Is Capitalism in Crisis?

Posted on April 17, 2014 by jackheidel

The economist and public lecturer, Richard Wolff, gave an address in Omaha NE last night, entitled “Capitalism in Crisis: How Lopsided Wealth Distribution Threatens Our Democracy”. His thesis is that after 150 years, from 1820 – 1970, of steadily increasing worker productivity and matching wage gains, a structural change has taken place in our economy. Since 1970 worker productivity has continued to increase at the same historical rate while the median wage level has been flat with no appreciable increase. This wage stagnation has been caused by an imbalance of supply and demand as follows:

Technology has eliminated lots of low skill and medium skill jobs in the U.S.
Globalization has made it less expensive for low skill jobs to be performed in the developing world at lower cost than in the U.S.
At the same time as jobs were being replaced by technology and disappearing overseas, millions of women entered the labor force.
A new wave of Hispanic immigration has caused even more competition for low skilled jobs.

In addition, stagnant wages for the low skilled and medium skilled worker have been accompanied by an increase in private debt through the advent of credit cards and subprime mortgage borrowing. This enormous increase of consumer debt led to the housing bubble, its bursting in 2007-2008, and the resulting Great Recession.
Five years after the end of the recession in June 2009, we still have an enormous mess on our hands: a stagnant economy, high unemployment, massive and increasing debt and a fractious political process. How in the world are we going to come together to address our perilous situation in a rational and timely manner?
Mr. Wolff believes that capitalism’s faults are too severe to be fixed with regulatory tweaks. He also agrees that socialism has proven to be unsuccessful where it has been tried. He proposes a new economic system of “Workers’ Self-Directed Enterprises” as an alternative.
I agree with Mr. Wolff that capitalism is in a crisis but I think that it can be repaired from within. The challenge is to simultaneously give our economy a sufficient boost to put millions of people back to work and to do this while dramatically shrinking our annual deficits in order to get our massive debt on a downward trajectory as a percent of GDP. How to do this is the main focus of my blog, day in and day out!

The Economic Outlook: 2014 – 2024 I. The Basic Data

Posted on February 6, 2014 by jackheidel

The Congressional Budget Office has just issued the report ”The Budget and Economic Outlook: 2014 to 2024”, giving its usual objective and nonpartisan look at our prospects for the next ten years. My purpose today is to give a simple interpretation of its basic data. In my next post I will address the implications of this interpretation.
The first chart above shows a forty year history of government deficit spending. The average deficit for this time period is 3% of GDP. From 1982 – 1987 the deficits were worse than this and from 2009 – 2013 they were much worse. The real problem is the accumulated deficits, i.e. the debt. The second chart above shows the public debt (what we pay interest on) all the way back to 1940 as a percent of GDP. As recently as 2008, the public debt was below 40% of GDP. Now it is 73% and climbing. This is very serious for two reasons. Right now our public debt is almost free money because interest rates are so low. But when interest rates return to their normal level of about 5%, interest payments will explode and be a huge drain on the economy. In addition, these CBO predictions assume continued steady growth of the economy. If and when we have a new recession or some other financial crisis, there will be much less flexibility available for dealing with it.
Now look at the last two charts. The first one shows the rate of GDP growth since 2000 which has averaged about 2% since the end of the recession in June 2009 and is projected by the CBO to level off at this same rate over the next 10 years. This is an historically low rate of growth for our economy. The final chart shows the gradual decrease of the labor force participation rate over this same time period. These two graphs are related! When fewer people are working, the economy simply will not grow as fast.
High debt and slow growth are big problems for an economy. We’re falling more deeply into this perilous state of affairs all the time. We need to take strong measures to break out of this dangerous trap!

Invested in America

Posted on January 30, 2014 by jackheidel

The Business Roundtable, an association of chief executive officers of leading U.S. companies, has just issued a new report, “Invested in America: A Growth Agenda for the U.S. Economy”, describing four actions which policymakers can take to rejuvenate the U.S. economy.
They are:

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!

Fundamental Tax Reform Is the Key to Solving Our Economic and Fiscal Problems I. Why Change Is Needed

Posted on January 5, 2014 by jackheidel

I have been writing this blog for just over a year. It addresses what I consider to be the two biggest problems faced by our country at the present time. First is our enormous national debt, now over $17 trillion, and the huge annual budget deficits which are continuing to make it worse. The second problem, of equal magnitude, is our slow rate of economic growth, about 2% of GDP annually, ever since the Great Recession ended in June 2009.
These two problems are closely related. If the economy grew faster, federal tax revenue would grow faster and the annual deficit would shrink faster. Not to mention that a faster growing economy would create more jobs and lower the unemployment rate, which is still a high 7%.
The impediments to solving these problems are huge. Our public debt, on which we pay interest, is now over $12 trillion or 73% of GDP. Although it may stabilize at this level for a few years, it will soon begin climbing much higher, without major changes in current policy. This is primarily because of exploding entitlement spending for retirees (Social Security and Medicare) who will increase in number from about 50 million today to over 70 million in just 20 years. As interest rates return to normal higher levels, just paying interest on the national debt will become, all by itself, a larger and larger drain on the economy.
The impediments to faster economic growth are increasing global competition, such as inexpensive foreign labor, as well as rapid advances in technology, such as electronics and robotics. Both of these trends reduce the need for unskilled workers in America which in turn holds down wages and slows down economic growth.
At the same time we have an antiquated tax code to raise the huge sums of money necessary to pay for a large and complex national government. It worked fine through the post-World War II period, as long as the U.S. had the dominant world economy with little significant competition from others. But this situation no longer exists. We now have a tax system which doesn’t raise enough money to pay our bills and at the same time is so progressive that the highest rates (39.6% on individuals and 35% for corporations) are not sufficiently competitive with other countries. This discourages the entrepreneurship and business investment we need to grow the economy faster and create more jobs.
We have an enormous problem on our hands! Is it possible to fundamentally change our tax system to turn things around? My next post will answer this question in the affirmative!

Oklahoma’s Senator Tom Coburn: We Need More like Him!

Posted on January 2, 2014 by jackheidel

Senator Tom Coburn of Oklahoma has an Op Ed column in the Wall Street Journal from two days ago “The Year Washington Fled Reality”, discussing many of the things that are wrong with our national government. Granted that all elected officials “play politics” to some extent or another, nevertheless Dr. Coburn, an obstetrician, is amazingly independent of the reigning political culture. He spent three consecutive terms in the House of Representatives, left Congress for four years, and now is back serving his second term in the Senate. He has announced that he will not run for re-election in 2016 when his present term ends.
Dr. Coburn is constantly drawing attention to, and attacking, the enormous amount of wasteful and inefficient spending approved by Congress. The Popular Romance Project, pictured above, is an example. His office has just published its fourth annual report on government waste, “Wastebook 2013”, detailing 100 different “examples of government mismanagement and stupidity. … Collectively these cost nearly $30 billion in a year when Washington would have you believe everything that could be done, has been done to control unnecessary spending.”
Dr. Coburn has prevailed upon the Government Accounting Office to issue annual reports called “Actions Needed to Reduce Fragmentation, Overlap and Duplication and Achieve Other Financial benefits.” Three of these reports have now been issued. Altogether they list almost 400 individual actions which could be taken to improve the efficiency and effectiveness of 162 different program areas.
In spite of all the good work he is doing, Dr. Coburn would be even more effective if he had more help. Fiscal conservatives should stop wasting their time on senseless gestures like trying to defund Obamacare. They need to get down in the trenches with serious deficit hawks like Tom Coburn and whittle away at wasteful programs one by one.

Why Is It So Hard For Congress To Do Its Job?

Posted on December 15, 2013 by jackheidel

In response to the recent budget deal which has already passed the House of Representatives, Taxpayers for Common Sense has issued a new report “Real Savings, Real Deficit Reduction: Relieving Budget Caps with Common Sense Savings in Fiscal Year 2014”, showing how $100 billion could be cut from the federal budget for fiscal 2014, completely offsetting the supposedly onerous cuts required by the sequester. Here is a summary of what TCS has come up with:

Of course there are many ways to achieve $100 billion in savings in a single year and this is only one particular way to do it. But it is a balanced plan making roughly comparable cuts from many different agencies and also including a significant amount of tax expenditure savings. It would, of course, be much better to also include adjustments to entitlement spending such as Social Security and Medicare. A big reason for keeping the sequester in place, or offsetting it with equivalent cuts, as TCS is suggesting, is to create more interest in making necessary changes in entitlement programs.
Yet another way of accomplishing the same goal would be to keep the sequester spending levels in place but to give each government agency the authority to rearrange the spending cuts within its only agency. This is what management should be doing anyway on a routine basis.
It is very disappointing that Congress will not do the job, one way or another, that is required to operate the government on a sound financial basis. Let’s hope that the voters make big changes in the elections coming up in 2014!

How to Get the Economy Back on Track

Posted on December 10, 2013 by jackheidel

Harvard Economist, Martin Feldstein, has an Op Ed column in yesterday’s New York Times, “Saving The Fed From Itself”, which gets our current economic situation half right. First of all, Mr. Feldstein says that the Fed’s quantitative easing policy is inadequate because “the magnitude of the effect has been too small to raise economic growth to a healthy rate. … The net result is that the economy has been growing at an annual rate of less than 2 percent. … Weak growth has also meant weak employment gains. … Total private sector employment is actually less than it was six years ago. … While doing little to stimulate the economy, the Fed’s policy of low long-term interest rates has caused individuals and institutions to take excessive risks that could destabilize the economy just as it did before the 2007-2009 recession.” So far he’s right on the button!
But then he goes on to say, “To get the economy back on track,” Congress should enact a five year plan to spend a trillion dollars or more on infrastructure improvement and that this would “move the growth of gross domestic product to above three percent a year.” An artificial stimulus like this might work temporarily but then it ends and we’re back where we started. We need a self-generating stimulus that will keep going indefinitely on its own. How do we accomplish this?
The answer should be obvious. We do it by stimulating the private sector to take more risk in order to generate more profits. In the process they will hire more employees and boost the economy.
How do we motivate the private sector? By lowering tax rates and loosening the regulations which stifle growth. Closing tax loopholes and lowering deductions (which will raise revenue to offset the lower tax rates) has the added benefit of attacking the corporate cronyism which everyone deplores.
We really do need to put first things first. If we can jump start the economy by motivating the private sector to invest and grow, we will have more tax revenue to spend on new and expanded government programs as well as shrinking the federal deficit.
Why is this so hard for so many people to understand?

The Mess in Detroit: A Stern Warning for the Whole Country

Posted on December 5, 2013 by jackheidel

An article in yesterday’s New York Times, “Detroit Ruling Lifts a Shield on Pensions”, reports a ruling by bankruptcy judge Steven W. Rhodes that Detroit “could formally enter bankruptcy and that Detroit’s obligations to pay pensions in full is not inviolable.”
The article goes on to say “that most here agree that the city’s situation is dire: annual operating deficits since 2008, a pattern of new borrowing to pay for old borrowing, miserably diminished city services, and the earmarking of about 38 percent of tax revenues for debt service. A city that was once the nation’s fourth largest has dropped to 18^th, losing more than half of its population since 1950. The city was once home to 1.8 million people but now has closer to 700,000.”
The parallels and analogies between what has happened in Detroit and what is now happening in the U.S. are striking. The U.S. has had huge annual deficits for five years in a row and the accumulated debt is enormous, the Federal Reserve is holding interest rates down to make borrowing cheaper, and our country’s infrastructure is deteriorating much faster than it is being repaired.
Right now interest on the national debt is small ($223 billion in 2013, or 8% of federal revenues). But interest rates will inevitably return before long to their average historical rate of about 5%. Right now the public debt (on which we pay interest) is just over $12 trillion. This means that in the near future interest on the national debt will be at least $600 billion per year and probably much larger because the debt is still growing so rapidly. This will take a huge bite out of revenue and leave far less of it for other purposes.
This problem will continue to exist even if the budget were to be miraculously balanced from now on but it would at least lessen over time as the economy continues to grow. Without budget restraint the problem will never go away and will be a perpetual drag on our national welfare.
This is, of course, exactly the condition in which Detroit finds itself at the present time. Detroit has the option to declare bankruptcy and make its creditors and pensioners take big losses. Once it does this it can make a fresh start and perhaps recover its former status.
But are we prepared to let the whole country suffer a similar fate? The consequences would be enormous. If the U.S. goes down, the whole western world could come down with it. Democracy and human progress would be severely threatened. This is really too terrible a tragedy to even contemplate. Let’s turn things around before they get any worse!

Controlling the Cost of Healthcare

Posted on December 3, 2013 by jackheidel

The New York Times is running a series of articles, “Paying Till It Hurts,” giving many examples of the very high cost of healthcare in the U.S. today. The latest article “As Hospital Prices Soar, A Single Stitch Tops $500”, focuses on the high cost of emergency room treatment around the country.
We spend 18% of GDP on healthcare, twice as much as any other country in the world. It is specifically the cost of healthcare entitlements, Medicare and Medicaid, which is driving our huge deficits and rapidly growing national debt. But to limit the cost of these entitlement programs, we first have to address the more fundamental problem: how to control the overall cost of healthcare in general.
Our current healthcare system, a combination of private insurance and government programs, is very inefficient. The basic problem is that the tax treatment of employer provided health insurance takes away the incentive for individuals to control the cost of their own care. And Obamacare does not solve this problem, because it just extends the present system to more people, rather than revamping it.
There are essentially two different ways to transform our current healthcare system to make it far more efficient. One way is to turn it into a single payer system, like what most of the rest of the world has. This could be accomplished by simply expanding Medicare to everyone. Costs would then be controlled by government regulation which would, of course, include rationing. Given the unpopularity of Obamacare, with all of its mandates and uniform coverage requirements, it is unlikely that Americans would be happy with such a highly proscribed single payer system.
The alternative is to change over to a truly consumer based, market oriented system. This could be accomplished by limiting the present tax exemption for employer provided insurance. For example, the current system could be replaced by a (refundable) tax credit equal to the cost of catastrophic insurance (i.e. insurance with a very high deductible). All other healthcare costs, whether paid for directly by consumers or through insurance, would be with after tax dollars. Subsidies could be provided to lower income people through the Obamacare exchanges. Once such a system is set up and running smoothly, it could fairly easily be extended to encompass Medicare and Medicaid.
Insurance companies selling catastrophic coverage would negotiate with hospitals and other healthcare providers to get the lowest possible prices for their customers. In other words, both insurance companies and providers would compete in the open market to deliver healthcare products at the lowest possible cost.
Something along this line will have to be done and the sooner we get started the better!

The Floundering of America

Posted on November 21, 2013 by jackheidel

In yesterday’s Wall Street Journal, columnist William Galston talks about “The Floundering of America”. Based on recent reports from the Congressional Budget Office, Mr. Galston says that “Today we are hurtling toward a less dynamic economy, a meaner society and a riskier world.”
His argument is based on these observations:

For the past 40 years, 1970-2010, the labor force expanded at an average rate of 1.6% per year. It will soon slow to only .4% annual growth, because of more retirements and a plateauing of women’s labor-force participation. This means that growth in GDP will slow down to about 2% annually from its historical average of over 3%.
America is aging very fast. Today there are 57 million Social Security beneficiaries which will increase to 76 million in 2023. Obviously this will rapidly increase entitlement spending on retirees.
America already spends 18% of GDP on healthcare costs and the CBO projects that this will grow to 22% by 2038.

“In sum, current trends and policies will yield lower rates of economic growth, painfully slow gains in real incomes, huge increases in outlays for expenses related to an aging population, and a health sector that devours more and more of the national product”, he says.
These trends are all contributing to an explosion of the national debt. The only current strategy to keep this debt even roughly stable during the next decade, let alone reduce it, is to shrink discretionary spending through sequestration. This will lead to a decline in discretionary spending to 5.3% of GDP by 2023. This means roughly 2.6% of GDP for national defense with an equal share or all other domestic purposes.
“This is pure folly”, says Mr. Galston. “The country needs a new national strategy for a viable future.”
How do we achieve a new strategy? Immigration reform will increase the size of the workforce. Tax reform could boost the economy by encouraging business expansion, risk taking and entrepreneurship. True (consumer-driven) healthcare reform could dramatically lower the cost of healthcare. In other words there are potential policies out there that address our national floundering. We simply need leaders who are capable of going beyond partisanship in order to help create a better future!

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility

Category Archives: federal spending