Category Archives: pro-growth economic policy

Why Growth Is Getting Harder

Posted on by
Reply

The Cato economist, Brink Lindsey, has just issued a new report, “Why Growth Is Getting Harder”.  See also Robert Samuelson’s Op Ed in yesterday’s Omaha World Herald, “Economic growth potion slowing to anemic trickle”.  Annual GDP growth has averaged over 3% since 1950.  But for the past four years, since the end of the Great Recession in June 2009, it has averaged barely 2% annually and, as Mr. Lindsey notes, this low growth rate is widely predicted to continue.
Historically the rate of GDP growth is attributed to four factors:

  • greater labor force participation, mainly by women
  • better educated workers, as reflected in high school and college graduation rates
  • more invested capital per worker
  • technological and organizational innovation

For example, women’s labor force participation went from 30.9% in 1950 to 59.9% in 2000.  Since then it has started to lag.  The national high school graduation rate is stuck at about 70% and realistically can’t go much higher.  Mr. Lindsey shows that both the national savings rate and domestic investment rate have been falling steadily since 1950.  Productivity growth was high from 1950 – 1979, high again from 1996 – 2004 and has fallen off again since.
Mr. Lindsey concludes “In the quest for new sources of growth to support the American economy’s flagging dynamism, policy reform now looms as the most promising “low-hanging fruit” available.”
What policy changes and improvements will counteract these negative trends?  Here are several more or less obvious suggestions:  Immigration reform can bring our 11,000,000 illegals into the main stream economy.  Education reform, especially including an early childhood emphasis, will improve the quality of education for low-income kids, and maybe even boost graduation rates.  Tax reform, with lower tax rates (offset by closing loopholes) has much potential for boosting investment and risk taking, as well as for boosting innovation and entrepreneurship.
Faster economic growth is so beneficial for so many reasons, that we should insist that our national leaders make it a top priority.  Ideological objections, such as providing “tax breaks for the rich” are not acceptable and must be constantly batted down!

What Is the Best Budget Outcome in the Current Standoff?

Posted on by
Reply

 

In yesterday’s Wall Street Journal, columnist Holman Jenkins describes “The Best Budget Outcome: Tax Reform”.  His point is that the only way we can possibly continue to pay for our rapidly growing entitlement programs of Social Security, Medicare and Medicaid, is by speeding up the growth of our economy.
All of the various fiscal reforms of these programs which have been suggested such as means testing for Medicare, raising the Social Security wage base ($113,700 in 2013), changing the way the COLA is computed, raising eligibility age limits for both Social Security and Medicare, and block granting Medicaid to the states, can at best slow down the growth of their costs.  This is because the number of retirees is growing so rapidly as well as the number of eligible recipients for Medicaid.
Most sensible people know that we have to do a much better job of controlling the cost of entitlement programs, even though it is tough in practical terms to agree on specifically which costs to rein in.
In addition to holding down the growth of government spending, the other way to shrink the deficit and slow down our soaring national debt, is by speeding up economic growth.  The best way to do this is by lowering tax rates (offset by closing tax loopholes) in order to encourage more entrepreneurial investment and risk taking.
But too many people are ideologically opposed to lowering tax rates because they think that it increases economic inequality.  As Mr. Jenkins says, such people would rather “see the lives of the young and unskilled be blighted by a slow-growth economy than approve a reform of rates and loopholes that …(could be mislabeled)… as a tax cut for the rich.”
In other words, the two sides in the budget debate can probably hammer out some reasonable ways to rein in entitlement spending.  But they probably will not be able to agree on sensible tax reforms which would grow the economy faster and put more people back to work.  What a shame!

A Pessimistic View of America’s Future V. When Wealth Disappears

Posted on by
2

 

Several of my recent posts have been pretty gloomy.  “Average is Over,” “What, Me Worry?” and “The Age of Oversupply,” for example.  Here’s another gloomy one.  The British economist, Stephen King, has an Op Ed column in last Monday’s New York Times, “When Wealth Disappears.”, based on his new book, “When the Money Runs Out.”
Our GDP grew at 3.4% per year in the 1980s and 1990s, then dropped to a growth rate of 2.4% from 2000 – 2007.  Since the Great Recession ended it has averaged barely 2% per year.  The Democrats say we just need more fiscal stimulus and monetary easing to boost the growth rate.  The Republicans say deficit reduction including entitlement reform, slashing regulations and tax reform is what is needed to revive the economy.
“Both sides are wrong,” says Mr. King.  “The underlying reason for the stagnation is that a half-century of one-off developments in the industrialized world will not be repeated.”  These one-off developments are: the unleashing of global trade after World War II, financial innovation such as consumer credit, expansion of social safety nets which reduces the need for household savings, reduced discrimination which has flooded the labor market with women and, finally, the great increase in the number of educated citizens.
What Mr. King recommends is “economic honesty, to recognize that promises made during good times can no longer be easily kept.  What this means is a higher retirement age, more immigration to increase the working age population, less borrowing from abroad (by holding down deficit spending), less reliance on monetary policy that creates unsustainable financial bubbles, a new social compact which doesn’t cannibalize the young to feed the boomers, and a further opening of world trade.”
“Policy makers simply pray for a strong recovery.  They opt for the illusion because the reality is too bleak to bear.  But as the current fiscal crisis demonstrates, facing the pain will not be easy.  And the waking up from our collective illusions has just begun.”
It is obviously time to bite the bullet, lower our expectations, and start doing the hard work needed for even incremental economic progress.

A Pessimistic View of America’s Future IV. The Age of Oversupply

Posted on by
Reply

 

Today’s New York Times has an interesting Op Ed column by Daniel Alpert, a partner at the investment bank, Westwood Capital, LLC, “The Rut We Can’t Get Out Of” .  It is based on Mr. Alpert’s new book, “The Age of Oversupply: Overcoming the Greatest Challenge to the Global Economy”.
“Hundreds of millions of people who once lived in sleepy or sclerotic statist and socialist economies now compete directly or indirectly with workers in the United States, Europe and Japan, in a world bound by lightning-fast communications and transportation,” says Mr. Alpert.
During the “Great Moderation,” beginning in the early 1980’s, with the tech bubble of the 1990’s and the housing bubble of the 2000’s, we could ignore this threat from the developing world.  But now, after the financial crisis and the Great Recession which followed, this huge new source of global competition for jobs and cheap goods is a drag on our recovery.
Mr. Alpert’s main prescription for recovery is to put the unemployed back to work “by any means, including big public sector investments to improve infrastructure and competitiveness.”  He would do this with massive new deficit spending, arguing that U.S. debt is not a serious problem in the short term.
I agree with his argument that the global oversupply of workers, money and goods is a huge threat to future prosperity.  Where I disagree is when he says that faster economic growth is more important than controlling deficit spending.
In my opinion, “America’s existential threat is fiscal” (Glenn Hubbard and Tim Kane).  In other words, as important as it is to boost the economy and create more jobs, and this is very important indeed, it is more urgent to get deficit spending under control and to do this quickly.  We can actually accomplish both of these critical tasks simultaneously, as I discussed in my post of September 20, 2013.

A Pessimistic View of America’s Future II. What Does Everyone Want?

Posted on by
Reply

 

In my previous post I laid out the view of the economist, Tyler Cowen, in his new book “Average is Over”, that the powerful trends of globalization, technology, and ever increasing machine intelligence (such as Google’s search engines), will lead to a super elite 10-15% of American’s who will have the ability and self-discipline to master tomorrow’s technology and profit from it.  The average middle class worker will be increasingly replaced or downgraded by intelligent machines.  Social and economic inequality will continue to grow and this new trend will be very hard to overcome.  This is a bleak prospect for the future of America.
What can be done to resist this trend and to try to turn it around?  Jim Clifton, the CEO of the Gallup Organization, says in “The Coming Jobs War”, that “what everyone in the world wants is a good job” and he has many ideas about how to boost the economy in order to produce more good jobs.  According to Mr. Clifton, there is no shortage in this country of creativity, new inventions and innovation.  What is lacking are successful business models to commercialize the good ideas which are already out there and create customers for new products.  We need entrepreneurship.  “Entrepreneurship has a direct impact on supply and demand, but with a distinction.  It doesn’t just provide supply, it builds demand.”
Next question: how do we boost entrepreneurship?  We get government out of the way as much as possible.  This means the lowest possible tax rates (offset by eliminating tax loopholes for the wealthy) and fewer burdensome regulations (such as the employer mandate for health insurance).
 As a society we have to decide which is more important:  creating more and better jobs by growing the economy faster or making everyone more equal with higher taxes and more income redistribution.  We can’t have it both ways.  To reverse or at least slow down the trends which are now shrinking the middle class,  the best policy is to go all out for entrepreneurship and investment!

A Pessimistic View of America’s Future

Posted on by
Reply

 

The George Mason University economist, Tyler Cowen, has written a provocative new book entitled “Average is Over”, which has just been reviewed by the Economist: “The American Dream, RIP?” .  His thesis is that the slow recovery of middle class jobs following the Great Recession of 2008-2009 portends a new economy more and more devoid of middle class jobs and broad prosperity.
Mr. Tyler says that “An elite 10-15% of Americans will have the brains and self-discipline to master tomorrow’s technology and extract profit from it.  They will enjoy great wealth and stimulating lives.  Others will endure stagnant or even falling wages as employers measure their output with ‘oppressive precision’.  Some will thrive as service providers to the rich….Young men will struggle in a labor market which rewards conscientiousness over muscle.”  Some highly motivated individuals, born poor, will be able to move into the elite group with cheap online education.  This creates overall a sense of “hyper-meritocracy” at the top which “will make it easier to ignore those left behind.”
What Mr. Cowen has done is to take the strong social and economic forces of globalization and technology, add to this mix emerging machine intelligence (Google is a prime example) and then to use his vivid imagination to conjure up an image of what life will be like in the not so distant future.  America will still likely be the dominant country in the world but the historically strong middle class will shrink as the rich become richer and the poor become poorer.
Is this pessimistic vision of America’s future inevitable?  Is there anything we can do to at least slow down if not to reverse these trends?
Speeding up economic growth is our only chance to turn things around and mitigate this grim future.  Better K-12 education (and therefore early child education as well) will help in the long run.  In the short run, broad based tax reform, healthcare cost control, relaxing overly burdensome regulations, and immigration reform are the four things which will help the most.  The same old basic stuff is what we need to do!  Tyler Cowen’s story just makes the need for such changes more compelling and more urgent!

Our Dire Fiscal Situation II A Promising Solution

Posted on by
Reply

 

As I discussed in my last post, the Congressional Budget Office has shown very clearly that the U.S. is on an unsustainable fiscal path which must be reversed in order to avoid calamity.  We are spending too much money and not taking in enough tax revenue.  In a recent Wall Street Journal Op Ed column, the economist Martin Feldstein describes “How to Create a Real Economic Stimulus”.  “A successful growth and employment strategy would combine substantial reductions in the relative size of the future national debt with immediate permanent tax rate cuts and a multiyear program of infrastructure spending…….The only way to reduce future deficits without weakening incentives and growth is by cutting future government spending.”
Mr. Feldstein proposes slowing the growth of benefits of middleclass retirees by gradually raising the full benefit retirement age for Social Security from 67 to 70 and also raising the age of Medicare eligibility to the same level.  This would create a budget savings of 1% of GDP, or $200 billion, by 2020.   Rather than eliminating such popular tax deductions as the one for mortgage interest or the exclusion of employer payments for health insurance, he recommends limiting the amount by which individuals can reduce their tax liabilities to 2% of adjusted gross income.  This single change to the tax code would, for example, reduce the 2013 deficit by $140 billion.
In addition to lowering tax rates for individuals, corporate tax rates should be cut from 35% to about 25% in order to be competitive with other industrial countries.  We should also adopt the internationally common “territorial” system which doesn’t tax foreign earnings brought back home.
In short, we decrease spending and raise revenue with entitlement reforms and a limit on tax expenditures thereby creating a framework for tax rate reductions and infrastructure spending.  These are the sorts of bold measures needed to produce a real stimulus and thereby get our economy back on track!

The Best Way to Spread the Wealth

Posted on by
Reply

 

In today’s Wall Street Journal, Stephen Moore discusses how “Obama’s Economy Hits His Voters Hardest.”  A  report by Sentier Research shows that the average American household income has fallen from $54,478 in June 2009 (when the recession ended) to $52,098 in June 2013, amounting to a decline of 4.4%.
Mr. Moore notes that in the 2012 election, won by Barack Obama with 51% of the vote, the President received 60% of the youth vote, 67% of single women, 93% of black, 73% of Hispanics, and 64% of those without a high school diploma.
But, according to Sentier Research, it is precisely these groups for which income has fallen the most during the last four years.  Those under age 25 experienced an income decline of 9.6%, single women’s income dropped 7%, black heads of household’s incomes dropped 10.9%, Hispanic’s by 4.5%, and those without a high school diploma by 6.9%.
On the other hand, during the period 1981 – 2008, often referred to as 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%.  In other words, income inequality shrunk dramatically during the Reagan-Bush-Clinton-Bush years and has increased significantly during the Obama years.
The lesson is that in order to spread the wealth it is first necessary to create more wealth.  If more people were working today, and the economy was growing faster, then the people at the bottom of the income scale would be doing much better and gaining on everyone else.  There are tried and true methods to get this done!  It’s exasperating that we aren’t using them!

The Best Way to Help Working People

Posted on by
Reply

 

The lead story in today’s Omaha World Herald, “Demand for skilled labor rising”, along with an accompanying editorial, point out that “Ours is a place where opportunity exists, to the tune of 35,000 advertised job openings counted by the Nebraska Department of Labor.”
Terry Moore, President of the Omaha Federation of Labor, predicts that demand for construction workers will only increase in the near future.
Gary Kelly, Business Manager for Local 22 of the International Brotherhood of Electrical Workers, said “It’s times of full employment that allow us to go out and organize the unorganized.”
Kirk Ahrends, Dean of Applied Technology at Metropolitan Community College, said that instructors who teach 16 different trade professions get many requests for job candidates.  “They’re knocking on the door.  Not only the students, but the industries.  They’re saying ‘Get us some graduates.’”
Nebraska is fortunate to have such a good job market, much better than the U.S. as a whole which is suffering from an unemployment rate of 7.4% and an anemic growth rate of just 2% a year.
By far the best thing the government can do to help workers is to adopt policies which will speed up economic growth.  This can be accomplished by giving entrepreneurs and investors greater incentives to take more risks.  Lowering tax rates (offset by closing loopholes) and easing burdensome regulations are the tried and true methods of getting this done.
There are twenty million unemployed and underemployed Americans who would benefit from national leaders more attuned to their need for work.

What Is the Best Way to Advance Martin Luther King’s Dream?

Posted on by
Reply

 

In Wednesday’s Wall Street Journal John McWhorter, an African-American professor at Columbia University, describes “A Better Way to Honor Dr. King’s Dream”. Mr. McWhorter writes that a new conversation about race, “one in which whites submit to a lesson from blacks about so-called institutional racism” is not what America needs.  “Today’s struggle should focus on three priorities.  First, the war on drugs, a policy that unnecessarily tears apart black families and neighborhoods.  Second, community colleges and vocational education, which are invaluable in helping black Americans get ahead.  And third, the AIDS and obesity epidemics, which are ravaging black communities.”
Such sentiments represent a huge dose of common sense.  The African-American community needs help and cooperation from the wider society to address fundamental issues like juvenile delinquency, poor educational outcomes and unhealthy environments.  But these things, as much as they’re needed, are not enough by themselves for further progress towards racial equality.
The route out of poverty for all low income people, including blacks, is to raise themselves up by their bootstraps through educational attainment and hard work.  Society can and should make sure that the appropriate institutions, such as community colleges, are readily available to provide training for jobs which are out there in the private sector.
But most of all we need a vibrant economy to give lower income Americans more opportunities to work their way up the economic ladder.  We have not yet recovered in a satisfactory manner from the Great Recession which ended in June 2009.  This makes it all the more important for our national leaders to focus on the pro-growth policies which will get our economy humming again.