Category Archives: Robert Samuelson

How to Solve the Student Debt Problem: Grow the Economy Faster!

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Based on a post I wrote last fall, “Solving the Student Debt Problem,” and a recent Op Ed by the economics journalist, Robert Samuelson, “Good News on the College Debt Front,” here is where I think we are on this serious problem:

  • The unemployment rate is very low for college graduates, about 2.5%. We should strongly encourage post-secondary education for all.
  • Since 1996 outstanding student loans have risen from $200 billion to $1.3 trillion.
  • Counting both community colleges, four year colleges and universities, 56% of college students borrow money to pay for college costs.
  • For undergraduates who attended two and four year colleges, more than half of loans were less than $20,000. Only 10% exceeded $40,000.
  • The highest default rates occur at community colleges (23% in 2012) and at for-profit colleges (18%). Hurt worst are low-income and minority students who never graduated but have unpaid debts.
  • The Federal Reserve Bank of New York has found a close correlation between subsidized loan and Pell Grant limits and the rapid increase of college tuition costs.

It seems clear that the way to address this problem is to focus on where it is worst: for the low-income and minority students who attend community colleges and for-profit colleges.
Capture36In other words:

  • Place a strict lid on the total amount of subsidized loans available for undergraduates, say $25,000 to $30,000 per person.
  • Use the savings achieved in doing this to increase the size of Pell grants for the lowest income students who need help the most.
  • Overall faster economic growth will help college graduates and dropouts alike find better paying jobs and make it easier for them to pay back their college debts.
  • On an individual basis, urge all students, but especially low-income and minority students, to avoid debt as much as possible in the first place!

Conclusion: Careful analysis of the student debt problem shows that there are very useful steps to take which will not cost the federal government more money.

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Racism and Black Progress

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At this time of heightened racial tensions in the U.S. it is worthwhile to step back and take a broader view of the economic and social status of blacks in America. The Washington Post’s Robert Samuelson has done just this in a recent column. As pointed out by Mr. Samuelson blacks have made much progress since the 1960s:

  • Poverty. Black poverty has dropped from 39.3% in 1967 to 26.2% in 2014, which was still double the white rate of 12.7%
  • Education. In 1950 only 13.7% of adult blacks had completed high school. By 2014 this had jumped to 86.7%. Over the same period the percentage of black adults with a four year college degree jumped from 2.2% to 22.8%. The corresponding percentage for whites in 2014 is 36%.
  • Upward Mobility. The black upper middle class (with incomes of $100,000 or more, inflation adjusted) has grown form 2.8% of households in 1967 to 13% in 2014. For the U.S. population as a whole it is now 31%.
  • Politics. In 1965, when the voting rights act was passed, there were five blacks in Congress, now there 46. Over the same time period, the number of black state legislators grew from 200 to 700.
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  • Life Expectancy. The life expectancy gap between blacks and whites shrank from 8 years in 1970 to 5 years in 2010.

Conclusion. Most people understand that life for blacks in America is more difficult than it is for whites. On the whole American society is trying to help blacks lift themselves up to be able to enjoy a more prosperous and satisfying life.  Much progress has been made in this respect in the last half-century but there is clearly still a long way to go in achieving full equality with white America. In my next post I will discuss one of the biggest barriers which remain in achieving equality between races.

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How Progress Has Led to Discord

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We were reminded by Robert Samuelson in yesterday’s Washington Post that America has made amazing progress in the last half century.
Consider that in 1960:

  • Men and Women held rigid gender roles.
  • African-Americans were restricted by legal segregation in the South and informal segregation almost everywhere else.
  • Homosexuality was virtually under the radar.
  • There was little environmental regulation.
  • Immigration was not an issue.
  • Defense made up 52% of government spending.

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Think about all the (mostly) positive changes which have taken place in the meantime:

  • Women have taken paying jobs by the millions.
  • Racial segregation has been outlawed.
  • Gay rights have been established.
  • Environmental regulation has exploded.
  • Immigration, both legal and illegal, has increased.
  • Social spending has soared.
  • Defense is down to 16% of the federal budget in 2015.

Consider how our national politics is now stalemated:

  • The political system favors extremes.
  • Minorities live largely in big cities where they produce Democratic super-majorities.
  • Rural areas produce Republican super-majorities.
  • Incumbents are insulated from general election challenges which might pull them towards the center but are perpetually vulnerable to primary challenges from extremists who pull them towards the fringes.
  • Ideological purity trumps pragmatism. In the internet and cable-news era, politicians are constantly reassuring their constituents that they haven’t sold out.
  • The center sags and paralysis prevails.

Meanwhile serious national problems are getting much worse and not being addressed. Our public debt (on which we pay interest) is 74% of GDP, the highest since WWII.  The U.S. economy is growing only slowly at the rate of 2.1% per year ever since the end of the Great Recession seven years ago.  Neither presidential candidate has a credible plan to deal with these two most aggravating problems.
As a country we are in a huge mess.  How do we break out of it?  I wish I knew!

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It’s Easy to be Pessimistic about America’s Future

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As I remind readers from time to time, this blog is concerned with America’s fundamental fiscal and economic problems: a slow economy, massive debt, and increasing income inequality. Largely because of these apparently intractable problems, more and more people are becoming pessimistic about the future of our country.
CaptureAlthough I am by nature an optimist, these matters weigh on me as well:

  • The just introduced “Bipartisan Budget Act of 2015” is a sell-out to the status quo. It breaks the agreed upon sequester spending limits by $112 billion over two years with essentially no attempt to create long term spending restraint.
  • As pointed out recently by the Washington Post’s Robert Samuelson, the presidential candidates are talking mainly about new entitlements (the Democrats) or tax cuts (the Republicans). In both cases this represents a flight from reality.
  • Entitlements: The number of people aged 65 or older will increase from 15% of the population today to 22% of the population in 2040. The cost of Social Security, Medicare and Medicaid will jump from 6.5 % of GDP today to 14% of GDP in 2040. We simply must control these costs by raising eligibility ages for SS and Medicare and increasing premiums for wealthier recipients.
  • Economic Growth: Annual growth has averaged only 2% of GDP since the end of the Great Recession in June 2009. Slow growth means weaker gains in wages, more unemployment and larger spending deficits. This can be fixed long term with honest tax reform, but not with unrealistic tax cuts.

Conclusion: Isn’t it obvious that we need political candidates who will speak forthrightly with the people about the need for addressing these humongous problems? Americans aren’t dumb.  They will respond to straight talk from their supposed leaders.   

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Status Quo on the Budget Is Not Good Enough

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I have now been writing this blog for just over two years.  I usually write three posts per week and this one is #280.  My top sources for background information are the New York Times and the Wall Street Journal.  My own local newspaper, the Omaha World Herald, carries the Washington Post economics journalist, Robert Samuelson, whom I greatly respect.
A column of his discusses a recent report from the Senate Budget Committee prepared by its outgoing chair, Patty Murray (D-WA), entitled “The updated fiscal outlook and its implications for the budget debate next year.”  To me this report clearly shows why there has been so little progress made in straightening out the budget over the past few years.
CaptureCapture1Here are some highlights of the report:

  • “Both our current fiscal situation and the outlook going forward have significantly improved, meaning we need a budget approach more focused on jobs and growth, not just on cuts.”
  • “Deficits have fallen dramatically over the last five years, and projected debt and deficits have also declined.”
  • “Revenue losses due to the recession and slow recovery were significant enough to counteract nearly half of the improvement in projected deficits, which highlights the need for new revenue from the wealthiest Americans and biggest corporations as part of any future deficit reduction effort.”
  • “It is clear that we need a federal budget approach more focused on jobs and growth, not on cuts for the sake of cutting. That leaves Republican leaders with a critical choice.”

In my opinion there are two basic problems with Senator Murray’s analysis:

  • Deficits have indeed fallen dramatically from their very high level in 2009, but not far enough! Deficits are projected to rise back to 3.9% in just ten years, as shown in the first chart. This means that debt will keep growing indefinitely, as shown in the second chart. This is unacceptable!
  • We do badly need to focus on jobs and growth but more deficit spending is not the way to do it. Although immigration reform and expanded trade would help, fundamental tax reform, individual and corporate, is what is really needed to grow the economy.

Hopefully a new Congress will be able to move in this direction next year!

How to Control Federal Spending III. Reform Medicaid!

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One of the many controversies involving the Affordable Care Act concerns the expansion of Medicaid to cover low income people up to 138% of the federal poverty level.  As Robert Samuelson reported in the Washington Post a few days ago, “The Real Medicaid Problem,” 24 states have refused to expand Medicaid coverage even though the federal government will pay 100% of all additional costs until 2017.
CaptureAs Mr. Samuelson points out, the underlying issue is a matter of cost:

  • The basic Medicaid program is funded with a fixed percentage of each state’s costs paid by the federal government. This means that the more a state spends, the more is contributed by the federal government. From 1989 to 2013, the share of state budgets devoted to Medicaid has risen from 9% to 19%. This upward trend is clearly unsustainable.
  • In Medicaid, children and adults up to age 65 represent three-fourths of beneficiaries, but only one-third of costs. The quarter of beneficiaries who are aged or disabled are responsible for two-thirds of costs.
  • More than 60% of nursing home residents are on Medicaid.
  • There is no assurance that the federal share of the expanded coverage will continue at the announced rate of 90% after 2017 because the federal government is in much worse financial shape than are most states.

An interesting Op Ed appeared recently in the Wall Street Journal, “The Smarter Way to Provide Health Care for the Poor,” written by Mike Pence, the Governor of Indiana.  In 2008 Indiana set up the Healthy Indiana Plan to better serve low income Indianans.  It now provides Health-Savings Accounts to 40,000 low income citizens, with very good results.  Indiana is applying for a waiver to the ACA to use Medicaid expansion funds to provide HIP to all low income families up to 138% of the poverty level ($33,000 for a family of four).
Clearly, individual states, when offered the opportunity, are quite capable of coming up with innovative solutions for difficult problems.
A good way to resolve the problem of state resistance to Medicaid expansion is to fundamentally change Medicaid into a block grant program whereby the federal government contributes a specific amount of money to each state each year.  Then the states design their own programs to meet their own needs.  Block grant funding for Medicaid is a common sense approach to address one aspect of our huge fiscal problem in an intelligent way!

 

Does Tax Reform Have a Future?

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My post on February 27, “A Breath of Fresh Air” praises the new tax reform proposal from the House Ways and Means Committee which both lowers and consolidates tax rates in a revenue neutral way as well as greatly simplifying the tax code.  It would be a big step in the right direction.  But the Washington Post’s Robert Samuelson makes a good case in ”Does Tax Reform Have a Future?” that the House bill does not go far enough.
CaptureMr. Samuelson argues that if we’re going to eliminate tax deductions and loopholes, and thereby alienate lots of special interest groups, in order to get lower tax rates, then we should avoid half measures and eliminate virtually all deductions in order to get the lowest possible rates.  In other words, eliminate the mortgage interest deduction rather than just limiting it, eliminate deductions for charitable contributions as well as deductions for state and local taxes.  Eliminate the deduction for employer provided healthcare (which by itself would go a long way towards reforming healthcare.)
Mr. Samuelson would retain only the Earned Income Tax Credit (which encourages low-income people to work) and also the tax preference for contributions to retirement accounts (without which most Americans wouldn’t save for retirement.)
We badly need broad based tax reform to stimulate our economy.  Douglas Holtz-Eakin, the former director of the Congressional Budget Office, has estimated “Reforming Taxes, Goosing the Economy”, that even the imperfect House tax reform proposal would raise GDP by .5% annually for 10 years and create 500,000 new jobs each year over this time period.
Full-fledged tax reform, a la Samuelson, would provide an even greater stimulus but let’s at least do something to put the millions of unemployed and underemployed people back to work and reduce our staggering budget deficits!

Truth and Myth about Inequality

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Two of my favorite columnists are the Brooking Institution’s William Galston, a social economist who has a weekly column in the Wall Street Journal and the economics journalist Robert Samuelson who writes for the Washington Post.  
Most people agree that income inequality in the U.S. is steadily getting worse.  Mr. Galston make a good case (see my last post) that it is primarily caused by the large gap between the rising productivity of American workers and the stagnant level of their pay which has developed since 1973.  He thinks that we need a fundamentally new social contract which links worker compensation to productivity.  This, of course, is a tall order and it is not at all clear how such a new order would be achieved.
CaptureMr. Samuelson has a different perspective: “Myth-making about Economic Inequality”.  For example:

  • The poor are not poor because the rich are rich
  • Most of the poor will not benefit from an increase in the minimum wage because only 6% of the 46 million poor people have full time jobs
  • All income groups have gained in the past three decades, even though the top 1% has gained the most (see the above chart from the CBO, December 2013)
  • Widening economic inequality did not cause the Great Recession

These two perspectives on inequality are quite different but not contradictory.  Basically what Mr. Samuelson is saying is that we have to be careful in how we address this problem or we’ll just make it worse.  Raising taxes on the rich is unlikely to help and might hurt if it slows down the economy.  Raising the minimum wage will only raise a fairly small number of people out of poverty and may cause a lot of unemployment along the way.
My solution: focus on boosting the economy to create more jobs in the short run (tax reform, immigration reform, trade expansion) and improved educational outcomes for the long run (early childhood education, increasing high school graduation rates, better career education).
But I agree with Mr. Galston that it is imperative to lessen income inequality, one way or another.  Otherwise as a society we’ll have big trouble on our hands.

How to Create a More Just and Equal Society

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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.

Why Growth Is Getting Harder

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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!