How Do We Fight Economic Inequality? By Restoring Growth!

Posted on December 17, 2013 by jackheidel

The liberal economist Paul Krugman returns to one of his favorite topics in yesterday’s New York Times, “Why Inequality Matters”. “On average, Americans remain a lot poorer today than they were before the economic crisis. For the bottom 90 percent of families, this impoverishment reflects both a shrinking economic pie and a declining share of that pie.” The problem with Mr. Krugman’s analysis is that he offers no solution beyond more fiscal stimulus: “the premature return to fiscal austerity has done more than anything to hobble the recovery.”
But there is another route to recovery and it is propounded in today’s Wall Street Journal by George Osborne, the United Kingdom’s Chancellor of the Exchequer, “How Britain Returned to Growth”. “We cut spending and top tax rates, and now deficits are down and jobs are being created at a healthy clip … at the rate of 60,000 per month, roughly equivalent to 300,000 in the U.S. … The corporate tax rate is being cut to 20% from 28%. … As a result, more international firms are moving their headquarters to Britain and investment is flowing into our country.”
Yes, as Mr. Krugman says, economic inequality in the U.S. is bad and getting worse. The question is what to do about it. Shall we try to improve the situation with artificial stimulation, increasing government debt, already very high, for future generations? Or shall we address this inequality by encouraging businesses to grow and expand and thereby raise wages and hire more people.
The good news is that America is the success story of the 20^th century. The bad news is that everyone else in the world has figured this out and is now copying our own best methods. Either we can compete, innovate, stay on top and thrive, or else we can get lazy, stagnate and sink down in the pack.
Will it be more inequality or more growth? The choice is up to us!

The Mess in Detroit: A Stern Warning for the Whole Country

Posted on December 5, 2013 by jackheidel

An article in yesterday’s New York Times, “Detroit Ruling Lifts a Shield on Pensions”, reports a ruling by bankruptcy judge Steven W. Rhodes that Detroit “could formally enter bankruptcy and that Detroit’s obligations to pay pensions in full is not inviolable.”
The article goes on to say “that most here agree that the city’s situation is dire: annual operating deficits since 2008, a pattern of new borrowing to pay for old borrowing, miserably diminished city services, and the earmarking of about 38 percent of tax revenues for debt service. A city that was once the nation’s fourth largest has dropped to 18^th, losing more than half of its population since 1950. The city was once home to 1.8 million people but now has closer to 700,000.”
The parallels and analogies between what has happened in Detroit and what is now happening in the U.S. are striking. The U.S. has had huge annual deficits for five years in a row and the accumulated debt is enormous, the Federal Reserve is holding interest rates down to make borrowing cheaper, and our country’s infrastructure is deteriorating much faster than it is being repaired.
Right now interest on the national debt is small ($223 billion in 2013, or 8% of federal revenues). But interest rates will inevitably return before long to their average historical rate of about 5%. Right now the public debt (on which we pay interest) is just over $12 trillion. This means that in the near future interest on the national debt will be at least $600 billion per year and probably much larger because the debt is still growing so rapidly. This will take a huge bite out of revenue and leave far less of it for other purposes.
This problem will continue to exist even if the budget were to be miraculously balanced from now on but it would at least lessen over time as the economy continues to grow. Without budget restraint the problem will never go away and will be a perpetual drag on our national welfare.
This is, of course, exactly the condition in which Detroit finds itself at the present time. Detroit has the option to declare bankruptcy and make its creditors and pensioners take big losses. Once it does this it can make a fresh start and perhaps recover its former status.
But are we prepared to let the whole country suffer a similar fate? The consequences would be enormous. If the U.S. goes down, the whole western world could come down with it. Democracy and human progress would be severely threatened. This is really too terrible a tragedy to even contemplate. Let’s turn things around before they get any worse!

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.

The Floundering of America

Posted on November 21, 2013 by jackheidel

In yesterday’s Wall Street Journal, columnist William Galston talks about “The Floundering of America”. Based on recent reports from the Congressional Budget Office, Mr. Galston says that “Today we are hurtling toward a less dynamic economy, a meaner society and a riskier world.”
His argument is based on these observations:

For the past 40 years, 1970-2010, the labor force expanded at an average rate of 1.6% per year. It will soon slow to only .4% annual growth, because of more retirements and a plateauing of women’s labor-force participation. This means that growth in GDP will slow down to about 2% annually from its historical average of over 3%.
America is aging very fast. Today there are 57 million Social Security beneficiaries which will increase to 76 million in 2023. Obviously this will rapidly increase entitlement spending on retirees.
America already spends 18% of GDP on healthcare costs and the CBO projects that this will grow to 22% by 2038.

“In sum, current trends and policies will yield lower rates of economic growth, painfully slow gains in real incomes, huge increases in outlays for expenses related to an aging population, and a health sector that devours more and more of the national product”, he says.
These trends are all contributing to an explosion of the national debt. The only current strategy to keep this debt even roughly stable during the next decade, let alone reduce it, is to shrink discretionary spending through sequestration. This will lead to a decline in discretionary spending to 5.3% of GDP by 2023. This means roughly 2.6% of GDP for national defense with an equal share or all other domestic purposes.
“This is pure folly”, says Mr. Galston. “The country needs a new national strategy for a viable future.”
How do we achieve a new strategy? Immigration reform will increase the size of the workforce. Tax reform could boost the economy by encouraging business expansion, risk taking and entrepreneurship. True (consumer-driven) healthcare reform could dramatically lower the cost of healthcare. In other words there are potential policies out there that address our national floundering. We simply need leaders who are capable of going beyond partisanship in order to help create a better future!

Does Our Economy Need More Inflation?

Posted on November 10, 2013 by jackheidel

The lead story in this week’s Economist, “The Perils of Falling Inflation” and a recent article in the New York Times, “In Fed and Out, Many Now Think Inflation Helps“, both make the case that the U.S. core inflation rate of 1.2%, excluding food and energy prices, is dangerously low, risking deflation. “Rising prices help companies increase profits; rising wages help borrowers repay debts. Inflation also encourages people and businesses to borrow money and spend it more quickly.”
But there is another distinctly different point of view. In a Barron’s column last week “Deflating the Inflation Myth”, Gene Epstein points out that “business activity is motivated by profit, not prices.” He shows with a chart that profits decreased during the highly inflationary 1970’s and 1980’s but they have been increasing since the end of the recession in 2009, even with very low inflation. The key to boosting the economy is more business investment and risk taking but a higher rate of inflation is not the way to accomplish this.
In a speech at the Economic Club of New York in June of this year, former Fed Chair Paul Volcker said that “the implicit assumption behind that siren call (to let inflation increase) must be that the inflation rate can be manipulated to reach economic objectives – up today, maybe a little bit more tomorrow, and then pulled back on command. All experience amply demonstrates that inflation, when fairly and deliberately started, is hard to control and reverse.”
As soon as interest rates go up as they surely will in the not too distant future, interest payments on our now enormous national debt will skyrocket and become a huge drag on the economy. If and when inflation goes up, it will pull interest rates up along with it. Let’s not push inflation, and therefore interest rates, up any faster or higher than necessary!

Are Deficit Fears Overblown?

Posted on November 1, 2013 by jackheidel

In yesterday’s Wall Street Journal columnist David Wessel responds too mildly in “Why It’s Wrong to Dismiss the Deficit” to Larry Summers’ view that we should not worry about the deficit. Mr. Summers says, “Let me be clear. I am not saying that fiscal discipline and economic growth are twin priorities. I am saying that our priority must be on increasing demand.” According to Mr. Wessel, here is the essence of Mr. Summers’ argument:

The deficit isn’t an immediate problem; growth is.
We’ve done enough (about the deficit) already.
The future is so uncertain that acting now is unwise.

Granted that the deficit for fiscal year 2013 is “only” $680 billion after four years in a row of deficits over a trillion dollars each and that interest rates are at an historically low level at the present time. The problem is that the public debt is now at the very high level of 73% of GDP and is projected by the Congressional Budget Office to continue climbing indefinitely. Interest on the debt was $415 billion for fiscal year 2013 which represents 2.5% of GDP of $16.8 trillion. With GDP growth increasing at about 2% per year since the end of the recession in June 2009, this means that interest on the debt is already slowing down the economy and it’s just going to keep getting worse as interest rates inevitably return to higher historical levels.
Growth is very definitely an immediate problem. But increased government spending is the wrong way to address it. The right way to address it is with broad based tax reform (lowering tax rates in return for closing loopholes) to stimulate investment and risk taking by businesses and entrepreneurs. Significant relaxing of the regulatory burden would also help, especially for the small businesses which are responsible for much of the growth of new jobs. So would immigration reform to boost the number of legal workers.
As uncertain as the future is, we can be quite sure that entitlement spending (Social Security, Medicare and Medicaid) will be going up fast in the very near future as more and more baby boomers retire and the ratio of workers to retirees continues to decline. It would be very risky indeed to assume that economic growth will increase fast enough to pay for increased entitlement spending.
Conclusion: large deficits are a very urgent and immediate problem which we ignore at our peril! Furthermore the best ways of boosting the economy don’t require increased government spending.

Must America Resign Itself to Much Slower Economic Growth?

Posted on October 28, 2013 by jackheidel

The cover story in this week’s Barron’s, by Jonathan Laing, “The Snail Economy, Slowing to a Crawl”, makes a well-documented argument that “over the next 20 years, the U.S. economy is likely to grow only 2% a year. That’s down from 3% or better since World War II. Blame it on an aging population and sluggish productivity growth. Bad news for stocks and social harmony.”
Here’s an example of the argument he makes. “Mean incomes of minorities in the U.S. population have remained at about 60% of white incomes in recent decades. Unless that pattern changes, and minorities earn bigger incomes, that augers slower income growth for the overall population as the baby boomers, predominately white, retire over the next 20 years. …At the same time the minority population, particularly Hispanic, will expand. …If income relationships remain the same, U.S. median income growth will drop by an estimated 0.43% a year through 2020 and 0.52% a year over the succeeding decade.”
This demographic trend can be offset to some extent by boosting the ages at which Social Security benefits are received in order to lighten the burden on those who are working. Immigration policy could be reformed to attract more highly skilled (and therefore more highly paid as well) workers to further offset the growing number of retirees. “And most of all, the U.S. should engage in a crash educational program to close the gap in skills and income levels among different parts of the American population.”
In addition to the demographic challenge well described by Mr. Laing, there is the problem that growing economic efficiency (caused by advances in technology and ever more globalization) will continue to replace American workers by both machines and lower cost foreign workers.
It is imperative for us to set aside partisan ideology and dramatically confront all of these economic challenges to continued American supremacy on the world stage. First and foremost we need fundamental tax reform, significantly lowering tax rates for all productive aspects of our economy, especially for investors, risk takers, entrepreneurs and corporations. (Lower tax rates can be made revenue neutral by eliminating deductions and closing loopholes.) We should simplify and streamline regulatory processes, again, to give all possible support to the businesses which can make the economy grow faster.
Our status in the world and therefore the future of our country depend on our success in this urgent endeavor!

Where Are the Jobs? II. How to Create More of Them

Posted on October 26, 2013 by jackheidel

My previous post, two days ago, introduced a new book by two economists, John Dearie and Courtney Geduldig, “Where the Jobs Are, Entrepreneurship and the Soul of the American Economy”. They make a very strong case that net job creation comes primarily from businesses less than one year old, true “start-ups”. But, unfortunately, there has been a huge drop off in the number of new businesses created each year since 2007 and, furthermore, the historical average of seven new jobs created by a firm in its first year has now fallen to less than five.
How do we reverse this alarming trend? Here is what the authors have learned from the many entrepreneurs they have talked to:

“Not enough people with the skills we need”
“Our immigration policies are insane”
“Regulations are killing us”
“Tax payments can be the difference between survival and failure”
“There’s too much uncertainty and it’s Washington’s fault”

Although there are 24 million Americans either unemployed or underemployed, there are also 3 million advertised high skill job openings going begging and many more potential jobs available for qualified individuals. A greater emphasis on STEM (Science, Technology, Engineering and Mathematics) education in the U.S. would help. But also immigration reform is urgently needed. The Senate has passed legislation to raise the annual cap on H1-B visas (for high skilled workers) from 65,000 currently to 110,000. Hopefully the House will concur.
A Preferential Regulatory Framework for New Businesses could be devised to help fragile new businesses in their first five years. A Regulatory Improvement Commission could be created to streamline the entire federal regulatory process. Likewise a Preferential Tax Framework for New Business should be created and could, for example, recommend taxing income for the first five years at a much lower rate than normal.
Regarding policy uncertainty the authors refer to the U.S. Economic Policy Uncertainty Index which is at a very high level since the Great Recession. Economic uncertainty obviously discourages business growth.
Conclusion: A very good way to boost the economy and create more new jobs is to put greater emphasis on supporting entrepreneurs who are trying to start new businesses. There are a number of concrete actions that the federal government can take to do this and doing so should be a very high priority for our national leaders.

Where Are The Jobs? I. The Basics

Posted on October 24, 2013 by jackheidel

Two economists, John Dearie and Courtney Geduldig, have just published a very interesting new book, “Where the Jobs Are, Entrepreneurship and the Soul of the American Economy”. In April 2011, Mr. Dearie and Ms. Geduldig launched an effort to understand the nature and scope of the damage to the U.S. labor markets caused by the Great Recession and, if possible, identify new ways to enhance the economy’s job-creating capacity.
They quickly “learned of research that demonstrates how virtually all net new job creation in the United States over the past 30 years has come from businesses less than a year old – true ‘start-ups.’ Investigating further, they also learned that America’s job creation machine is faltering, with the rate of start-up formation declining precipitously in recent years. To find out why, they launched an ambitious summer road trip – conducting roundtables with entrepreneurs in 12 cities across the nation.” Here is what they learned.
First of all, the U.S. labor market is tremendously dynamic, as existing businesses create new jobs and eliminate others. “In 2011, for example, 47.5 million separations occurred while 49.6 million Americans took new jobs.” But “existing firms, of any age or size, in aggregate, nearly always produce more separations than hires. … Indeed, existing businesses shed on a net basis a combined average of about 1 million jobs each year as some businesses fail, others become more efficient, and as separations simply outpace new hires. By stark contrast, new firms in their first year of existence, create an average of 3 million new jobs.”
Unfortunately, there has been a huge drop off in the number of new businesses created annually since 2007. Furthermore, the historical average of seven new jobs created by a new firm in its first year, has now fallen to less than five new jobs.
The obvious question which this discussion raises is: what policy changes are needed to boost the creation of new businesses? This will be the topic of my next post in a couple of days!

When Will Young Obama Supporters Wake Up and See the Light?

Posted on October 20, 2013 by jackheidel

Yesterday’s weekend interview in the Wall Street Journal with money manager Stanley Druckenmiller, “How Washington Really Redistributes Income”, vividly illustrates how disastrous Obama economic policy has been for the young people who form the core of his coalition. “High unemployment is paired with exploding debt that they will have to finance whenever they eventually find jobs.”
“I thought that tying Obama Care to the debt ceiling was nutty”, says Mr. Druckenmiller. “I did not think it would be nutty to tie entitlements to the debt ceiling because there’s a massive long term problem. And this president, despite what he says, has shown time and time again that he needs a gun at his head to negotiate in good faith.”
How about the “rat through the python” theory which holds that the fiscal disaster will only be temporary while the baby-boom generation moves through the benefit pipeline and then entitlement costs will become bearable. Unfortunately for taxpayers, “the debt accumulates while the rat’s going through the python,” so that by the 2030’s the debt and its enormous interest payments become bigger problems than entitlements. “That’s where Greece was when it hit the skids”, he says.
What is Mr. Druckenmiller’s solution? Raise taxes on dividends and capital gains up to ordinary income rates and eliminate corporate taxes all together. This is justified because it ends double taxation of corporate profits. But, in addition, the people who run the corporations would be more incentivized to invest the profits in growth and expansion. Ending corporate taxation also ends crony capitalism and corporate welfare. All of this would be “very, very good for growth which is a good part of the solution to the debt problem long-term. You can’t do it without growth.”
Bottom line: we urgently need to rein in entitlement spending but we also need smarter policies to grow the economy faster. Young people ought to be totally on board with all of this. When will they wake up and see the light?

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility

Category Archives: pro-growth economic policy