans are serious about shrinking deficit spending and hopefully Mr. Trump will support their efforts.
Conclusion. Donald Trump has a highly unconventional (but very effective) style of communication. If it leads to progress in addressing our biggest problems as above, then he’ll have a very successful presidency.
My last post, “What Is Slowing Down the U.S. Economy,” reports on an interesting analysis by the Gallup economist, Jonathan Rothwell, making an excellent case that three of the biggest drags on the U.S. economy are the costs of:
Healthcare. By far the biggest drag, healthcare costs have increased from 9% of GDP in 1980 to 18% in 2015. Mr. Rothwell notes that the average U.S. physician spends $83,000 per year to process claims and interact with insurance companies compared to $22,000 in Canada which has a single payer system. The solution, in my opinion, is to change the tax treatment of employer provided health insurance (to cover catastrophic coverage only) in order to give individuals more “skin in the game.”
Education. Although education costs have risen only from 6% to 7% of GDP over the past 35 years, education overall is 8.9% more expensive in 2015 than in 1980 and higher education is 11.1 times more expensive. Considering the ever increasing need for highly trained workers in today’s high-tech and globally competitive economy, such rapidly increasing cost presents a huge impediment to progress. Foundational K-12 education is also failing to close the achievement gap between low-income minority students and middle-class students. Such disparity in educational outcomes bodes ill for future social harmony. Even overall cognitive performance in math and literacy is now declining (see chart). These are tough problems to solve.
Housing. Again, only a 1% increase (from 11% to 12%) in GDP from 1980 to 2015 but this translates into a rental cost increase of 19% of GDP in 1980 to 28% of GDP in 2015. Also mortgage payment costs increased from 12% of GDP in 1980 to 16% of GDP today. Mr. Rothwell attributes these increases to a tightening of local zoning restrictions. There does not appear to be any general policy solution to such a problem.
Conclusion. The costs of healthcare, education and housing are eating up greater and greater amounts of family income and therefore are retarding economic growth and social progress. What can be done about these problems? Stay tuned!
We will soon have a new President and, even though his election was somewhat of a fluke, he will obviously want to help the blue-collar workers who elected him. The best way to do this is to make the economy grow faster.
The Gallup economist, Jonathan Rothwell, has just issued an excellent analysis of some of the major reasons for our current slow economy, “No Recovery: an analysis of long-term U.S. productivity decline.”
Says Mr. Rothwell:
The problem is severe. U.S. GDP growth per capita has declined from 2.6% in 1966 to .5% today. Small differences expand into vast gaps in potential living standards. 1% growth for the next 35 years would expand household income from $56,000 in 2015 to $79,000 in 2050 (inflation adjusted), whereas 1.7% growth would raise household income to $101,000 in 2050.
Changes in living standards are fundamentally linked to changes of how the quantity of goods and services relate to their cost. Deterioration in the quality-to-cost ratio for healthcare, housing and education is dragging down economic growth. These three sectors alone have increased from 25% of GDP in 1980 to 36% of GDP in 2015.
The cost of healthcare is 4.8 times as high today as in 1980, the cost of education is 8.9 times as high today as in 1980 and the cost of housing is 3.5 times as high today as in 1980. These compare to an overall cost increase of all items of 2.5 times today compared to 1980.
These three sectors have all gotten more expensive (without getting more productive), thereby absorbing more of families’ incomes, making it harder to satisfy other wants.
Conclusion. We all want schools that work, adequate housing, and quality healthcare. The problem is how to achieve these ends in a much more affordable manner. Stay tuned!
My last post, “Racism and Black Progress,” pointed out that, despite all of the racial tension in our society, especially bad at the present time, blacks have made much social and economic progress over the past half century. All Americans of good will want this progress to continue.
I live in Omaha NE and am personally involved in a very promising public initiative to improve educational outcomes in inner city schools. It is called the Learning Community and is an Omaha metro-wide effort to close the academic achievement gap between children from low-income families and those from the middle class. The above chart shows clearly what the problem is. Already in third grade FRL (free and reduced priced lunch) kids are behind on the NeSA (Nebraska State Assessment) reading test. The gap persists into middle school and then gets much worse in high school. A recent article in the Omaha World Herald reports that while black students make up 25% of Omaha Public Schools enrollment, they are responsible for 55% of disciplinary incidents. Obviously, disruptive students are not learning what they need to know to succeed in school and in life.
A promising solution to this very difficult problem of improving educational outcomes for inner city students is early childhood education to prepare these kids to succeed in Kindergarten and then stay in school until graduation. This is in fact the approach being taken by Omaha’s Learning Community. But it is clearly a long range program which will take many years to show success. Conclusion. A solid basic education is essential for success in today’s highly complex society. Blacks will never reach full social and economic equality with whites until they achieve better educational outcomes. Early childhood education has much promise in closing the academic achievement gap but will take many years to show significant progress.
One of the biggest problems facing the U.S. today is the slow growth of our economy, averaging just 2.1% per year since the end of the Great Recession seven years ago, well below the 3.5% average from 1950 – 2000. My last post introduced an excellent Wall Street Journal Op Ed by the Hoover Institution economist John Cochrane. He says that “the U.S. economy needs a dramatic legal and regulatory simplification.” In particular:
Tax reform. Instead of arguing over tax rates, what’s really needed is deep tax reform, cleaning out the insane complexity and cronyism.
Social programs. Rather than arguing over whether to increase or cut spending, what’s needed is a thorough overhaul of the programs’ pernicious incentives. For example, Social Security disability (almost 9 million beneficiaries in March 2016) needs to remove its disincentives to work, move or change careers.
Education spending. Rather than arguing about the level of public spending, America needs the better schools that come from increased choice and competition.
Over-regulation. Most of all the country needs a dramatic legal and regulatory simplification. Middle-aged America is living in a hoarder’s house of a legal system, including state and local impediments such as excessive occupational licensing.
Growth-oriented policies will be resisted. Growth comes from productivity which comes from new technology and new companies. These displace the profits of old companies, and the hefty pay and settled lives of their managers and workers.
The presidential frontrunners are not championing economic growth. But the House of Representatives, under Speaker Paul Ryan, is doing exactly this. Perhaps economic policy leadership can be transferred from the Presidency to Congress.
After two disappointing presidencies our economy is lagging far behind where it could and should be. This is the reason for the rise of Bernie Sanders and Donald Trump. Regardless of the outcome of the 2016 presidential election, there is hope for better days ahead!
The two main themes on this website, “It Does Not Add Up,” are that the U.S. national debt is too high and that our economy is growing too slowly. How can we shrink the debt (as a percentage of GDP) and how can we make the economy grow faster? I make use of all sources of information which shed light on these two fundamental issues. Today I briefly discuss the work of the Northwestern University Economist Robert Gordon, summarized in his new book, “The Rise and Fall of American Growth.” His basic thesis, see the above chart, is that human civilization experienced essentially no economic growth up until about 1700, then slow growth occurred mainly in the UK and US up until about 1870 followed by explosive growth mainly in the US up until about 1970. Since 1970 growth has slowed way down except for a brief spurt from 1994 – 2004.
According to Mr. Gordon, these growth periods were caused by Industrial Revolution #1 (steam, railroads), IR #2 (electricity, internal combustion, modern plumbing, communications, petroleum), and IR #3 (computers, internet, mobile phones), all of which led to productivity growth spurts which have by now largely run their course. Not only are we out of industrial revolutions but there are, in addition, stiff headwinds working against economic growth. For example:
The First Headwind: Rising Inequality. Downward pressure on the wages of the bottom 90%. Increased inequality at the top. Educational outcomes strongly correlated with socio-economic status.
The Second Headwind:Education. Stagnation in high school graduation rates and poor performance on international tests measuring achievement. High debt levels for college graduates.
The Third Headwind: Demography. The labor participation rate has dropped form 66.0% in 2007 to 62.6% today, only half caused by baby boomer retirements.
The Fourth Headwind: Repaying debt. The public debt, on which interest is paid, is now 74% of GDP and is predicted by the CBO to steadily increase. This will inevitably lead to either higher taxes or slower growth in future transfer payments.
The Fifth Headwind: Social deterioration at the bottom of the income distribution. Increasing number of children are born out of wedlock for high school graduates and dropouts, much higher for blacks than for whites. For mothers aged 40, the percentage of children living with both biological parents declined from 94% in 1960 to 34% in 2010.
Other Headwinds. Globalization and Global warming.
Mr. Gordon makes a voluminous case for the slowing down of economic growth, the basic reasons why this is happening, and the social forces which are making it worse. Next: How should public policy respond to this huge challenge?