Category Archives: Jack Heidel

Why Faster Economic Growth Is So Important III. Speeding Up Anemic Wage Growth

Posted on by
Reply

 

The U.S. economy is in a peculiar and potentially perilous situation:

  • On the one hand, overall economic growth has averaged only 2.1% since the end of the Great Recession in June 2009.
  • On the other hand, the unemployment rate has dropped from 8% in early 2012 to 5% today.
  • But wages and salaries have grown by only 2% in the past year and near that rate for the past four years.

What explains our relatively low, and steadily dropping, unemployment rate when overall economic growth, and wage growth in particular, are so slow?
Capture2It is low productivity growth as the New York Times’ Neil Irwin, has recently pointed out: here  and here.

  • GDP is up 1.9% in the past year. But the number of hours worked by Americans is also up 1.9% in the past year. This means no increase in labor productivity in the past year.
  • For the past five years labor productivity has only advanced by .4% annually, far below the 2.3% average annual growth since the 1950s.
  • Most job growth in the last decade has been in (low productivity) services rather than (high productivity) manufacturing.

We do not have to accept low productivity growth as immutable. As I have recently discussed here, and here, better government policies can boost labor productivity and therefore boost economic growth as well.  Here is a brief summary of what needs to be done:

  • Decrease regulation: the Dodd-Frank Act and Affordable Care Act, for example, are hampering growth by increasing the inefficiency of the financial and healthcare sectors of the economy.
  • Reform taxation: growth oriented taxation would have the lowest possible rates paid for by shrinking deductions.
  • Reform immigration: giving legal status to millions of illegal immigrants would turn them into far more productive citizens.

In other words, our severe slow growth predicament can be greatly ameliorated if we would adopt more sensible economic policies. It is a shame that this is so hard to do!

Follow me on Twitter
Follow me on Facebook

Why Faster Economic Growth Is So Important II. Replacing Factory Jobs

Posted on by
Reply

 

Populists such as Bernie Sanders and Donald Trump are doing so well in the 2016 presidential primaries because the middle class is suffering from the slow economic growth of the past 15 years.
Capture2My last post is based on the report of a typical victim.   Today’s post is based on an article by Eduardo Porter in yesterday’s New York Times discussing the loss of U.S. manufacturing jobs.  Says Mr. Porter:

  • Fifty years ago, 45,000 workers were employed in California to harvest 2.2 million tons of tomatoes. Now, with mechanization, it only requires 5000 workers to harvest 12 million tons.
  • In 1950, 24% of nonfarm jobs in the U.S. were in manufacturing. Today only 8.5% of nonfarm jobs are in manufacturing.
  • The same thing is true worldwide. Global employment in manufacturing is going down because productivity increases are exceeding increases in demand by significant amounts. The likelihood that we will get a manufacturing recovery is close to nil.
  • The U.S. has a trade surplus in manufacturing with the 20 countries with which it has trade agreements (which does not include China). We have an overall annual trade surplus in services of more than $200 billion.

In other words, an attempt to recover or save manufacturing jobs with smarter trade policies is simply impractical and will likely do more harm than good. What should be done instead is to:

  • Definitely do a better job of helping displaced manufacturing workers with Trade Adjustment Assistance and smarter job retraining programs.
  • Adopt policies to speed up overall economic growth from the anemic 2.1% annual growth rate since the end of the Great Recession in June 2009. Faster growth such as the 3.5% annual average from 1971 – 2001 will do wonders in creating more jobs and better paying jobs. For how to do this see an earlier post.

Our very serious economic problems can be solved if policy makers (and presidential candidates) would only get serious about it!

Follow me on Twitter
Follow me on Facebook

Why Faster Economic Growth Is So Important

Posted on by
Reply

 

The main topic of this blog is addressing America’s two biggest problems which are:

  • Slow economic growth, averaging 2.1% since the end of the Great Recession in June 2009, and
  • Massive public (on which we pay interest) debt, now 74% of GDP and growing, the highest it has been since right after WWII.

In a recent post, “Is America’s Middle Class Really Shrinking?” I showed that middle-income households did very well from 1971 – 2001, while our economy was growing on average at a rate of 3.5% per year.  Middle-income households then stood still from 2001 – 2008, and have lost ground since.
Capture2A vivid example of what has happened in the last 15 years is provided in the article, “My Secret Shame” in the current issue of the Atlantic magazine.  The author describes his own financial hardships supplemented with pertinent data from several sources:

  • In 2013, 47% of Americans responded to a survey that they would have great difficulty coming up with $400 to handle an emergency.
  • The inflation-adjusted net worth of a typical (median level) household in 2003 was $87,992. By 2013 it had declined to $54,500, a 38% drop.
  • A family headed by someone of prime working age, between 24 and 55 years old, and with an income of $50,000, could continue to self-fund its current consumption, if the family were to lose its current income, presuming the liquidation of all financial assets except home equity, for only six days!

As this data clearly shows, many Americans are in a precarious financial situation! The solution to this very serious problem is to speed up the growth of the American economy.  I have discussed how to do this over and over again in previous posts, i.e. here and here.
It is both surprising and disturbing that the presidential candidates are either ignoring this problem or making unserious proposals for how to solve it.

Follow me on Twitter: https://twitter.com/jack_heidel
Follow me on Facebook: https://www.facebook.com/jack.heidel.3

Can She Fix It?

Posted on by
Reply

 

As I have recently pointed out, Hillary Clinton is now likely to be our next president.  In my last post I provided vivid evidence that middle class income grew dramatically between 1971 and 2001 and has been either stagnant or declining since then.  The fact is that the years from 1971 – 2001 were a time of rapid economic growth, about 3.5% per year.
Capture2So it is obvious what needs to be done to fix America’s economic woes: grow the economy faster!  In its latest issue, the Economist asks, “Can she fix it?” The tentative answer suggested by the Economist is no, based on Mrs. Clinton’s tepid policy proposals to date:

  • She wants to make college more affordable, grant paid leave to parents, raise the national minimum wage to $12 per hour, and increase infrastructure spending. These are nice sounding proposals but will have only minor effects on growth or add greatly to the national debt (infrastructure spending).
  • She proposes a tax-credit for companies to encourage profit-sharing schemes. This would just make the tax code more complicated.
  • She wants an extra tax on the debt of big banks but simply increasing capital requirements on big banks would be more effective.
  • She wants to raise the top tax individual tax rate to 45% but shrinking deductions and closing loopholes would be a more efficient way to make the tax code more progressive.
  • She wants to abandon the Trans Pacific Trade Partnership rather than figuring out how to help those workers who lose from expanded trade with such measures as wage insurance or better job retraining.

As the Economist concludes, “A bigger plan to help American workers would start by boosting competition, both by slashing unnecessary regulations for small businesses, and by ensuring that big firms no longer operate in protected markets.”
If we are going to end up with another Clinton presidency, we certainly don’t want four more years of Obama-type economic stagnation!

Follow me on Twitter: https://twitter.com/jack_heidel
Follow me on Facebook: https://www.facebook.com/jack.heidel.3

Is America’s Middle Class Really Shrinking?

Posted on by
Reply

 

For several years now Americans have been having a lively debate about income inequality and the supposedly shrinking middle class. The American Enterprise Institute scholar, Mark Perry, has an enlightening new post on this topic.
Capture0The AEI has produced a vivid graphic showing that the American Middle Class (defined as the middle 50% of Americans by household income) has dramatically increased in income from 1971 through 2001 but has been stagnant since the Great Recession in 2008-2009.
Capture1He has other charts showing that both the Low-Income group and the Middle-Income group have been shrinking since 1971 precisely because the High-Income group (defined to be households with $100,000 or more in income in constant 2014 dollars) has been growing so rapidly. Isn’t it obvious what we need to do to restore confidence to the Middle Class?  Clearly we need to speed up economic growth.  For example we could:

  • Implement broad-based tax reform. Lower the rates for both individual and corporate taxes, paid for by closing loopholes and limiting deductions. Better yet, shift from taxing income to taxing consumption.
  • Remove roadblocks to innovation by making it easier to start new businesses.
  • Improve K-12 education, especially for low-income kids who need extra help. Enhanced early childhood education, more emphasis on career (vocational) education, and charter schools in big cities are the way to get this done.
  • Make attending college more affordable. There are many good schools around the country which are not expensive to attend (the University of Nebraska at Omaha where I teach is one of them). College students and their families should make it a top priority to avoid huge debt. Attending a prestigious (and expensive) institution is simply not necessary to get a good education.

There are other more controversial ways to speed up economic growth such as increasing international trade and reforming our broken immigration system. But just the measures above will go a long way and shouldn’t be that difficult to implement.

Follow me on Twitter: https://twitter.com/jack_heidel
Follow me on Facebook: https://www.facebook.com/jack.heidel.3

Five Ways to Destroy the U.S. Economy

Posted on by
Reply

 

For seven years following the end of the Great Recession in June 2009 our economy has been plodding along at an average growth rate of 2.1% per year, much more slowly than after a typical recession. Instead of talking about how to fix the mess we are in, most of the presidential candidates are proposing measures which will make things even worse.
Capture0The economists Glenn Hubbard and Tim Kane, writing in the Weekly Standard, take a novel approach.  Rather than suggesting ways of speeding up economic growth, which may no longer be of interest to voters in primary elections, they list their “Top Five Ways to Destroy the U.S. Economy” which are to:

  • Restrict Trade. Free exchange is the cornerstone of a growing economy. Raising tariffs will restrict imports, cause inflation and harm American consumers. Killing the Trans Pacific Partnership, stopping the Keystone Pipeline, and curtailing legal immigration would just be a start.
  • Make Work Illegal. Raising the minimum wage to $15 per hour will do lasting harm to underprivileged teenagers who are denied a first job. In the U.S. today over 30% of jobs require a government license compared to only 5% in the 1950s. This creeping need for permission keeps untold millions out of the labor force.
  • Tax People More Unequally. Why should the tax code be riddled with exemptions, deductions and credits which primarily benefit the wealthy? Why do we insist on taxing corporations at 35% when all other advanced economies are competing to lower their corporate taxes? This simply drives jobs overseas.
  • Stop Innovation. Why does Washington continue to favor big banks and bail out old established industries? A generation ago 1 in 6 companies were startups: today 1 in 12 are.
  • Increase the Debt. Debt has more than doubled in the past decade, yet interest payments in 2015 were the same as in 2006, because rates are artificially low. How long can this last? A sure path to a slow growth future is this kind of fiscal profligacy. Just call it investment and hope that most people will ignore the problem.

As Mr. Hubbard and Mr. Kane conclude, “The good news about this policy agenda is that it requires no sacrifices. If Washington just stays on course we will reap the whirlwind.”

Follow me on Twitter: https://twitter.com/jack_heidel
Follow me on Facebook: https://www.facebook.com/jack.heidel.3

After Donald Trump

Posted on by
6

 

It looks more and more likely that Hillary Clinton will be our next President. She is almost certain to be the Democratic nominee and unlikely to be indicted for mishandling classified information.  If Donald Trump is the Republican nominee, she will trounce him because his negatives are much worse than hers.  If Mr. Trump is denied the Republican nomination, he is likely to run as an independent candidate and take votes away from the Republican nominee, thereby also electing Mrs. Clinton.
Capture0What happens then?  The Republicans will regroup by broadening their base to better appeal to Mr. Trump’s constituency of disaffected white working class voters.  Yuval Levin, editor of National Affairs, has visualized what policies a reconstituted conservative party might want to embrace to replace the no longer affordable progressive model:

  • Healthcare: a new approach would liberate insurers and providers to offer many different models of coverage and care and empower consumers to choose between them.
  • K-12 Education: a new approach would allow parents to make choices for their children and reshape the educational system around their preferences.
  • Welfare: a new system would empower local problem solvers to mix resources, advice, experience and moral leadership in a process of bottom-up experimentation.
  • Higher Education: a new model would no longer reinforce a cycle of rising tuition and declining value with inflationary federal loans. Rather it would open up accreditation to allow for more options and offer aid to the needy which rewards high value rather than high prices.
  • Cultural Issues: moral traditionalists should emphasize building cohesive and attractive subcultures, offering alternatives to the chaos of the mainstream permissive society.
  • Diminished Opportunity for the Working Class: Improvements to Trade Adjustment Assistance and Job Retraining programs (wage insurance?) will have to be embraced.

Conclusion. The disruption caused by Donald Trump could lead to a new and more broadly based Republican Party better equipped to address the emerging problems of the 21st century.

Follow me on Twitter: https://twitter.com/jack_heidel
Follow me on Facebook: https://www.facebook.com/jack.heidel.3

Who is Responsible for the Rise of Donald Trump?

Posted on by
Reply

 

It is generally agreed that Donald Trump’s great success as a presidential candidate is his strong appeal to working class white voters, often described as white voters without a college degree. It is also widely agreed that Mr. Trump is unsuited to be president, based on his unstable temperament as well as a poor understanding of many basic issues.
Capture0As I have described in a previous post, the quality of life for working class white men has been declining for many years. Nevertheless it has gotten even worse since the Great Recession of 2007-2009 and our slow recovery from it.
Steven Rattner, in yesterday’s New York Times, blames the Republican Congress for the rise of Mr. Trump because of Republican opposition to President Obama’s economic agenda as follows:

  • Opposition to the American Jobs Act of 2011 which proposed a $447 billion package of measures including payroll tax cuts and the creation of an infrastructure bank which would have created thousands of construction jobs.
  • Opposition to continuing federal emergency benefits for the large number of long-term unemployed.
  • Apparent opposition to a recent plan for wage insurance. Under this proposal a worker who lost a job and was forced to take a lower wage job which paid less than $50,000 per year, would receive half of the lost wages for two years, up to $10,000.

These aren’t necessarily bad ideas. In fact I think wage insurance is an excellent idea, as long as it is paid for and does not add to deficit spending.  The problem is that these measures do not generally address the basic problem of slow economic growth, averaging just 2.1% of GDP since the end of the recession in June 2009.  Only by speeding up economic growth, with fundamental tax reform, both individual and corporate, can our economy support both the new jobs and higher paying jobs that will create broad-based prosperity in the United States.
It is both detrimental and inaccurate for supporters of President Obama to blame political opposition for the plight of working class Americans.

Follow me on Twitter: https://twitter.com/jack_heidel
Follow me on Facebook: https://www.facebook.com/jack.heidel.3

What Might Fundamental Tax Reform Look Like?

Posted on by
16

 

All four of the major presidential candidates have tax plans. Hillary Clinton would make small tweaks in our current tax system.  Bernie Sanders would raise current taxes substantially.  Both Donald Trump and Ted Cruz would both radically reduce the size of the federal income tax but would also greatly add to the national debt over the next ten years.
I have been trying to make the case on this blog that fundamental tax reform is the best thing we can do to get the economy growing faster in order to create more and better paying jobs.  I have also discussed a specific way to accomplish fundamental reform, namely the so-called Competitive Tax Plan proposed by the tax law expert, Michael Graetz.  It is a progressive consumption tax, a so-called Value Added Tax.
Capture2As reviewed in yesterday’s Wall Street Journal by Reihan Salam, the editor of the National Review, the Graetz Plan has these features:

  • A broad-based VAT of about 14% on goods and services.
  • Families earning less than $100,000 per year are exempt from the income tax. The tax rate would be 15% for incomes between $100,000 and $250,000 and 25% above this level.
  • The payroll tax (supporting Social Security and Medicare) would be greatly reduced for all workers earning less than $40,000 per year.
  • The corporate tax rate would be lowered to 15%, making it among the lowest in the world.
  • The Graetz Plan is revenue neutral as verified by the Tax Policy Center.

Think of the incredible advantages of such a tax plan. Of the expected 145 million tax returns for this year, 120 million would no longer be necessary.  Extravagant deductions such as for mortgage interest would have much less political support. The low corporate tax rate would bring jobs back to the U.S. instead of sending them overseas.  The rampant cronyism involved in tax breaks being handed out by Congress would be greatly reduced.
What is not to like about the Graetz Plan?

Follow me on Twitter: https://twitter.com/jack_heidel
Follow me on Facebook: https://www.facebook.com/jack.heidel.3

Trade Makes America Great

Posted on by
2

 

Two leading presidential candidates, Bernie Sanders and Donald Trump are running against trade expansion because they say it costs American jobs. I pointed out in my last post, that there is a strong correlation between international trade and global GDP growth.
Capture2Today I will focus on the direct benefits to the American economy of expanded international trade.  First of all, I refer to a recent article in the Wall Street Journal by Frederick Smith, the CEO of FedEx Corp.  Says Mr. Smith:

  • From less than $50 billion in total trade in 1966, the U.S. now imports and exports over $4 trillion annually in goods and services, out of a global trade market which exceeds $15 trillion annually.
  • NAFTA has clearly been an economic success. U.S. trade with Mexico and Canada has risen to $1.2 trillion in 2014 from $737 billion twenty years ago.
  • History shows that trade made easy, affordable and fast always begets more trade, more jobs and more prosperity.

The U.S. typically runs a trade deficit of about $500 billion per year. The New York Times journalist, Neil Irwin, explains what this means. Says Mr. Irwin:

  • The dollar is a global reserve currency, meaning that it is used around the world in transactions which have nothing to do with the U.S.
  • This creates upward pressure on the dollar for reasons unrelated to trade flows between the U.S. and its partners. That, in turn, makes the dollar stronger and American exporters less competitive.
  • In other words, trade deficits with other countries serve as their reserve dollars.
  • Maintaining this global reserve currency creates lots of advantages for the U.S., including lower interest rates and higher stock prices.
  • The centrality of the dollar to global finance gives the U.S. power on the global stage which no other country can match.

There certainly are workers who lose their jobs because of trade competition. We can and should do more to help these workers get back on their feet.  This will increase popular support for free trade and allow its growth to continue unimpeded.

Follow me on Twitter: https://twitter.com/jack_heidel
Follow me on Facebook: https://www.facebook.com/jack.heidel.3