A Rescue That Worked But Left a Troubled Economy

 

The occasion of the publication of Timothy Geithner’s book “Stress Test,” giving his version of the financial crisis, has led to a number of newspaper articles looking back at the Great Recession and its aftermath.  The New York Times’ economics reporter David Leonhardt has such an analysis “A Rescue That Worked, But Left a Troubled Economy” in today’s NYT.
Capture“The Great Depression created much of modern American government and reversed decades of rising inequality.  Today, by contrast, incomes are rising at the top again, while still stagnant for most Americans.  Wall Street is flourishing again.”
“The financial crisis offered an opportunity to change this dynamic.  But the (Dodd-Frank) law seems unlikely to transform Wall Street, and the debate over finance’s huge role in today’s economy will now fall to others.  Should the banks be broken up?  Should the government tax wealth?  Should the banks face higher taxes?”
In my opinion, the real problem is not our financial system but the strong headwinds which are slowing down the economy.

 

  • Globalization of markets which creates huge pressure for low operating costs.
  • Labor saving technology which also puts downward pressure on wages.
  • Women and immigrants having entered the labor market in huge numbers, and therefore greatly increasing the labor supply.

The loss of wealth in the Great Recession also means that even people with good jobs have less money to spend.  What we sorely need is faster economic growth to create more jobs and higher paying jobs.  How do we accomplish this?

  • The best way to boost the economy is with broad-based tax reform to achieve the lowest possible tax rates to put more money in the hands of the working people who are the most likely to spend it. Such lower rates can be offset by closing the myriad tax loopholes and at least shrinking, if not completely eliminating, tax deductions which primarily benefit the wealthy.
  • Lowering corporate tax rates, again offset by eliminating deductions, providing a huge incentive for American multinational companies to bring their profits back home for reinvestment or redistribution.

With millions of unemployed and underemployed workers, reviving our economy with a faster rate of growth should be one of the very top priorities of Congress and the President.  Survey after survey show that this is what voters want.  Why isn’t it happening?

Is Capitalism in Crisis?

 

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:
Capture

  • 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!

Wealth Inequality I. What Is It?

 

The subject of income inequality has generated much interest and concern in recent months.  Now we will also be hearing a lot about wealth inequality, based on the highly credible new work, “Capital in the Twenty-First Century” by the French economist, Thomas Piketty.  The New York Time’s Eduardo Porter, summarizes the basic message in his recent column “A Relentless Widening of Disparity in Wealth”, which is clearly displayed in the two charts below.
CaptureThe value of private capital as a percentage of national income worldwide has been growing steadily since about 1950 and Mr. Piketty predicts that this trend will continue indefinitely.  The trend is equally true, not only in the U.S., but also in other developed countries as is illustrated in the chart.  It happens because the income from wealth, i.e. return on investment, typically grows faster than wages and GDP.
As Mr. Porter says, “It means future inequality in the United States will be driven by two forces.  First of all, a growing share of national income will go to the owners of capital.  Of the remaining labor income, a growing share will also go to the top executives and highly compensated stars at the pinnacle of the earnings scale.”
This trend has now been in effect ever since 1870, with the exception of the period between World War I and World War II, when a massive amount of wealth was destroyed.  The forces of globalization and growth of technology are contributing to both types of inequality, especially in the developed world (see my post of January 23), and these forces will almost surely continue unabated.  So the wealth and income inequality gaps are just going to keep getting worse.
How much inequality can exist in a democracy?  The number of losers (the low income, the poor, and even the struggling middle class) will gradually get bigger and bigger and will become more and more frustrated and express their discontent at the ballot box.  This threatens the future of capitalism and free enterprise, the economic principles on which our way of life is founded.
Something has to be done!  Stay tuned for my next post!

Invested in America

 

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.
CaptureThey 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!

What Is the State of the U.S. Economy?

 

On the eve of the President’s State of the Union address, the New York Times gives an answer to this question in today’s paper, “Obama’s Puzzle: Economy Rarely Better, Approval Rarely Worse”.  The charts below do show the basic trends all moving in the right direction.  But is this good enough?
CaptureThe unemployment rate is moving steadily downward but it is still a high 6.7% almost five years after the recession ended in June 2009.  And this is with a labor participation rate of only 58.6%, which is historically very low.
The budget deficit is dropping but is still unsustainably high.  In the five years, 2009 – 2013, deficits have totaled $6 trillion dollars.  As soon as interest rates return to their historical average of 5%, interest on this $6 trillion in new debt alone will total $300 billion per year, forever!  Furthermore, the Congressional Budget Office, the most credible source of budget information, predicts that the deficit is likely to resume an inexorable climb within a few years as baby boomers retire in ever greater numbers, rapidly driving up entitlement costs.
Economic growth was stronger than expected in the last quarter of 2013 and this is a good sign.  But it has averaged only about 2% since the recession ended which is very low by historical standards, in a post recessionary period.
The point is, do we really need to settle for such mediocre performance: a stagnant economy, high unemployment and massively accumulating debt?  Should we just declare that in a highly competitive global economy with an ever higher premium on information and technology, that we just can’t do any better than we already are?  Isn’t there some way to make our economy grow faster in order to provide more and higher paying jobs?
I think that the answer to this last question is an emphatic yes!  In fact, this is what my blog is all about.  Just read some of the other recent posts and let me know if you disagree with what I am saying!

A Global Perspective on Income Inequality II. Where Are the Jobs?

 

My last post on January 23 shows vividly what the challenges are in restoring the American middle class to the prosperity which existed up until the Great Recession hit in late 2007.  The problem, of course, is the gale strength force of globalization which is lifting up low wage workers all over the developing world and creating huge competition for the many low-skilled workers in the United States.
In today’s New York Times, the former Obama Administration car czar, Steven Rattner, writes about “The Myth of Industrial Rebound” in the United States, explaining why manufacturing jobs are coming back much more slowly than other jobs.  “Manufacturing would benefit from the same reforms that would help the broader economy: restructuring of our loophole-ridden corporate tax code, new policies to bring in skilled immigrants, added spending on infrastructure and, yes, more trade agreements to encourage foreign direct investment.”
CaptureThe above chart shows the huge decline in manufacturing jobs relative to other parts of the economy such as the education and health sector as well as the professional and business sector.  Of course, these more rapidly growing service sectors are the ones benefitting from the information technology revolution.  In manufacturing, on the other hand, the low skill jobs are going overseas while the high skill jobs, using technology such as robots, are much fewer in number.
Conclusion: in order to increase manufacturing jobs in the U.S., we better government policies, as outlined above by Mr. Rattner.  But we also need to recognize that there aren’t going to be as many high skilled manufacturing jobs in the future.  We are going to need much better K-12 and post-secondary educational outcomes to prepare the middle class for the high skilled service jobs which will predominate in the future.

Harnessing Market Forces versus Offsetting Market Forces

 

The economist Matthew Slaughter writes in today’s Wall Street Journal that ’High Trade’ Jobs Pay Higher Wages. He points out that the 22.9 million Americans who work for U.S. headquartered multinational companies made an average of $73,338 in 2011 compared with the overall average wage of about $55,000 that year.  “Workers in multinational firms earn more, as global engagement fosters innovation and productivity growth.”
“There is a growing concern about stagnant or falling incomes, yet most of the measures proposed to deal with the issue – raising the minimum wage and reinstating unemployment benefits – purport to help workers by offsetting market forces.  Less attention is given to harnessing market forces.”
CaptureThis can be done by “liberalizing U.S. trade, investment, immigration and tax policies.”  In other words, we need more trade agreements like NAFTA, which has been so successful in increasing trade in North America.  We need more high skilled workers, both domestic and foreign.  We need lower corporate tax rates to encourage multinational corporations to bring their trillions of dollars in overseas profits back home.
We should always strive for a more equal society with less income inequality.  But the best single way to do this is to create more opportunity by growing the economy, i.e. by harnessing market forces.