What’s Wrong With U.S. Manufacturing Policy

 

The Brookings Institution’s Martin Baily has an informative article, “what’s wrong with U.S. manufacturing policy,” in a recent issue of the Wall Street Journal.
Capture1Says Mr. Baily, “Of the 5.7 million manufacturing jobs that disappeared in the 2000s, only 870,000 have returned so far, according to the Bureau of Labor Statistics, and the claim that millions more are coming back is nothing more than a myth. … If the U.S. is serious about promoting a recovery in manufacturing, it will stop measuring success by the number of people employed in the sector and start supporting the technological advancements that are making factories more productive, competitive and innovative.”
CaptureAccording to Mr. Baily the technological shift taking place is powered by three developments:

  • The internet of things in which machines are able to communicate with each other.
  • Advanced manufacturing including 3-D printing, new materials and more accurate digital logistics.
  • Distributed innovation in which crowdsourcing is used to find solutions to technical challenges more quickly.

Such advances must be supported even if it means putting robots in place of workers.  It follows that:

  • there will still be good jobs in manufacturing for those with big data, programming and other specialized skills
  • a shortage of qualified workers means we want highly qualified immigrants to stay in the U.S. instead of returning to their home countries
  • propping up uncompetitive jobs with tax breaks and subsidies won’t work for long and just interferes with introducing a lower corporate tax rate to drive new investment
  • new trade agreements strengthen U.S. manufacturing by reducing foreign barriers to U.S. goods
  • Displaced workers Should be supported with retraining programs especially through community colleges
  • Government can further help with infrastructure improvements and expedited permitting processes.

Conclusion:  U.S. manufacturing will continue to thrive in a rapidly changing environment as long as it is properly supported with intelligent government policies.

Learning By Doing III. Limiting the Influence of Lobbyists

 

The eclectic entrepreneur/economist/law professor, James Bessen, suggests how to boost our stagnant economy in a new book, “Learning by Doing: the real connection between innovation, wages and wealth.” The idea is to make fuller use of new technology by putting more emphasis on practical vocational training, ending government favoritism for established businesses, and by removing regulatory roadblocks to job mobility and entrepreneurship.  He also thinks that the greatest hindrance to progress on these fronts is the influence of lobbyists and, more generally, “the growing role of money in politics.”
CaptureHow do we limit the ability of lobbyists, with their huge financial resources, to slow down the opening up of new technology to the broadest possible group of participants?  Some people would say this can only be done by curtailing the use of money in politics.  But this is virtually impossible.  Spending money to get your message out is really just a form of speech and the First Amendment to the Constitution says that “Congress shall make no law abridging the freedom of speech.”
Rather than trying to restrict the ways in which lobbyists can spend their money, we could alternatively try to immunize our elected representatives from its effect, in one or both of these two different ways:

  • Pass a Balanced Budget Amendment to the Constitution. Such an amendment would likely create the discipline needed for Congress to be able to set priorities and decide what is more or less important with regard to the overall economy. Spending programs, tax revenue, and the effects of regulation would all have to be considered together to maximize economic efficiency. Lobbyists would have far less power to push one particular program independently of how it relates to everything else.
  • Term Limits for national office. Knowing that one’s time in office is limited would help provide the strength to make the difficult tradeoffs necessary for good legislation and make officeholders more immune to special interest influence.

Conclusion:  Rather than making a likely futile attempt to reduce the amount of money in the political process, change the process sufficiently so that money doesn’t have as much influence!

“We’ve Got to Do Something about Income Inequality”

 

This is what I hear over and over again from my liberal-minded friends.  Their solution is to raise taxes on the rich and give to the poor.  This might help a little but not nearly enough.
The best way to help middle- and lower-income people is to give them more opportunities for self-advancement by providing more upward mobility in society.  Right now the middle class is being “hollowed out” as shown in the chart just below.
CaptureThere are three major reasons for this:

  • Economic Globalization which provides low cost goods from around the world and thus puts pressure on low- and semi-skilled workers in the U.S.
  • Rapid technological advancement which puts a higher premium on educational attainment and advanced skill acquisition.
  • Slow economic growth averaging only 2.3% since the end of the Great Recession in June 2009.

Globalization and technological advancement are strong worldwide forces likely to continue indefinitely.  We will simply have to adapt to them with long term strategies such as improved educational outcomes at all levels (early childhood, K-12 and post-secondary).  But speeding up economic growth is under our direct control with tried and true methods which are not being fully utilized at the present time. Such as:

  • Tax Reform. We should lower tax rates for individuals across the board, paid for by shrinking deductions for the wealthy. This will give middle- and lower-income workers, as well as new entrepreneurs, more money to spend, thereby boosting both supply and demand in the economy.
  • Increasing the Earned Income Tax Credit paid for by using some of the increased revenues from shrinking deductions for the wealthy. This would encourage more people to take and hold onto entry level jobs, thus boosting the economy by increasing the size of the workforce.

In other words, much can be done to reduce income inequality.  Redistribution of tax revenue is fine as long as it is done in a way which increases economic growth, rather than just punishing the rich.

Raising America’s Pay

 

The Economic Policy Institute has just issued a provocative new report, “Raising America’s Pay: Why It’s Our Central Economic Policy Challenge”.  It is based on the now widely accepted view, as summarized in the chart below, that wages for the typical (i.e. median, not average) American worker have been stagnant since the early 1970’s, even though productivity has continued to increase at its historical rate.
CaptureFirst of all, the authors make reasonable arguments that:

  • The slumping of hourly wage growth for the vast majority explains the overall trends in income inequality.
  • Wage stagnation stalls progress in reducing poverty.
  • Wages are the root of economic security for the vast majority. This includes the fact that Social Security benefits depend upon wage earnings before retirement.

Then they ask: “Why has wage growth faltered for the vast majority, and what can be done?”  Here is where the report becomes controversial!

  • The authors do agree that globalization of markets and technological change have contributed to the wage growth slowdown but argue that this overlooks the impact of labor market and tax policy and business practices as follows:
  • Falling top tax rates have increased the income share of the top 1 percent.
  • The Federal Reserve has prioritized low rates of inflation over low rates of unemployment in recent decades and high unemployment suppresses wage growth.
  • The erosion of the inflation adjusted minimum wage and the share of the workforce represented by a union explain much of the entire rise of wage inequality over this time period.

The authors are completely correct that stagnant wages for American workers is a critical, even “central,” problem facing the economy at the present time.  The question, of course, is how to address this problem most effectively.  In my opinion, the authors have completely neglected to take into account how a faster rate of economic growth would contribute to a solution of the problem and how this could be accomplished.  I will address this question in my next post in a couple of days.
They conclude by saying that this report is only the first in a multiyear research and public education initiative of the EPI.  We have a lot to look forward to!

Is Capitalism in Crisis?

 

The economist and public lecturer, Richard Wolff, gave an address in Omaha NE last night, entitled “Capitalism in Crisis: How Lopsided Wealth Distribution Threatens Our Democracy”.  His thesis is that after 150 years, from 1820 – 1970, of steadily increasing worker productivity and matching wage gains, a structural change has taken place in our economy.  Since 1970 worker productivity has continued to increase at the same historical rate while the median wage level has been flat with no appreciable increase. This wage stagnation has been caused by an imbalance of supply and demand as follows:
Capture

  • Technology has eliminated lots of low skill and medium skill jobs in the U.S.
  • Globalization has made it less expensive for low skill jobs to be performed in the developing world at lower cost than in the U.S.
  • At the same time as jobs were being replaced by technology and disappearing overseas, millions of women entered the labor force.
  • A new wave of Hispanic immigration has caused even more competition for low skilled jobs.

In addition, stagnant wages for the low skilled and medium skilled worker have been accompanied by an increase in private debt through the advent of credit cards and subprime mortgage borrowing.  This enormous increase of consumer debt led to the housing bubble, its bursting in 2007-2008, and the resulting Great Recession.
Five years after the end of the recession in June 2009, we still have an enormous mess on our hands: a stagnant economy, high unemployment, massive and increasing debt and a fractious political process.  How in the world are we going to come together to address our perilous situation in a rational and timely manner?
Mr. Wolff believes that capitalism’s faults are too severe to be fixed with regulatory tweaks.  He also agrees that socialism has proven to be unsuccessful where it has been tried.  He proposes a new economic system of “Workers’ Self-Directed Enterprises” as an alternative.
I agree with Mr. Wolff that capitalism is in a crisis but I think that it can be repaired from within.  The challenge is to simultaneously give our economy a sufficient boost to put millions of people back to work and to do this while dramatically shrinking our annual deficits in order to get our massive debt on a downward trajectory as a percent of GDP. How to do this is the main focus of my blog, day in and day out!

Wealth Inequality I. What Is It?

 

The subject of income inequality has generated much interest and concern in recent months.  Now we will also be hearing a lot about wealth inequality, based on the highly credible new work, “Capital in the Twenty-First Century” by the French economist, Thomas Piketty.  The New York Time’s Eduardo Porter, summarizes the basic message in his recent column “A Relentless Widening of Disparity in Wealth”, which is clearly displayed in the two charts below.
CaptureThe value of private capital as a percentage of national income worldwide has been growing steadily since about 1950 and Mr. Piketty predicts that this trend will continue indefinitely.  The trend is equally true, not only in the U.S., but also in other developed countries as is illustrated in the chart.  It happens because the income from wealth, i.e. return on investment, typically grows faster than wages and GDP.
As Mr. Porter says, “It means future inequality in the United States will be driven by two forces.  First of all, a growing share of national income will go to the owners of capital.  Of the remaining labor income, a growing share will also go to the top executives and highly compensated stars at the pinnacle of the earnings scale.”
This trend has now been in effect ever since 1870, with the exception of the period between World War I and World War II, when a massive amount of wealth was destroyed.  The forces of globalization and growth of technology are contributing to both types of inequality, especially in the developed world (see my post of January 23), and these forces will almost surely continue unabated.  So the wealth and income inequality gaps are just going to keep getting worse.
How much inequality can exist in a democracy?  The number of losers (the low income, the poor, and even the struggling middle class) will gradually get bigger and bigger and will become more and more frustrated and express their discontent at the ballot box.  This threatens the future of capitalism and free enterprise, the economic principles on which our way of life is founded.
Something has to be done!  Stay tuned for my next post!

Why a High Corporate Income Tax Is So Damaging to Our Economy

 

My previous post, “Fundamental Tax Reform Is the Key to Solving Our Economic and Fiscal Problems II.  The Graetz Plan”, describes a tax reform plan which establishes a 14% national consumption (VAT) tax, exempts families earning under $100,000 from paying any income tax and also reduces the Corporate Income Tax to 15%.  All of this is done in a revenue neutral manner while also preserving all of the progressivity of our current income tax system.
CaptureA recent Op Ed column in the New York Times, by the economist Lawrence Kotlikoff, “Abolish the Corporate Income Tax”, makes the case that such a proposal “might sound like a gift to the rich, but it would actually help workers. … Apple’s tax return says it all:  The company, according to one calculation, paid only 8% of its worldwide profits in United States corporate income taxes, thanks to piling up most of its profits and locating far too many of its operations overseas.”
Our corporate income tax rate, at 35%, is one of the highest in the world and this is what encourages American multinational companies to move their business to other countries.  Whether we abolish the corporate income tax entirely, or just reduce it to 15%, is less important than recognizing the need to overcome popular prejudice about big business and make fundamental changes in our tax structure.
Solving our country’s many problems, from rising inequality at home to projecting adequate strength around the world, requires that the U.S. have a strong economy.  An annual growth rate of 2% of GDP is not nearly good enough to end our current economic stagnation.  To accomplish this will require overcoming the strong headwinds of increasing global competition and the replacement of people with machines.  We will need innovative thinking and initiative to break out of the old ways of doing things which are holding us back.
Are the American people “exceptional” enough to accomplish this challenging task?

An Optimistic View of America’s Future!

 

In the latest issue of Barron’s, Frederick Rowe, the managing partner of Greenbrier Partners Capital Management, asks in “More Than a Sugar High?” , “Can you imagine a country that is managed in an economically rational manner, creating the wealth that’s necessary to take proper care of the citizens who get left behind? … What if our economic recovery is more than a sugar high?  What if there is more here than insanely stimulative monetary policy from the Federal Reserve?  What if the U.S. has already begun to steer an economic course to a period of unprecedented and genuine prosperity, achievement, and problem solving?”
Here are eight factors which Mr. Rowe gives to point us in the right direction:

  • North American Energy Independence (already on the horizon).
  • Sensible Immigration Reform: encouraging our most enterprising and hard-working people to become citizens rather than chasing them away.
  • Repatriation of Corporate Income: if a company domiciled in the U.S. makes money in Argentina and wants to invest it in the U.S. we double-tax the daylights out of it.  It would be hard to imagine a more counterproductive tax policy.
  • Changing Directors and Their Thinking: the once unthinkable mindset of corporate directors acting on behalf of long-term owners (rather than the CEOs with whom they play golf) is actually gaining traction.
  • Lowering Corporate Taxes: the tax-writing committees in Congress are working on this.
  • Increasing Technological Leadership: the most dynamic technology companies in the world are domiciled in the U.S. Technology, in the short run, displaces workers.  But eventually workers catch up because new technology creates new kinds of jobs that were never imagined before.
  • Americanization of the World: more than three billion people around the world will soon be able to afford to live much more like the 300 million Americans do.  So companies which make it big here have an automatic global opportunity.
  • Obamacare:  Even this bureaucratic catastrophe provides a large opportunity for economic opportunity.  Think of Jimmy Carter’s failures which led to Ronald Reagan’s successes.

“Let your imagination run and consider all the things that can be accomplished by an energy-independent, cash-generating, cash-repatriating country that is a hotbed of technological innovation.”
I can’t possibly say it any better than this!

Labor’s Share of National Income Is Falling

The latest issue of the Economist shows quite dramatically in the article “Labour Pains” that labor’s share of national income is dropping.  In the U.S. workers’ wages have historically been about 70% of GDP.  In the early 1980s this figure started falling and is now 64%.  Similar declines are occurring in many other countries.
This phenomenon is closely related to what others are observing as I have reported recently.  Tyler Cowen’s new book “Average is Over” discusses the threat of technology to the middle class.  Daniel Alpert in “The Age of Oversupply” talks about the increase of competition from various global forces.  Stephen King’s “When the Money Runs Out” makes the case that “a half-century of one-off developments in the industrialized world will not be repeated.”
Historically the stability of the wage to GDP ratio “provides the link between productivity and prosperity.  If workers always get the same slice of the economic pie, then an improvement in their average productivity – which boosts growth – should translate into higher average earnings. … A falling labour share implies that productivity gains no longer translate into broad rises in pay.  Instead, an ever larger share of the benefits of growth accrues to the owners of capital.”
A shrinking share of a GDP which itself is slowing down is a double whammy.  The only way to address the problem effectively is to deal with the root causes.
First of all, we need to boost overall economic growth by the proven methods of broad based tax reform, especially including much lower corporate tax rates, making regulations less onerous, carrying out immigration reform, and giving special attention to helping entrepreneurs create new businesses.
How can we, additionally, help low skilled and low waged workers move up the ladder?  Long term the most worthwhile action is to change K-12 education by putting more emphasis on career education to produce more highly skilled workers.  Short term, we should provide crash job training for the estimated three million current job openings in the U.S. which require skilled workers.
Economic inequality in the U.S. is becoming progressively worse all the time.  There are fiscally sound ways to address this alarming problem and it is important that they be clearly and forcefully advocated.

Many Skilled Jobs Are Going Begging in the U.S.

A few days ago the Omaha World Herald ran a story, ”Manufacturers Want More Young People to Consider a Job on the Factory Floor”, pointing out that there are almost 100,000 manufacturing jobs in Nebraska paying an average salary of $55,000 per year, many of which are unfilled because of a lack of qualified applicants.  Says Dwayne Probyn, Executive Director of the Nebraska Advanced Manufacturing Coalition, “Science, technology, engineering and math, that’s what we need.”
This is in fact a nationwide problem.  A few weeks ago the New York Times had an article, “Stubborn Skills Gap In America’s Work Force” reporting on a recent study by the Organization for Economic Cooperation and Development assessing literacy, math skills and problem solving using information technology, for people aged 16 – 65, in the 22 advanced nations of the O.E.C.D..  Eduardo Porter reports that while the U.S. is about average in literacy skills, it lags way behind in both math and problem solving skills.
One question addressed by Mr. Porter is the much larger wage premium for highly skilled U.S. workers over unskilled workers, than in most other O.E.C.D. countries.  Another question is “how can the U.S. remain such an innovative, comparatively agile economy if the supply of skilled workers is so poor?”  The suggested answer is troubling.  “The American economy rewards skill very well but the supply hasn’t responded.”
This situation is first of all an indictment of K-12 education in the U.S. which has a high school graduation rate of only 80% and also focuses too much on college preparation rather than career education.  These two problems are likely interrelated and at least partially explain the skills gap.
Another factor is immigration.  Right now the U.S. is still attracting more talented foreigners than other countries.  But it is risky to our economy to depend on foreign talent which can stay home as well as choosing to go elsewhere.  Immigration reform will help with this problem but improved K-12 education will help even more.