How to Get Our Economy Back On Track

Posted on October 18, 2016 by jackheidel

My last several posts have expressed dissatisfaction with both presidential candidates and the hope that whoever wins in November (very likely Hillary Clinton) will work with the Republican House of Representatives to implement its “A Better Way” plan for national renewal.
In particular, faster economic growth would produce more jobs and better paying jobs and hence is highly desirable. As many people, including myself, have pointed out, it is low productivity growth caused by low business investment, which is largely responsible for slow economic growth.
The economist John Taylor has an excellent analysis of this problem. He points out that the rate of economic growth equals the growth of labor productivity plus the growth of employment.

He then shows that:

Productivity growth slowed from the mid-1960s until the early 1980s, then increased until the mid-2000s, and has slowed way down in the past ten years.
The labor force participation rate has dropped dramatically since the Great Recession but only a small part of this drop off was caused by demographic trends (i.e. more retirees).
Such relatively long cycles of productivity growth and decline (longer than normal business cycles) suggests that government policy is having a major effect on economic performance. According to Mr. Taylor, what is needed is:
Tax reform to lower tax rates to improve incentives for work and investment.
Regulatory reform to prevent regulations which fail cost-benefit tests.
Free trade agreements to open markets.
Entitlement reforms to prevent a debt explosion.
Monetary reform to restore predictability in financial markets.

Conclusion. Mr. Taylor makes a very strong case that faster economic growth is not only possible but even achievable in the short run if our national leaders would just make some common sense policy changes.

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Why I Lean Republican II. Priorities for the Next President

Posted on March 20, 2016 by jackheidel

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!

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How to Lower Income Inequality

Posted on March 8, 2016 by jackheidel

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.

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How Do We Speed Up Economic Growth?

Posted on February 24, 2015 by jackheidel

The 2015 Economic Report of the President has just been released. It shows that the slow growth of productivity is playing a bigger role in squeezing middle class incomes than the rise of economic inequality.
The above chart makes some dire predictions:

The labor force, which has averaged 1.5% growth since 1950, is likely to grow just .5% a year in coming decades, because any increase in new workers is likely to be swamped out by baby-boomer retirements.
Productivity has grown just 1.3% a year since the end of the last expansion in 2007.
These two figures together predict an anemic, less than 2% growth, economy going forward.

The President proposes several policies to address this slow growth:

Immigration Reform would provide more highly skilled workers for the economy as well as a more efficient guest worker system for low-income labor.
Increased Foreign Trade would expand our export economy.
An Expanded Workforce could be achieved with a higher Earned Income Tax Credit to boost dual-income households.
An increase of Infrastructure spending of 1% of GDP is estimated to boost output by 2.8% after 10 years.
Corporate Tax Reform would encourage U.S. multinationals to bring their foreign profits home for reinvestment.

These are good ideas but much more could be done as well:

Individual Income Tax Reform, exchanging lower tax rates for all by closing loopholes and deductions would boost spending by middle- and lower-income tax payers.
Reforming Social Security and Medicare by setting higher retirement ages would encourage longer work lives.
Reforming the Affordable Care Act by removing the employer mandate would boost productivity by making the labor market more efficient.

Faster economic growth will not only reduce unemployment, it will also make it much easier to shrink the deficit as more tax revenue is raised. This should be one of the very highest priorities for our elected representatives in Washington!

The Economic Effect of ObamaCare

Posted on February 9, 2014 by jackheidel

Last week’s report from the Congressional Budget Office “The Economic Outlook: 2014 – 2024” (which I discussed in my last post) caused a big stir with its prediction that ObamaCare will cause a loss of 2,000,000 mostly low wage jobs by 2017 and 2,500,000 such jobs by 2024. The lost jobs aren’t necessarily from workers being fired or fewer workers being hired but rather the overall decreased incentive for individuals to find work. The CBO analysis is based on the research of the economist Casey Mulligan featured in yesterday’s Wall Street Journal as “The Economist Who Exposed ObamaCare”.
The above chart of Mr. Mulligan interprets several recent government subsidy programs as a new marginal tax rate, i.e. the “extra taxes paid and government benefits foregone as a result of earning an extra dollar of income.” The 2009 stimulus, the Recovery and Reinvestment Act, had an effect like this but it was temporary. The marginal tax increase of the Affordable Care Act will last as long as it remains in effect.
The above chart from the same CBO report, showing the steady decline in the Labor Force Participation Rate from the year 2000 onward, demonstrates the critical nature of this problem. Lower labor force participation means lower growth in overall labor productivity which in turn means slower economic growth. Since the Great Recession ended in June 2009, GDP growth has averaged only about 2% annually.
Slow GDP growth means, in addition to a higher unemployment rate, that America’s standard of living will not increase very rapidly if at all. But the problem is really much worse than this. We have an enormous debt problem which is only getting worse every year that we continue to have large deficits. The CBO report predicts increasing growth in the size of our national debt. By far the least painful way of shrinking our debt (relative to the size of the economy) is to grow the economy as fast as we reasonably can. But our economy is actually slowing down, not speeding up!
This is a very serious problem which many of our national leaders are much too complacent about!

The Economic Outlook: 2014 – 2024 I. The Basic Data

Posted on February 6, 2014 by jackheidel

The Congressional Budget Office has just issued the report ”The Budget and Economic Outlook: 2014 to 2024”, giving its usual objective and nonpartisan look at our prospects for the next ten years. My purpose today is to give a simple interpretation of its basic data. In my next post I will address the implications of this interpretation.
The first chart above shows a forty year history of government deficit spending. The average deficit for this time period is 3% of GDP. From 1982 – 1987 the deficits were worse than this and from 2009 – 2013 they were much worse. The real problem is the accumulated deficits, i.e. the debt. The second chart above shows the public debt (what we pay interest on) all the way back to 1940 as a percent of GDP. As recently as 2008, the public debt was below 40% of GDP. Now it is 73% and climbing. This is very serious for two reasons. Right now our public debt is almost free money because interest rates are so low. But when interest rates return to their normal level of about 5%, interest payments will explode and be a huge drain on the economy. In addition, these CBO predictions assume continued steady growth of the economy. If and when we have a new recession or some other financial crisis, there will be much less flexibility available for dealing with it.
Now look at the last two charts. The first one shows the rate of GDP growth since 2000 which has averaged about 2% since the end of the recession in June 2009 and is projected by the CBO to level off at this same rate over the next 10 years. This is an historically low rate of growth for our economy. The final chart shows the gradual decrease of the labor force participation rate over this same time period. These two graphs are related! When fewer people are working, the economy simply will not grow as fast.
High debt and slow growth are big problems for an economy. We’re falling more deeply into this perilous state of affairs all the time. We need to take strong measures to break out of this dangerous trap!

What Is the State of the U.S. Economy?

Posted on January 28, 2014 by jackheidel

On the eve of the President’s State of the Union address, the New York Times gives an answer to this question in today’s paper, “Obama’s Puzzle: Economy Rarely Better, Approval Rarely Worse”. The charts below do show the basic trends all moving in the right direction. But is this good enough?
The unemployment rate is moving steadily downward but it is still a high 6.7% almost five years after the recession ended in June 2009. And this is with a labor participation rate of only 58.6%, which is historically very low.
The budget deficit is dropping but is still unsustainably high. In the five years, 2009 – 2013, deficits have totaled $6 trillion dollars. As soon as interest rates return to their historical average of 5%, interest on this $6 trillion in new debt alone will total $300 billion per year, forever! Furthermore, the Congressional Budget Office, the most credible source of budget information, predicts that the deficit is likely to resume an inexorable climb within a few years as baby boomers retire in ever greater numbers, rapidly driving up entitlement costs.
Economic growth was stronger than expected in the last quarter of 2013 and this is a good sign. But it has averaged only about 2% since the recession ended which is very low by historical standards, in a post recessionary period.
The point is, do we really need to settle for such mediocre performance: a stagnant economy, high unemployment and massively accumulating debt? Should we just declare that in a highly competitive global economy with an ever higher premium on information and technology, that we just can’t do any better than we already are? Isn’t there some way to make our economy grow faster in order to provide more and higher paying jobs?
I think that the answer to this last question is an emphatic yes! In fact, this is what my blog is all about. Just read some of the other recent posts and let me know if you disagree with what I am saying!

Who Are the Enemies of the Poor?

Posted on January 14, 2014 by jackheidel

In his usual provocative fashion, New York Times columnist Paul Krugman says that Republicans are “Enemies of the Poor” because “they’re deeply committed to the view that efforts to aid the poor are actually perpetuating poverty, by reducing incentives to work.”
But the Heritage Foundation’s Robert Rector has recently pointed out in the Wall Street Journal, “How the War on Poverty Was Lost”, that “the typical American living below the poverty line in 2013 lives in a house or apartment that is in good repair, equipped with air conditioning and cable TV. He has a car, multiple color TVs and a DVD player. The overwhelming majority of poor Americans are not undernourished and did not suffer from hunger for even one day of the previous year.” In fact we are now spending $600 billion a year of our $3.4 trillion federal budget and another $230 billion by the states to fight poverty. The poverty rate was 19% in 1964 and is 16% today (when government benefits are included).
Mr. Rector reminds us that “LBJ’s original aim (in initiating his antipoverty program) was to give poor Americans ‘opportunities, not doles’. It would attack not just the symptoms of poverty but, more important, remove the causes. By that standard, the war on poverty has been a catastrophe. The root ‘causes’ of poverty have not shrunk but expanded as family structure disintegrated and labor force participation among men dropped.”
So what should our poverty agenda look like going forward? We are already providing the basic necessities of life. Our future efforts should therefore be focused on improving the quality of life for the poor. This means more effective education and job training. It means more effort to keep families together by reducing marriage penalties. But most of all it means providing more opportunities for employment and job advancement. This requires faster economic growth. There are many ways to accomplish this. Back to square one!
The true enemies of the poor are those who refuse to accept the progress which has been made in the War on Poverty and the need to change our approach in order to make further progress.

How Do We Increase Economic Mobility?

Posted on January 12, 2014 by jackheidel

As the Wall Street Journal reported several days ago, “Economic Mobility Is the New Flashpoint”. “Both parties agree the opportunity gap is widening, but the proposed solutions are starkly different.” The Democrats want to increase the minimum wage, extend unemployment benefits, and expand access to college. The Republicans suggest a whole potpourri of approaches such as reforming welfare (including food stamps), extending school choice, cutting taxes, and relaxing regulations on new businesses.
A look at the latest jobs report from the Labor Department should provide the focus which Congress needs to figure out how to increase economic opportunity. Although the unemployment rate dropped substantially to 6.7% from 7.0% at the beginning of December, only 74,000 new jobs were created in December. The explanation is that 347,000 left the labor force last month. The labor force participation rate, the share of the U.S. working-age population employed, age 16 and over, has dropped from 64.5% in 2000, to just under 63% at the beginning of 2008 to near a post-recession low of 58.6% last month (see chart below).
In other words, Congress should be totally focused on speeding up economic growth in order to create more jobs. Since new businesses create the most new jobs, we should indeed relax as many regulations as possible which impede entrepreneurship. We should lower the corporate tax rate from its very high current value of 35% to get American multinational companies to bring their trillions of overseas profits back home for reinvestment in the U.S. Moving to a national consumption tax (see the Graetz Plan discussion in my January 7 post), could mean dropping the corporate tax rate to as low as 15%.
Isn’t is obvious that the best thing we can do to give low income people an opportunity to rise up the economic ladder is to just give them a job in the first place? If they’re ambitious they’ll take any opportunity they can get and run with it!

How to Create a More Just and Equal Society

Posted on November 24, 2013 by jackheidel

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.

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility

Category Archives: labor participation rate