On Monday the Democratic Congressional leadership held a rally in rural Berryville, Virginia. They laid out a program designed to appeal to the middle class and blue-collar workers who voted for Donald Trump. However many of their proposals involve expensive government programs and therefore would add significantly to the national debt.
What is needed is a greater emphasis on free-market ways of helping middle- and low-income workers such as:
Increasing basic economic growth which has stalled to a relatively slow 2% per year of GDP since the end of the Great Recession in June 2009. For example:
Revenue neutral tax reform, lowering rates for both individuals and corporations, paid for by closing loopholes and shrinking deductions, would have many benefits. It would stimulate business investment, create new demand by lowering the taxes paid by the approximately 2/3 of taxpayers who do not itemize deductions, and provide an incentive for multinational corporations to bring their foreign profits back to the U.S. for reinvestment.
Targeted deregulation of the financial sector by exempting main street banks from the onerous requirements of the Dodd-Frank Act would enable these smaller banks to lend more money to small businesses.
Fundamental healthcare reform to lower costs from the current 18% of GDP to the approximate 12% average of other developed countries. This would save the American economy $1 trillion annually which could be spent far more productively. The Democrats are on the right track here by refusing to accept Republican half measures.
Improve educational opportunities such as early childhood education for low-income families, expanded career education and job training in high school and community colleges, and more emphasis on income-based repayment for student college debt. There would be some cost involved here.
Modest increase in the national minimum wage from the current level of $7.25 per hour to perhaps $10 per hour and then index it to inflation going forward. The Democratic proposal for a national $15 per hour minimum wage would put too many people out of work.
Conclusion. This collection of proposals involves both Democratic and Republican ideas and should be implementable with a bipartisan effort.
Donald Trump was elected President because of strong blue-collar support. Many blue collar workers feel left out of the American dream because of stagnant incomes and/or job loss.
At the same time there is a huge national focus on the high cost of college and the associated huge student loan debt. But student loan debt is a fixable problem and is not what is holding our economy back.
Take a look at the two charts below from recent issues of the Wall Street Journal, here and here.
The first chart shows the last four growth cycles and how wages eventually tick up as unemployment continues to fall. Missing this time is hardly any growth in wages towards the end of the cycle (Of course, the current cycle won’t be over until we have the next recession).
The second chart shows that there are now more job openings (6 million) than job hires for the first time since 2001. Furthermore there were only a low of 138,000 jobs added in May with an average of 121,000 per month for the past three months. This suggests that employers are having a hard time finding qualified workers.
Obviously, what is badly needed is a renewed emphasis on workforce training. Interestingly enough, the Business Roundtable has just issued an extensive report detailing what many major corporations are doing to close America’s skills gap.
Conclusion. Lots of people, certainly including President Trump and the Republican Congress, would like to see faster economic growth. Clearly there are practical and useful ways to achieve this and many people are already trying to make it happen.
In many respects things are going quite well in the U.S. at the present time:
The economy is chugging along at 2% annual growth, not spectacular but better than in most other developed countries. In fact a rather severe labor shortage is developing in some industries such as construction and agriculture. More specialized guest worker visas would help relieve these shortages. Better career and vocational education in high school as well as targeted job retraining programs for the underemployed would help prepare workers for the millions of high-skill manufacturing jobs going unfilled.
Pesky foreign policy problems are under control. ISIS is being squeezed in the Middle East. China appears willing to help contain the North Korean nuclear threat. Iran is mostly abiding by the 2015 nuclear agreement.
Congress is inching its way towards resolution of the healthcare stalemate, by repairing Obamacare rather than repealing it. It’s not clear how much tax reform will be implemented this session but there is at least a consensus on lowering the corporate tax rate to encourage multinational companies to bring their profits back home.
Deregulation efforts by the Trump Administration will give the economy at least a small beneficial boost.
But there is one huge problem which is constantly being swept under the rug or being kicked down the road by both parties in Congress and by Democratic as well as Republican presidential administrations alike. I am referring, of course, to our massive national debt, now sitting at 77% of GDP (and growing) for the public part on which we pay interest. Right now this debt is essentially “free” money because interest rates are so low. But it’s really a ticking time bomb because sooner or later interest rates will return to more normal levels and then interest payments will skyrocket causing a huge fiscal crisis.
Conclusion. It is imperative for Congress to reform entitlement programs to make them less costly to the federal budget and to otherwise restrain discretionary federal spending across the board. The future of our country depends on our national leaders exercising much greater fiscal restraint. They need to get much better at doing this!
In my last post, “Why I Lean Republican,” I endorse the ten year budget plan just released by the House Budget Committee which will lead to a balanced budget within ten years. It represents an excellent starting point towards addressing one of our country’s most serious problems, our huge and rapidly growing national debt.
Jim Vanderholm responded to this post by giving his own top priorities for the next President. They are:
Job Formation. All sorts of other problems would be addressed in the process. Record high numbers of unemployed and underemployed. Record numbers of people on 85 different welfare programs at a cost of over $1 trillion per year.
Highly targeted education/training of the workforce to fill the newly created jobs with American citizens.
Reducing annual deficits. Growing the economy by putting more people back to work will bring in more tax revenue. Along with slowing the growth of spending this will lead to lower annual deficits. Once the deficit is reduced by half or more of its current value (about $500 billion), then the debt as a percentage of GDP will begin to shrink.
Reduced focus on divisive social issues. The basic structural problems referred to above will not be solved by more gun control, higher carbon tax, shuttering the coal industry, free pre-school and college education, or discontinuing tax-payer funding to Planned Parenthood.
In other words, we need a new President who will focus on basic economic and fiscal issues and not be distracted by divisive social issues. In fact, an ideal division of labor would be for the House Budget Committee to take the lead in getting spending under control while the new President attempts to implement policies to get the economy growing faster. This would lead to real progress on both fronts!
Yesterday’s New York Times has an article “Battles Looming Over Surpluses in Many States”, pointing out that “unexpectedly robust revenues from taxes and other sources are filling most state coffers, creating surpluses not seen in years and prompting statehouse battles over what to do with the money.” For example, in Kansas, Governor Sam Brownback is calling for full day kindergarten for all students. This raises a larger issue. The states are recovering from the Great Recession and have lots of money. We know that states spend money far more efficiently than the federal government, because states have constitutional requirements to balance their budgets. On the other hand, the federal government is hemorrhaging red ink at a frightening rate which will just keep getting worse indefinitely until strong measures are taken. It has taken on far too many responsibilities and spends money very inefficiently.
All of this suggests an obvious course of action to turn around a very bad situation. We should devolve as many federal programs as possible back to the states. Here are three good ones to start with:
Medicaid costs the federal government about $250 billion per year with another $150 billion being paid for by the states. The problem is that federal support is a fixed percentage of what the states spend. This makes Medicaid a very expensive program with no limit on the cost to the federal government. A good way to solve this problem is to “block grant” Medicaid to the states and let each state figure out the best way to spend its own federal allotment. Annual increases in the size of federal block grants could be tied to the rate of inflation in order to limit their growth.
Education spending at the federal level is a $100 billion per year (not counting student loans) item. Just at the K-12 level alone there are over 100 individual programs to which states and school districts have to apply for funds separately. Wouldn’t it make far more sense to “block grant” education funds back to the states so that this large sum of money can be spent more effectively and efficiently by targeting it at the biggest needs in each state?
Job-Training costs the federal government $18 billion per year for 47 different programs. Again it would be so much more sensible to block-grant job training funds to the states and measure effectiveness by the number of workers hired.
There really are relatively simple ways for the federal government to operate more effectively and at much lower cost. We need national leaders who are committed to getting this done.