The House and Senate have now each passed their own similar tax bills and a conference will come up with a single unified plan. Each of the individual bills has been scored to add $1 trillion to the national debt over a ten year period and so the final plan will almost surely have this same feature.
With our public (on which interest is paid) debt now 77% of GDP, the highest since right after WWII, and already growing rapidly, this is an extremely unattractive, and even dangerous, feature of the tax plan.
One of our most cherished principles in the U.S. is “liberty and justice for all.” But consider the normally perceived philosophical differences between the two political parties:
The Republicans are the party of liberty concentrating on providing maximum opportunity for people to succeed in life by realizing their full potential. This means fostering strong economic growth in order to have lots of opportunities for self-betterment. It also means keeping government at all levels as lean and efficient as possible, so as to minimize interference with private initiative. Excessive public debt is a particular anathema by creating a huge public burden, especially on future generations.
The Democrats are the party of justice concentrating on helping to provide the less fortunate members of society with the necessities of life by means of public support programs. This also means working to oppose all forms of prejudicial behavior based on race, gender, sexual orientation, etc. In addition it means trying to alleviate the inevitable income inequalities which arise in a free and dynamic society like ours, primarily with redistribution of tax revenues.
Conclusion. Both parties have fundamentally important principles. They gain and keep adherents by fighting for what they believe in. If the national Republican Party becomes lackadaisical about our huge national debt, as it appears to be right now, it risks losing its reputation for fiscal responsibility. This will do it great damage.
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.
My recent posts about the American Idea have argued that our country has a great future before it. We have a strong and prosperous economy and are the world’s leading innovator. Furthermore there are clear cut and effective ways to address the income inequality and poverty which hold back many Americans from fully sharing the benefits of our remarkably successful society.
But there is one huge problem our political system is ignoring which will lead to a major crisis if left unattended much longer.
I am referring, of course, to our gargantuan:
National Debt, now sitting at 77% of GDP (for the public part on which we pay interest), the largest it has been since the end of WWII. It is predicted by the Congressional Budget Office to keep steadily getting worse without major changes in current policy. Right now all of this debt is essentially “free money” because interest rates are so low.
Economic growthis created by tax cuts but only 10-20% of the lost revenue from tax cuts is offset by new growth.
Democrats, on the other hand, don’t take the debt seriously, except when arguing against Republican tax cuts. Debt deniers claim that the risk of government overspending is inflation, not bankruptcy. What they don’t understand is that
Interest rates will return to more normal (and much higher) historical levels eventually and, when this happens, interest payments on the debt will skyrocket by hundreds of billions of dollars every year. This will crowd out all sorts of spending on popular domestic programs. It is likely to lead to a new fiscal crisis, much worse than the Financial Crisis of 2008.
Conclusion. For all of our nation’s great strengths, we are in a very serious fiscal pickle, with no clear cut path of orderly resolution. Realistically our debt problem cannot be wound down without committed Presidential leadership and this is unlikely to happen anytime soon.
With an unemployment rate now down to 4.2% and the average wage rising 3.1% in the past year, the U.S. is finally recovering from the Great Recession which ended in June 2009. My last several posts have described an optimistic scenario for the U.S. economy going forward.
The American idea is thriving. The U.S. is the world’s most competitive large economy. Amazon, Apple, Facebook and Google are in the process of revolutionizing all aspects of life, all over the world. Productivity growth in the digital industries has grown at the annual rate of 2.7%, much faster than for physical industries. Democracy is mostly flourishing around the world.
Ecommerce is one example of a thriving industry. Fulfillment center weekly wages are 31% higher on average than for brick and mortar retail in the same area. Total ecommerce related jobs have increased much faster in the last two years than have traditional retail jobs been lost.
Income inequalitycan be addressed effectively by speeding up economic growth (with tax and regulatory reform), improving educational (especially with early childhood) opportunities and with better training programs for the unemployed and underemployed to qualify them for the millions of skilled jobs going begging for lack of qualified applicants.
One additional feature needed is “A balanced and sensible anti-poverty program,” to help many of the down and out get back on their feet.
The way to accomplish this is with:
Work requirements as a condition of public assistance. The work first approach has been shown to have better outcomes with regard to attachment to the labor force (see above chart) than even approaches which focus on training and education.
Conclusion. The U.S. economy is basically sound. We lead the world in many industries and especially in digital technology. There are lots of good jobs going begging for lack of qualified applicants. The best anti-poverty program is job training.
I have pointed out in a recent post that, not only is the U.S. the world’s most competitive large economy, but also that our per-capita GDP is growing faster than for our nearest rivals.
A particularly vivid example of this dynamism is ecommerce where both the adjusted (gains minus losses) size of the workforce and the average wage are increasing rapidly.
We also know that incomes in the U.S. are rising faster at the high end rather than further down (see chart below). What to do about this has become a major political issue.
Here are my ideas (in rough order of importance):
Economic growth is too slow, averaging just 2% per year since the end of the Great Recession in June 2009. It is reasonable to expect that the regulatory reform already underway and the tax reform under consideration in Congress can increase growth to 2.5% per year. Together with our low unemployment rate of 4.2%, this is already leading to more and better paying jobs.
Improve educational opportunities by, for example, making early childhood education widely available to low-income families and attracting the best teachers to the poorest performing schools with targeted bonus pay.
Better vocational and retraining programs to prepare the unemployed and underemployed for the millions of skilled jobs now going begging for a lack of qualified applicants.
Attempt to address the social inequality associated with income inequality, see here. Marriage rates, civic involvement and public trust have all declined significantly in recent years for the lower class. A very difficult problem to solve!
Conclusion. In a free society like the U.S., providing self-help opportunities for advancement is the natural and preferred way of lifting up people who need assistance. The U.S. does a okay job in this respect but there is plenty of room for improvement.
Income inequality is a hot political issue today and I have frequently discussed it on this blog. In particular, the chart just below shows that income inequality is only slightly worse since 1979, after government transfers and federal taxes are taken into account.
The AEI scholar, Mark Perry, has analyzed the 2016 annual report from the Census Bureau on “Income and Poverty in the United States” and points out the very strong correlation between income inequality and household demographics.
The mean number of earners per household increases steadily from a low of .43 in the lowest income households to 2.04 in the top income households.
The marital status of householders. The share of married-couple households is only 17.3% in the bottom income quintile and then increases steadily to 76.5% for the top income quintile.
The age of householders. In the lowest income quintile only 42.4% of households included individuals in the prime earning years of ages 35-64, while 69.9% of households in the top quintile include individuals in this group.
The work status of householders. Only 18% of the lowest earning quintile households included an adult who was working full time, as compared to 77.7% of top earning households.
The education of householders. Only 14.6% of lowest earning households had a family member with a college degree and this percentage rose steadily to 64% for top earning households.
Conclusion. Household demographics are very highly correlated with household income. Specifically, high-income households have a greater average number of income-earners than households in the lower-income quintiles. Individuals in high-income quintiles are far more likely to be well-educated, married, working full-time and in their prime working years. It is also true that individuals and households can and do move up and down the income quintiles as these key demographic variables change.
In today’s fractious political climate, it is at least widely recognized that skilled blue-collar workers are often suffering from stagnant income growth and/or job loss. Unfortunately, the political parties often disagree on how to address this major problem. There are several different perspectives from which to view the overall situation:
Slow economic growth, averaging only 2% per year since the end of the Great Recession in June 2009. From 1950 – 2000 the economy grew at over 3% per year and produced a prosperous American middle class. Now, with strong headwinds from globalization and constantly improving technology, we badly need faster overall economic growth to provide more and better paying middle class jobs.
Income inequality. There is increasing income inequality in the U.S. even though the top 25% or so are doing very well. But raising taxes on the wealthy could slow down economic growth by discouraging new investment. In addition, redistribution of tax revenue to lower income Americans will not give them much of a boost.
Income insecurity. This is a huge problem for the many blue-collar workers who are struggling to make ends meet. There are a number of specific government actions which could alleviate this enormous societal problem.
Economic justice. Poverty in the U.S. is widely distributed geographically, with almost as much in rural and small town areas as in big cities. This could provide an opportunity for Republicans and Democrats to work together to address a very challenging problem.
Conclusion. Our country has very serious economic and fiscal problems which are not being addressed because of severe partisan infighting in Congress. But slow economic growth, income insecurity and poverty affect a wide variety of people with different political outlooks. It’s inexcusable to allow partisan bickering to get in the way of finding workable solutions.
I’ve had several posts recently elaborating on the theme of Tyler Cowen’s new book, “The Complacent Class,” that too many Americans have become complacent about the comfortable life which they now enjoy.
Let’s take a different approach today and consider some of the problems which large numbers of Americans really are concerned about:
The election of Donald Trump as President. Granted, he just barely squeaked through in the Electoral College with 46% of the popular vote. He makes outlandish statements which have little, if any, basis in fact. But he has appointed many capable cabinet secretaries and other assistants and he listens to them. He adjusts his policies when struck down by the courts. In my opinion he has suffered no major mistakes so far.
Increasing income inequality in American society. This is a problem but, as Nicholas Eberstadt has pointed out, the real problem is income insecurity for millions of blue-collar workers. The best solution here is faster economic growth which the Trump Administration and the Republican Congress hope to achieve through tax reform and deregulation.
Global Warming. More and more Americans understand the increasing severity of this problem. There is a fair chance that a revenue neutral carbon tax will be implemented in the near future. This would be a big boost toward controlling carbon emissions in the U.S. and would provide more clout in establishing worldwide emission standards as well.
A chaotic world. Terrorism will not go away but at least ISIS will soon be defeated as an independent state. Other worldwide threats such as China, Russia and Iran can be managed with a strong U.S. military force undergirded by a strong U.S. economy.
Conclusion. The above problems are considered by large numbers of people to be serious and are therefore being addressed in one way or another. But our biggest problem of all, massive debt, is off the radar for much of the political class, including President Trump. It needs to be taken far more seriously than it is before we have another, and much more severe, financial crisis.
One of the topics I discuss on this blog is income inequality (here,here, and here). An interesting article in yesterday’s Wall Street Journal, “Upper Middle Class Sees Big Gains, Research Finds,” is highly pertinent to the inequality issue. As can be seen in the above chart, the percentage of people in the middle class or above has greatly expanded between 1979 and 2014. Furthermore, the basic research on this issue,by Stephen Rose at the Urban Institute, shows very clearly (in the chart below) what is happening: the higher is a family income, the faster it is increasing. The best policy response to this phenomenon should be clear. Rather than trying to decrease inequality with higher taxes on the wealthy, we should be trying to boost the less wealthy into higher income classes. The way to accomplish this is to:
Grow the economy faster with broad-based tax reform (lower tax rates paid for by shrinking deductions), immigration (guest worker) reform, (fair) trade expansion, and regulation reform (to help more small businesses get started). This will create more jobs and better paying jobs.
Improve education with early childhood education (to get minorities off to a better start in school), boosting high school graduation rates above the current 80% average (with better career and vocational education) and making college more affordable by putting more resources into community colleges and scholarships for low-income students.
Combat social inequality. The fraction of children with a single parent is the best predictor of upward economic mobility. The lower-income class marriage rate has dropped from 84% in 1960 to 48% in 2010. Policy should therefore focus on removing the marriage penalty in all government programs.
The basic forces of globalization and growing technology use are driving this societal change. The best way to respond is to enable more people to benefit from these basic trends.
My last post provides evidence that income inequality has increased more under recent Democratic presidents than under Republican presidents. Here is a brief summary of the argument:
Cheap money is of greatest value to those who have access to it.
The effects of the Bush housing bubble (in the 2000s) were more evenly distributed than for the Clinton stock market bubble (in the 1990s) or the Obama credit bubble.
Two earner households are the backbone of the American middle class.
During the first six years of the Obama presidency, the number of two-earner households declined, the number of single-earner households rose by 2.6 million and the number of no-earner households rose by 5 million. In other words, two-thirds of the increase in the number of households under Obama is accounted for by households with no-one working. This largely accounts for the shrinking middle class and the increase in inequality.
Another way to consider this situation is to look at the labor force participation rate which has been steadily decreasing since the year 2000. As the above chart shows, this trend is expected to continue indefinitely in the same downward direction. Along with a slowing increase in the productivity rate, this constrains the U.S. economy’s capacity to expand. Clearly what is needed is faster economic growth in order to create more jobs and better paying jobs. The way to accomplish this is with:
Tax Reform. Lower individual and corporate tax rates for all paid for by shrinking deductions and closing loopholes. More money in the hands of the middle class will stimulate demand. More money in the hands of small business will stimulate supply.
Expanded Earned Income Tax Credit. Putting more money in the pockets of low-income and marginally employed workers will encourage more of them to find work and stay in the workforce.
With all the headwinds holding the economy back, our national leaders (and would be leaders!) ought to be focusing much more attention on taking specific actions which would speed up economic growth.