The Atlantic monthly magazine is celebrating its 160th anniversary this year. In 1857 its founders envisioned that the magazine would “honestly endeavor to be the exponent of what its conductors believe to be the American idea.” In the current issue one of its writers asks, “Is the American Idea Doomed?” and claims that it has few supporters on either the left or the right. Well, I happen to be in the middle and I think the American idea is doing very well indeed.
The World Economic Forum ranks the U.S. as the world’s most competitive large economy and, in fact, the U.S. is getting richer faster than anybody else.
Productivity growth in the digital industries has grown at the annual rate of 2.7% over the past 15 years compared with only an anemic .7% annual growth in productivity in the physical industries. The U.S. economy is becoming more digital all the time.
The four U.S. companies, Amazon, Apple, Facebook and Google are in the process of revolutionizing all aspects of life not only in America but all around the world.
According to the Kauffman Foundation entrepreneurship is flourishing in the U.S. (see chart), and not just in Silicon Valley.
According to Freedom House democracy has made much progress around the world in the last 30 years, even if further growth has stalled for the past ten years. Other democratic countries are our best friends and so we want more of them.
Granted Donald Trump is a wild card. So far his record is mixed but he hasn’t made any big mistakes (liking dragging us into war or hurting the economy). It is unlikely that he’ll slow our huge forward momentum whether or not he helps it.
Conclusion. “The democratic experiment is fragile” (perhaps!) but it’s also got a lot going for it right now. We can never afford to be complacent but we need not be pessimistic either.
The American Enterprise Institute’s Nicholas Eberstadt has performed a valuable national service with two recent publications: “Men without Work” and “Our Miserable 21st Century” These works lay out in great detail what has gone wrong in our country in the past 16 years:
Overall household wealth has doubled as a result of a surging stock market fed by the Federal Reserve policy of quantitative easing.
The recovery from the crash of 2008 has been singularly slow and weak compared to the 1947 – 2007 trend line.
The work rate for Americans aged 20 and older has declined by 4% from 66% to 62%.
Half of all prime working age male labor-force dropouts take opioid medication on a daily basis paid for by Medicaid. 57% of this population class is collecting disability benefits.
17 million male ex-prisoners and convicted felons are now in our midst and largely unable to find the employment which would lead to productive lives.
Here is Mr. Eberstadt’s initial prescription for addressing this very serious social problem:
Revitalize American business and its job-generating capacities. According to the Brooking Institution’s Ian Hathaway and Robert Litan, “business deaths now exceed business births for the first time in the thirty-plus-year history of our data.”
Reducing the immense and perverse disincentives against male work embedded in our social welfare programs. For example, U.S. disability programs are subject to widespread abuse and gaming. Social welfare programs should emphasize a “work first” principle emphasizing training and education, job placement, and tax credits, etc.
Drawing men with a criminal record back into productive work life. Note that the huge increase in America’s ex-prisoner and ex-felon population in recent years coincides with a dramatic drop in rates for both violent crime and property crime. This suggests that former criminals do not pose a continuing danger to society.
Conclusion. For the future prosperity and social cohesion of our country addressing this problem should be a very high priority. Let’s hope that President Trump gets the message.
As many commentators, including myself, have pointed out, we need faster economic growth in order to create more and better paying jobs and also to bring in more tax revenue to shrink our huge budget deficits.
The rate of economic growth equals the growth of labor productivity plus the growth of employment. The problem is that both productivity growth and the labor force participation rate have dropped steeply in recent years.
As I have pointed out in previous posts, the U.S. economy has become less entrepreneurial in recent years in the sense that there are now more firms going out of business than new firms going into business.
An article in yesterday’s Wall Street Journal has another way of looking at this. The rate of startup formation has been declining in the U.S. for decades (as shown just below). It is obvious that figuring out how to boost entrepreneurship would do a lot to spur economic growth.
This can be accomplished with:
General growth measures. Tax reform (lower marginal rates paid for by shrinking deductions), regulatory reform and simplification, maximum free trade to open markets, immigration reform to bring in more skilled workers, entitlement reforms to prevent a debt explosion.
Business tax incentives. Immediate write-off (i.e. expensing) of business investment. This encourages more investment by eliminating the need for depreciation over an arbitrary number of years. It is paid for by eliminating the deduction for interest expense to finance such investment.
Conclusion. Lots of voices are saying that technological innovation is slowing down and that only fiscal stimulus by the government can speed up growth. Such pessimistic views will predominate unless the private sector is given the tools it needs to achieve growth in the most productive way.
Our economy is doing a little better recently but not nearly as good as it could be. In my last post, “Men without Work,” I present Nicholas Eberstadt’s data that a significant part of the problem is the very large number (9.5 million) of prime working age (25 – 54) men who are unemployed and not looking for work.
Statistically, such men are likely to be un-workers if 1) they have no more than a high school diploma, 2) are unmarried and without dependent children, 3) are not immigrants and 4) are African American.
Two other relevant factors are 1) the huge increase in employment for prime working age women, from 34% in 1948 to 70% in 2015 and 2) the very high male arrest and incarceration rates for blacks and those without a high school diploma.
Obviously, it is highly detrimental to society to have such a large number of men who are idle during their prime working years.
Here are several ways to address this problem:
Revitalize America’s job-generating capacities. More businesses have closed than opened in each year since the 2008 financial crisis. Furthermore, the growing regulatory burden is not a recipe for encouraging entrepreneurship.
Reverse the perverse disincentives against male work embedded in our social welfare systems. The Earned Income Tax Credits should be extended to single adults without dependents. Eligibility for disability income should be tightened considerably.
Come to terms with the enormous challenge of bringing convicts and felons back into our economy and society. The huge increase in incarceration rates in recent years has coincided with a dramatic drop in rates for both violent crime and property crime.
Conclusion. One good way to speed up economic growth is to put more unemployed prime working age men back to work. There are several very concrete steps which can be taken to do this.
The economist Alan Blinder has just reported, “The Mystery of Declining Productivity Growth” that U.S. productivity growth has fallen dramatically in the last few years. “The healthy 2.6% a year from 1995-2010 has since been an anemic 0.4%. What’s scary is that we don’t know why.” The economists Edward Prescott and Lee Ohanian believe the productivity slowdown is caused by a corresponding slowdown in new startups (as illustrated by the above chart). They point out, for example, that:
The creation rate of new businesses in 2011 was 30% lower than the average rate of the 1980s.
New startups are critical for growth since many of today’s heavyweights will decline as new businesses take their place. For example, only half of the Fortune 500 firms in 1995 remained on that list in 2010.
Startups in high technology have also declined since 2000 even though there is no slowdown in the development of new technology.
Consistent with the recommendations of James Bessen in a recent post of mine, “Learning by Doing,” Messrs. Prescott and Ohanian recommend policy changes such as:
Better training, plus immigration reform, to produce more skilled workers.
Streamlining regulations that raise cost, especially for small businesses.
Tax reform to reduce marginal tax rates.
Reforming Dodd-Frank to make it easier for small businesses to obtain loans from main street banks.
In today’s New York Times, the economist Tyler Cowen wonders whether our economy is in the midst of a “Great Reset.” “Perhaps the most crucial issue is whether economies will return to normal conditions of steady growth, or whether we are witnessing a fundamental transformation” to a less productive economy.
Here’s another way to put it: shall we attempt to adopt better pro-growth policies or shall we just give in to the status quo and accept that we can’t do any better? Are we optimists or are we pessimists?
The two biggest problems facing our country today are a stagnant economy and an exploding national debt. Faster economic growth would help pay our bills by bringing in more tax revenue. It would also create more jobs and give a boost to stagnant wages. One of the causes of this stagnation is that our economy has become less entrepreneurial over time as shown by this often cited chart from the Brookings Institution. A very interesting new book by James Bessen, “Learning by Doing: the real connection between innovation, wages and wealth.” looks at both our economic history and our current economy to understand how society can best meet the challenges posed by new technology. Mr. Bessen identifies the basic problems as follows:
Funds have been shifted away from vocational education and community colleges at a time when large numbers of workers could acquire valuable skills at these institutions.
The rapid growth of occupational licensing restricts training and jobs open to mid-skill workers and, in many cases, limits their use of technology.
Military procurement favors large defense contractors over start-up firms, while heightened secrecy requirements limit the development of open standards and the broad sharing of knowledge.
Job mobility has declined, limiting knowledge sharing and weakening labor markets.
Abusive patent litigation has exploded, making it harder for startups and small firms to develop new technology.
Mr. Bessen concludes:“The practical skills of ordinary people have been a wellspring of widely shared wealth for 200 years, and the economic power of mighty nations rests on the technical knowledge of the humble. Provide the means for ordinary workers to acquire the skills and knowledge to implement new technology today and the economic bounty will not only grow, it will be widely shared.”
What are the roadblocks to implementing Mr. Bessen’s recommendations? I will return to this question later.
The Yale Economist and Nobel Prize winner, Robert Shiller, has an article in today’s New York Times, “Better Insurance Against Inequality”, proposing that “taxes should be indexed to income inequality so that they automatically become more progressive – meaning that the marginal tax rate for the highest income people will rise – if income equality becomes much worse.” We do know, of course, that income inequality is steadily increasing in the U.S. It is in fact essentially folklore that the top 1% of Americans is collecting a larger and larger share of the national income. Furthermore the French economist, Thomas Piketty, has recently shown that there is also “a relentless widening of disparity in wealth”.
Our democratic political system will surely respond in some way to this increasing gap between the rich and the poor. It is important to our future wellbeing to respond in a constructive manner. Today’s top tax rate of 39.6% is already very high and Mr. Shiller admits that the top rate would have to rise well over 75% in his plan.
Our biggest economic problem today is a stagnant economy. We badly need faster economic growth, in order to put people back to work and to bring in more revenue to shrink the deficit. Today what we need is lower tax rates, to put more money in the hands of people who will spend it, including potential entrepreneurs who will invest it in new businesses. Raising tax rates to address rising income inequality is therefore self-defeating as an economic strategy.
Rather let’s tax people’s financial assets after they have earned their money. A 1% wealth tax with a relatively high $10,000,000 personal exemption would bring in approximately $200 billion per year. $200 billion per year would enable us to pay down our deficit at a much faster rate as well as having a lot left over to begin an extensive infrastructure renewal program (for example)!
You keep saying that we need lower tax rates to boost the economy but what makes you think this will help? Businesses are sitting on piles of cash. They have plenty of money to invest in expansion. What they need are more customers. The basic problem is not enough demand for more goods. This is what is holding back the economy. It doesn’t much matter what the tax rates are. If the demand and customers are there, businesses will spend their own money or borrow as much money as they need, at low interest rates, to produce all the products they can sell. Anonymous Critic
I have several responses to this criticism:
First of all I want to make it clear that all cuts in tax rates must be offset by shrinking or eliminating tax preferences. So there will be no loss of tax revenue. Two thirds of all taxpayers take the standard deduction and will therefore automatically benefit from lower tax rates. This will put tens of billions of new dollars into the hands of middle class wage earners who will spend most of this money because they have tight budgets. This will give the economy a big boost.
As I discussed in my blog post from October 26, 2013 “Where are the Jobs? II. How to Create More of Them,” most net new job creation comes from businesses less than one year old, the true “startups.” New business owners are typically not wealthy, with lots of personal tax deductions. They need all the financial resources they can muster. Lower tax rates will save them money and therefore help them get their new business going.
In general, tax deductions such as for mortgage interest, municipal bond interest payments, state and local taxes, etc. benefit the wealthiest tax payers. Therefore the lowering of tax rates, offset by shrinking tax deductions, represents a shift of funds from the wealthier to the less wealthy. This will at least slow down the increase of inequality which afflicts the modern world.
Conclusion: Lower tax rates will put more money in the hands of people who will spend it, thereby boosting the economy by creating more demand, provide support for entrepreneurs starting new businesses (which will create more jobs) and lessen income inequality. All in all this represents major progress!
Last week I summarized the latest economic report from the Congressional Budget Office which very clearly describes both the slow rate of growth of our economy since the end of the recession, the enormous buildup of our national debt in the past five years and also the likelihood that it will continue getting worse for the foreseeable future unless big changes are made. About a week ago the two economists Edward Prescott and Lee Ohanian had an Op Ed in the Wall Street Journal, “U.S. Productivity Growth Has Taken a Dive”, pointing out that the productivity of U.S. workers has grown at an average annual rate of only 1.1% since 2011, much lower than the average annual rate of about 2.5% since 1948 (see the above chart). They also point out that the rate of new business creation is 28% below where it was in the 1980s (see the chart just below). Growth of worker productivity and growth of new business formation are the two main forces which drive economic growth. “Why is the startup rate so low? The answer lies in Washington and the policies implemented in the wake of the 2008 financial crisis that were, ironically, intended to grow and stabilize the economy.” Mr. Prescott and Mr. Ohanian continue that it is the “explosion in federal regulation, intervention and subsidies (which) has retarded productivity growth by protecting incumbents at the expense of more efficient producers, including startups.”
It is easy to be pessimistic about the prospects for change in the government policies which are retarding economic growth. Unfortunately, many political and social leaders have the point of view that it is income inequality which is “the defining issue of our time.”
The best response to this pervasive attitude is to shift the conversation towards equality of opportunity rather than dwelling on income inequality. By far the best way to increase opportunity for those who desire it and are willing to work for it is to grow the economy faster in order to create more and better jobs. If we are able to do this, we’ll all be much better off.
Restore Fiscal Stability: constrain federal spending in a manner that reduces long-term spending growth, making both Medicare and Social Security more progressive and less expensive.
Enact Comprehensive Tax Reform: adopt a competitive, pro-growth tax framework that levels the playing field for U.S. companies competing in global markets. Several studies estimate that cutting the U.S. corporate tax rate by 10 % (e.g. from 35% to 25%) would boost GDP by 1% or more.
Expand U.S. Trade and Investment Opportunities: pass updated Trade Promotion Authority legislation and use TPA to complete many new trade agreements which are already pending.
Repair America’s Broken Immigration System: increase the number of visas for higher skilled workers and provide legal status for the millions of undocumented immigrants currently living in the U.S.
These are the same “big four” policy changes which many progressive business leaders as well as evenhanded think tank experts often recommend. They are really just common sense ideas which reasonable people should be able to come together on.
Isn’t it obvious that we’ll soon be in big trouble if we don’t get our enormous budget deficits under control? And that controlling entitlement spending is key to getting this done?
Isn’t it just as obviously commonsensical that even U.S. based multinational corporations will try to avoid locating business operations in countries like the United States with very high corporate tax rates?
Isn’t it likewise obvious that foreign trade is just an extension of domestic trade and that the world is better off with as much trade as possible?
Finally, the secret of a vibrant, growing economy is to encourage as much initiative and innovation as possible. Who take more initiative than the immigrants who figure out how to get here in the first place?
We don’t have to accept a sluggish economy, high unemployment and massive debt! But we do need to take intelligent action to extricate ourselves from the predicament we are in!