“Speak softly and carry a big stick” President Theodore Roosevelt, 1858 – 1919
Donald Trump was elected President because of his strong support from white blue-collar workers who feel left behind in the modern world of globalization and rapid technological change. While the President has to work with Congress to implement new economic and fiscal policies, he has almost free rein in conducting foreign policy.
There are major international issues that President Trump will have to deal with such as:
Rapid Chinese economic growth and assertion of power in Southeast Asia. Also currency manipulation and over-protection of domestic industry against foreign imports.
Russian assertion of power in Eastern Europe and the Middle East make it a dangerous adversary. All the more so since the Russian population is in decline and its economy is stalled under Putin.
Iran’s nuclear ambitions are only temporarily halted under the Iranian nuclear deal of 2015. Iran continues to support terrorism in Syria and elsewhere in the Middle East.
The defeat of ISIS and the containment of terrorism all around the world but especially in the Middle East.
Support of our democratic allies in hotspots around the world such as Japan and South Korea in Asia as well as our NATO allies in Europe.
Ever since WWII when the U.S. emerged as the sole superpower, the world has benefitted from overwhelming U.S. economic and military strength. The resulting “Pax Americana” has resulted in a long lasting period of relative peace and stability. But U.S. military strength is not automatic nor does it occur in a vacuum. It depends fundamentally on the underlying strength of the U.S. economy which has been growing at the very slow rate of 2% annually since the end of the Great Recession in June 2009.
Conclusion. If we want continued peace and stability around the world, then we need faster economic growth to better support the U.S. effort to project strength.
One of my favorite writer’s on current affairs is Arthur Brooks from the American Enterprise Institute. His article in yesterday’s New York Times, “An Aging Europe in Decline” gives a good explanation for the current malaise in Europe. “The optimists see the region’s economy growing by just 1% in 2015: many fear that a triple-dip recession is in the offing. … Predictions of decade-long deflation, low productivity and high unemployment are becoming conventional wisdom.” But Mr. Brooks makes a strong case that Europe’s core problems are as much demographic as economic:
In 2014, the average number of children per woman in the European Union was 1.6, well below the replacement rate of 2.1.
The labor participation rate in the EU in 2013 was just 57.5%, much lower than the 62.7% in the U.S..
In 2012 the median age of the national population in the EU was 41.9 while the average age of foreigners living in the EU was 34.7. But “anti-immigration sentiment is surging across the continent.”
In other words, Europe is “rejecting the culture of family, turning its back on work and closing itself off to strivers from the outside.” This is a powerful indictment of contemporary European culture. To a certain extent these same trends are evident in the U.S. although to a somewhat lesser degree:
Our own fertility rate (see the above chart) is down to 1.9 children per woman in 2012, and is dropping among all racial groups.
Our labor participation rate is better than Europe’s but is our own lowest in 36 years.
We admit over a million legal immigrants per year who lower the average age of our population. However we fail to accept many highly educated and skilled workers who would be able to give our economy a huge boost.
Demographics are a problem for the U.S. just as they are for Europe. The only way to counteract strong demographic trends is with smarter economic policies.
According to Peter Wehner, a senior fellow at the Ethics and Policy Center, the middle class consists of Americans “who do not consider themselves poor or rich, and can imagine their fortunes turning either way.” “We’ve moved towards an economy that more significantly favors skilled over unskilled labor. In addition, jobs, including even higher skilled jobs, are being outsourced to countries like China and India as the economy grows more globalized.”
“While President Obama has shown that he is able to effectively describe these trends, he has proved singularly unable to improve the economy in light of them. Indeed, a slew of economic indicators have worsened during his presidency.”
“Among the public there is a very deep sense of unease and apprehension. Ground that people once believed was stable is seen as crumbling, and many Americans seem unsure what to make of it. But one thing they do believe: right now politics is out of touch with what they’re experiencing. We’ve witnessed a collapse of trust in the federal government, and when it comes to Republicans and Democrats, the public’s attitude is: a pox on both your parties.”
“Most Americans have lost confidence in President Obama; they are deeply unhappy with both his policies and their consequences. …Yet Americans have not so much turned to the Republicans as they have turned against the Democrats.”
“Americans do not have a sense that conservatives offer them a better shot at success and security than liberals. … Rather than speak about the economy in broad abstractions, conservatives need to explain how to put government on the side of people working to better their conditions.”
I consider these excerpts from Mr. Wehner’s introductory essay in the document “Room to Grow: conservative reforms for a limited government and a thriving middle class” to be an excellent summary of the mood of the American Middle Class. Some of the accompanying policy prescriptions are good ideas and some are not. Stay tuned!
“When the Athenians finally wanted not to give to society but for society to give to them, when the freedom they wished for most was freedom from responsibility, then Athens ceased to be free.”
Edward Gibbon, 1737 – 1794, The Decline and Fall of the Roman Empire
In my last blog, “The Government We Deserve,” I reported on a new book “Dead Men Ruling” by Eugene Steuerle, which shows how “Dead and retired policymakers have put America on a budget path in which spending will grow faster than any conceivable growth in revenues.” Our country is clearly in a huge predicament. We can get out of this jam by:
Restoring Balance: our legislators should only appropriate spending for one year at a time.
Investing in our future: i) opportunity is a more optimistic goal than adequacy ii) policies to assure adequacy often reduce opportunity by creating negative incentives (e.g. food stamps, disability programs, housing vouchers) iii) means-tested programs are often anti-family (i.e. discourage marriage)
Building a Better Government: our main goal today should be to restore fiscal freedom by allowing future generations to create the government they need and want. i) constrain the automatic growth in big federal tax subsidy, health and retirement programs ii) reorient government towards investment, children, opportunity and leanness
“Both parties talk the talk about deficit reduction but fail to see that the deficit is but a symptom of a much broader disease – the extent to which both have tried to legislate far too much of what future government should look like.”
Here are the kinds of fixes which are needed:
Eschew Constitutional Fixes (i.e. a balanced budget amendment, term limits).
Require Presidents to propose budgets which balance over a business cycle.
A True Grand Compromise (end automatic growth of entitlements, generate revenues needed to pay current bills).
As Mr. Steuerle says, “If the obstacles to progress are considerable, the payoffs are enormous.”
“As for the future, your task is not to foresee it, but to enable it.”
Antoine de Saint-Exupery, 1900 – 1944
An important new book, “Dead Men Ruling,” by the Urban Institute’s C. Eugene Steuerle, has just been published. Here is the flavor of its message: “Dead and retired policymakers have put America on a budget path in which spending will grow faster than any conceivable growth in revenues. … The same policy makers also cut taxes so much below spending that they created huge deficits, which have now compounded the problem with additional debt.”
“Both sides have largely achieved their central policy goals – liberals have expanded social welfare programs, conservatives have delivered lower taxes. Both now cling tenaciously to their victories.”
In short, “our central problem is the loss of fiscal freedom.” There are “four deadly economic consequences of this disease:
rising and unsustainable levels of debt,
shrinking ability of policymakers to fight recession or address other emergencies,
a budget that invests ever less in our future and is now a blueprint for a declining nation, and
a broken government, as reflected in antiquated tax and social welfare systems.”
In addition there are “three deadly political consequences:
a decline of ‘fiscal democracy’ depriving current and future voters of the right to control their own budget,
a classic ‘prisoner’s dilemma’ where both left and right leaning elected officials conclude that they will suffer politically if they lead efforts to impose either spending cuts or tax hikes, and
rising hurdles to changing our fiscal course because, to do anything new, requires reneging on past promises of rising benefits and low taxes, that voters have come to expect.”
In other words the U.S. is in a very difficult predicament. Mr. Steuerle thinks it will take a major “fiscal turning point” to escape from the present danger. Both sides will have to make big concessions in order for us to get out of this jam. But how is this possibly ever going to happen? More next time!
Yesterday’s New York Times has a very interesting article, “U.S. Middle Class No Longer World’s Richest”, demonstrating that from 1980 -2010 the median wage in many other developed nations has grown faster than in the U.S. The chart below does show that the U.S. median wage is still growing but just not as fast as elsewhere. The authors suggest three reasons to explain what is happening:
Educational attainment in the U.S. is growing more slowly than in the rest of the industrialized world.
A larger portion of business profits in the U.S. is going to top executives meaning less for middle and low income workers.
There is a higher degree of income redistribution (through taxation) in Canada and Western Europe than in the U.S.
The data presented in this article is more elaborate but nevertheless consistent with what other studies are showing. We are still on top but we need to make some major changes in order to stay there. For example:
Most states have adopted the national Common Core curriculum for K – 12 schools. In today’s highly competitive global environment, this will enable a more rigorous evaluation of educational attainment between the states and should, therefore, improve overall academic achievement.
The best way to raise salaries for middle and low-income workers is to boost economic output overall. Fundamental tax reform, with lower tax rates for everyone, offset by closing loopholes and lowering deductions for the wealthy, will put more money in the hands of the people most likely to spend it. This will increase demand and make the economy grow faster.
As a highly visible way of addressing economic inequality in the U.S., institute a relatively small, i.e. 1% or 2%, wealth tax on the assets of individuals with a net worth exceeding $10 million. This would raise up to $200 billion per year which could be used for an extensive infrastructure renewal program, creating lots of jobs and further boosting the economy, with a lot left over to devote to shrinking our massive federal deficits.
A program like this encourages everyone to work hard and reach their highest potential, including accumulating as much wealth as they are able to. But the people at the very top, i.e. the superrich, will be required to give back a little bit more in order to benefit the entire country.
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)!