The occasion of the publication of Timothy Geithner’s book “Stress Test,” giving his version of the financial crisis, has led to a number of newspaper articles looking back at the Great Recession and its aftermath. The New York Times’ economics reporter David Leonhardt has such an analysis “A Rescue That Worked, But Left a Troubled Economy” in today’s NYT. “The Great Depression created much of modern American government and reversed decades of rising inequality. Today, by contrast, incomes are rising at the top again, while still stagnant for most Americans. Wall Street is flourishing again.”
“The financial crisis offered an opportunity to change this dynamic. But the (Dodd-Frank) law seems unlikely to transform Wall Street, and the debate over finance’s huge role in today’s economy will now fall to others. Should the banks be broken up? Should the government tax wealth? Should the banks face higher taxes?”
In my opinion, the real problem is not our financial system but the strong headwinds which are slowing down the economy.
Globalization of markets which creates huge pressure for low operating costs.
Labor saving technology which also puts downward pressure on wages.
Women and immigrants having entered the labor market in huge numbers, and therefore greatly increasing the labor supply.
The loss of wealth in the Great Recession also means that even people with good jobs have less money to spend. What we sorely need is faster economic growth to create more jobs and higher paying jobs. How do we accomplish this?
The best way to boost the economy is with broad-based tax reform to achieve the lowest possible tax rates to put more money in the hands of the working people who are the most likely to spend it. Such lower rates can be offset by closing the myriad tax loopholes and at least shrinking, if not completely eliminating, tax deductions which primarily benefit the wealthy.
Lowering corporate tax rates, again offset by eliminating deductions, providing a huge incentive for American multinational companies to bring their profits back home for reinvestment or redistribution.
With millions of unemployed and underemployed workers, reviving our economy with a faster rate of growth should be one of the very top priorities of Congress and the President. Survey after survey show that this is what voters want. Why isn’t it happening?
Several days ago, David Bonior, a former Congressman from Michigan, wrote in the New York Times about “Obama’s Free-Trade Conundrum”. “The President cannot both open markets and close the wage gap.” There is an “academic consensus that trade flows contribute to between 10 and 40 percent of inequality increases.” This happens because “there is downward pressure on middle-class wages as manufacturing workers are forced to compete with imports made by poorly paid workers from abroad.” But there is another point of view, provided, for example, by the report “NAFTA at 20: Overview and Trade Effects”, prepared by the Congressional Research Service about a year ago. “U.S. trade with its NAFTA partners has more than tripled since the agreement took effect (in 1993). (Canada and Mexico) accounted for 32% of U.S. exports in 2012. 40% of the content of U.S. imports from Mexico and 25% of U.S. exports from Canada are of U.S. origin. In comparison, U.S. imports from China are said to have only 4% U.S. content.” In other words, NAFTA at least has been a huge success.
Being able to trade with others is the foundation of private enterprise. Foreign trade is simply an extension of domestic trade. To limit trading opportunities with other countries would be a huge barrier to economic growth and therefore to future prosperity as well.
But at the same time we do want a more equal society as well as well as a more prosperous one. The key to resolving this “conundrum”, as Mr. Bonior puts it, is to address “opportunity inequality” as well as “income inequality.”
It is estimated that each billion dollars in U.S. exports provides employment for about 5000 workers. Nebraska, for example, exported $12.6 billion worth of goods and services in 2012 which translates into 63,000 jobs.
More jobs and better jobs are what create economic opportunity. One way to create more jobs and better jobs is to promote foreign trade by removing as many trade barriers as possible. Hopefully Congress and the President can work together to get this done!
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. A 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?
In today’s New York Times, the economist Arindrajit Dube has an Op Ed column in the Great Divide series, “The Minimum We Can Do”, pointing out that today’s minimum wage of $7.25 per hour is only 37% of today’s median hourly wage of about $20 per hour. This compares with the 1968 minimum wage of $10.60 per hour (in today’s dollars, adjusted for inflation) which was 55% of the median wage at that time. This is in line with the current Democratic proposal to raise the minimum wage to $10.10 per hour.
The standard argument against raising the minimum wage is that it will reduce employment because “when labor is made more costly, employers will hire less of it.” However Mr. Dube offers empirical data which “suggest that a hypothetical 10% increase in the minimum wage affects employment in the restaurant or retail industries by much less than 1 percent” and therefore very little.
Basically Mr. Dube is arguing that raising the minimum wage won’t hurt the economy and it will help many low-paid workers. The problem with this point of view is that it distracts attention from what we really should be doing: namely, everything we possibly can to speed up economic growth. By far the best way to raise wages is to increase the value of labor by creating more jobs!
I may sound like a broken record, repeating the same thing over and over again, but we badly need to concentrate on the fundamentals of growing the economy: lowering tax rates, individual and corporate, to stimulate business investment and risk taking by entrepreneurs; removing onerous regulatory burdens, especially on new businesses and existing small businesses; and emphasizing career education and job training to fill the millions of high skill job openings which exist.
There are strong headwinds facing our economy: bad demographics (rapidly retiring baby boomers), pressure from technological progress and globalization which put a high premium on education and advanced skills, and massive national debt which will become a huge burden as interest rates inevitably increase.
These strong headwinds aren’t going away. To overcome them we need national leaders who are able to rise above ideology and focus on the fundamentals.
Conclusion: we should raise the minimum wage when unemployment drops to 6% or, perhaps, tie a raise in the minimum wage to a tax reform measure which significantly lowers tax rates.
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!