Category Archives: growth vs equity

How Do We Fight Economic Inequality? By Restoring Growth!

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The liberal economist Paul Krugman returns to one of his favorite topics in yesterday’s New York Times, “Why Inequality Matters”.  “On average, Americans remain a lot poorer today than they were before the economic crisis.  For the bottom 90 percent of families, this impoverishment reflects both a shrinking economic pie and a declining share of that pie.”  The problem with Mr. Krugman’s analysis is that he offers no solution beyond more fiscal stimulus: “the premature return to fiscal austerity has done more than anything to hobble the recovery.”
CaptureBut there is another route to recovery and it is propounded in today’s Wall Street Journal by George Osborne, the United Kingdom’s Chancellor of the Exchequer, “How Britain Returned to Growth”. “We cut spending and top tax rates, and now deficits are down and jobs are being created at a healthy clip … at the rate of 60,000 per month, roughly equivalent to 300,000 in the U.S. … The corporate tax rate is being cut to 20% from 28%. … As a result, more international firms are moving their headquarters to Britain and investment is flowing into our country.”
Yes, as Mr. Krugman says, economic inequality in the U.S. is bad and getting worse.  The question is what to do about it.  Shall we try to improve the situation with artificial stimulation, increasing government debt, already very high, for future generations?  Or shall we address this inequality by encouraging businesses to grow and expand and thereby raise wages and hire more people.
The good news is that America is the success story of the 20th century.  The bad news is that everyone else in the world has figured this out and is now copying our own best methods.  Either we can compete, innovate, stay on top and thrive, or else we can get lazy, stagnate and sink down in the pack.
Will it be more inequality or more growth?  The choice is up to us!

How to Create a More Just and Equal Society

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In a recent Washington Post column, “Government is Not Beholden to the Rich”, the economics writer Robert Samuelson shows that the federal government is actually “beholden to the poor and middle class.  It redistributes from the young, well-off and wealthy to the old, needy and unlucky.”
For example, in 2006 “53% of non-interest federal spending represented individual benefits and healthcare.  Of these transfers (nearly $1.3 trillion), almost 60% went to the elderly.  Of the non-elderly’s $550 billion of benefits and healthcare, the poorest fifth of households received half.  The non-elderly paid about 85% of the taxes, with the richest fifth covering two-thirds of that.  If government taxes and transfers – what people pay and get – are lumped together, the average elderly household received a net payment of $13,900 in 2006; the poorest fifth of non-elderly households received $12,600.  By contrast, the net tax payment for the richest fifth of non-elderly households averaged $66,000.”
A couple of months ago a Wall Street Journal Op Ed “Obama’s Economy Hits His Voters Hardest” by the economist Stephen Moore, points out that during the time period 1981 – 2008, the Great Moderation, income for black women was up by 81%, followed by white women up 67%, black men up 31% and, finally, white men up only 8%.  Of course, all of these groups have lost income in the last four years, during the very weak recovery from the Great Recession.
The answer is clear.  The best way to help low income people lift themselves up is not to redistribute even more government resources to them but rather to boost the economy to create more and better jobs.  There are tried and true methods to get this done: tax reform (to encourage more risk taking and entrepreneurship), immigration reform (to provide more willing workers) and true healthcare reform (to get healthcare spending under control).
We need national leaders who understand how to make the economy grow faster and are able to stay focused on this urgent task.

Where Are the Jobs? III. The Real Inequality Gap

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Today’s Wall Street Journal has a story “Job Gap Widens in Uneven Recovery”, which shows how unbalanced the economic recovery is.  For workers aged 25 and older, unemployment is only 6%, compared to the overall unemployment rate of 7.3%.  But for the young, ages 16 – 24, unemployment is 15%.  Since the end of the recession in June 2009, wages have risen by 12% for the highest paid 25% of all workers.  For the lowest paid 25%, wages have only risen by 6% over this time period.
“Households earning $50,000 or more have become steadily more confident over the past year and a half.  Among lower income households, confidence has stagnated.  The gap in confidence between the two groups is near its widest ever.  That isn’t only bad for those being left behind.  It’s also hurting the broader recovery, because it means families are able to spend only on essential items.  Consumer spending rose just .1% in September 2013, after adjusting for inflation.”
Unfortunately, this data is entirely consistent with other gloomy economic trends which I have been reporting on recently such as the threat of technology to the middle class, the increased competition from globalization, and the shrinking size of the labor pool because of baby boomer retirements.
The New York Times has a running series of articles on “The Great Divide” and how to address it.   Here is a clear cut example of this divide: how older, better trained and more affluent Americans are recovering from the recent recession more quickly than the less well off.  This evident unfairness is damaging to the health of our society.  The question is how do we address it in an effective manner?
The basic problem is the overall slow growth of the economy, about 2% of GDP per year, since the recession ended in June 2009.  There are many things that policy makers can do to speed up this growth if they were only able to set aside ideological differences.  The best single action by far is tax reform, for both individuals and corporations, lowering overall rates in exchange for reducing deductions and loopholes which primarily benefit the wealthy.
Here is yet another reason why it is so important to speed up the growth of our economy.  How exasperating that our national leaders cannot figure out a way to come to together and get this done!

What Is the Best Way to Reform the Tax Code?

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In today’s New York Times it is reported that President Obama, “Obama Proposes Deal Over Taxes and Jobs”, proposes “a cut in corporate tax rates in return for a pledge from Republicans to invest in more programs to generate middle class jobs.”  Reducing the top corporate tax rate from 35% to 28%, for example, balanced by tightening tax deductions and loopholes, would raise additional revenue on a one time basis as companies switch from one tax system to another.  It is this new one time revenue which would be spent on the president’s priorities.
The President’s proposal has given a boost to Senator Max Baucus and Representative David Camp, the chairs of Congress’s tax writing panels, “Lonely Bipartisan Push to Overhaul Tax Code Finally Gets Noticed”, who are working together to construct a broad based, pro-growth, plan to reform the entire tax code, for both individuals and corporations.
Which is the better way to proceed?  What is the best way to boost the economy? Revamping only the corporate tax structure to raise new tax revenue for public spending projects?  Or by eliminating as many deductions and loopholes as possible over all in order to enact the lowest possible tax rates for both individuals and corporations?
To me the answer is obvious.  It is investment, risk taking and entrepreneurship which create the most jobs for the long term.  The best way to stimulate the private economy is with the lowest possible tax rates for all.  It is unfortunate that the President will not accept this basic economic truth and work with Congress in a bipartisan manner to move the economy forward and create more jobs.

What Is the Best Way to Help the Middle Class?

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An article in yesterday’s New York Times, “Obama Says Income Gap Is Fraying U.S. Social Fabric”, quotes the President that “If we don’t do anything, then growth will be slower than it should be.  Unemployment will not go down as fast as it should.  Income inequality will continue to rise.  That’s not a future that we should accept.”  He says that “I will seize any opportunity I can to work with Congress to strengthen the middle class, improve their prospects, improve their security.”
A recent editorial in The Wall Street Journal, “The Inequality President”, shows with a chart that median household incomes have fallen from $54,218 in June 2009 as the recession ended to $51,500 in May 2013.  As the WSJ says, “For four and a half years, Mr. Obama has focused his policies  on reducing inequality rather than increasing growth.  The predictable result has been more inequality and less growth. … The rich have done well in the last few years, thanks to a rising stock market, but the middle class and poor have not.”
There are many things that Congress and the President could do to boost the economy if they were willing to work together and compromise.  Obamacare doesn’t need to be repealed, just modified by dropping the employer mandate which is a job killer.  Broad based tax reform, with lower tax rates, paid for by eliminating tax preferences, would be a big boost to investment, risk taking and entrepreneurship.  A reasonable compromise would be to use a part of the revenue raised from eliminating loopholes for deficit reduction.
But little progress will be made unless the President is willing to show leadership by rising above partisanship.  There are all sorts of ways he could do this.  One simple way would be to show that he understands the seriousness of the rapidly growing national debt by supporting some of the many thoughtful proposals for more government efficiency.
A large majority of people want our first African-American President to be successful.  But right now he is not on track to achieve this.

What is America’s Biggest Problem?

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I’d like to do things differently on Memorial Day and ask you to say what you think our biggest national problem is at the present time.  If you have been following this blog for a while, you can probably guess what my own answer is.  But I will not answer directly, at least not yet.   However I will respond to your comments and give you my take on your answer.  Later on I’ll give you my own answer to the question. I hope to hear back from you!

Income Inequality and What to Do About It

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In yesterday’s New York Times Timothy Noah has a column in The Great Divide series “The 1 Percent Are Only Half the Problem” in which he makes the case that there are two different types of inequality which society needs to address.  First, the income gap between the top 1% and the bottom 99% is getting wider and wider.  But there is also a skills gap between the (college) educated class and those whose education ended in high school.
What can and should be done about these two different aspects of inequality in America?  Controlling the excesses on Wall Street in order to avoid future bailouts will help control the wages of the top 1%.  This is already being done with the Dodd-Frank financial reforms and current efforts to require the biggest banks to hold more capital reserves.
But much more could be done.  Unfortunately, the main effect of the Federal Reserve’s low interest rate policy is to drive up the stock market which favors the more affluent.  Broad based tax reform which would lower tax rates by eliminating unjustified tax breaks for the rich would do much more to stimulate faster economic growth and give a big boost to middle class incomes.
The huge and rapidly growing cost of employer provided health care (now averaging about $5000 annually for individual coverage and about $14,000 for family coverage) is having a huge negative impact on middle class wage growth.  The U.S. spends twice as much of GDP, about 18%, on healthcare as any other developed nation.  Reforming employer provided health insurance by removing the tax exemption (and replacing it with lower tax rates) would get each of us personally involved with controlling healthcare costs.
The skills gap is driven by globalization and the advance of technology and is not going to disappear.  The only way to address it is by improving educational outcomes.  Putting more emphasis on early childhood education (ages 0-5) will help as well as making college more accessible and affordable.  Online education and especially Massive, Open, Online Courses (MOOCs) will help in both respects.  Hopefully more and more students and families will come to realize that there are many attractive alternatives to very expensive and elite residential colleges and universities.  It is not necessary to be wealthy or to borrow lots of money to attend college!
Conclusion:  inequality in American society is a large and growing problem.  But there are effective ways for both policy makers and individuals to respond.

The Stark Budget Choices Now Before Congress

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The Congressional Budget Office has just released a new report, “Macroeconomic Effects of Alternative Budgetary Paths” concerning several decisions which Congress will have to make in the very near future, pertaining to the sequester budget cuts of $1.1 trillion over ten years, approving a budget for the remainder of the current 2013 fiscal year and raising the federal debt limit.

The first page of the CBO report conveys the basic message with a single graph.  If the sequester is cancelled and there is perhaps even additional deficit spending in the near term, it will give the economy a small boost in 2014 but cause a drop in GDP of close to 1% by the year 2023.

If the deficit is decreased by an additional $2 trillion over 10 years, beyond the spending cuts required by the sequester, the economy will take a small hit in 2014 but will receive a boost of close to 1% by 2023.  An additional deficit reduction of $2 trillion over 10 years, will cause a greater immediate hit to the economy but produce a much more substantial boost of almost 2% by 2023.

An excellent summary of the CBO report, including political implications, is given by the Wall Street Journal on February 6, 2013.  For example, it is the last scenario above, an additional $4 trillion deficit reduction over ten years, which would put the US on a path to achieve a balance budget by 2023.

Under current law, with no additional deficit reduction in the future beyond the sequester which takes effect on March 1, the annual deficit will shrink for the next three years but then resume a steady climb back to $1 trillion by 2023 and the publicly held national debt will climb from its current level of 73% of GDP to 77% of GDP by 2023.

The choice now before Congress is thus very clear:  should we continue kicking the fiscal can down the road, as the Keynesian economists want to do, or should we bite the bullet, take a small immediate hit to the economy, and thereby put the future of our country on a sound financial basis?

To me the answer is clear as clear can be.  But it will require our national leaders to stand up and be counted.  Do enough of them have the political courage to do what needs to be done?

The Great Reset

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The Great Recession ended almost four years ago, in June 2009, and growth in the US economy has been an anemic 2% annually since then.  The unemployment rate, now 7.8% is dropping only very slowly and millions of workers are still unemployed or underemployed.  If this isn’t bad enough already, knowledgeable experts are now predicting (see the Friday January 25 Omaha World Herald)  that many mid-skill, mid-pay jobs will never return largely because of the rapidly accelerating use of technology in all aspects of our lives.
Faster economic growth would not only provide more jobs but would also increase tax revenue and therefore shrink the deficit.  If such traditional measures as lower tax rates, deregulation and aggressively promoting foreign trade won’t fly politically which, of course, is very disappointing, then we need to consider other measures which could gain political support.  A good place to start is to enact The Startup Act of 2011 proposed by the Kauffman Foundation.
The Startup Act proposes: 1) more visas for entrepreneurs and Green cards given out with STEM degrees, 2) tax incentives for startup investments, 3) speeding up the patent process for entrepreneurs and 4) relaxing the regulatory burden on startup businesses.  Such measures as these need not be expensive to undertake and could give our economy a big boost.
Our leadership role in world affairs depends on our economic, military and cultural dominance.  First and foremost is our economic strength.  It is vital to speed up the growth of our economy.  Any and all means to accomplish this should be considered.  The status quo is not acceptable!

Is inequality Holding Back the Recovery?

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The Nobel prize-winning Keynesian economist, Joseph Stiglitz, claims in the January 20, 2013 New York Times, that “Inequality is holding back the recovery”.  He says that the most important reason is because the middle class is too weak to support the consumer spending we need.  And that the weakness of the middle class is holding back tax receipts.  And that we are squandering our young who are increasingly unable to get an education without borrowing huge sums of money.

Many liberals deplore the slow rate of economic growth since the recession ended in June 2009 and all of the problems it creates and exacerbates such as high unemployment and lower tax revenue to support public services.  What these liberals amazingly fail to understand is that there are tried and true methods to promote economic growth.  What we need to do is to lower tax rates (offset by eliminating tax deductions and loopholes), remove or diminish the enormous new regulatory burdens which have recently been placed on the economy, boost domestic energy production and aggressively, rather than halfheartedly, pursue new trade agreements to lower the barriers to free trade.

Powerful trends such as globalization and computer technology are driving economic progress and causing the inequality which Stiglitz and many others deplore.  We need to embrace these trends and use them to our advantage.  The way to boost the middle class is to boost our stagnant economy in the tried and true ways which have worked in the past.  The way to boost postsecondary education is to recognize that there are many high quality and low cost schools all over the country.  And that it is not necessary to borrow lots of money to get a good education. 

In short, the solution to the urgent and critical economic and fiscal problems we are now facing lies entirely under our control.  All we need are national leaders who have the vision, capability and fortitude to lead the way.