GDP growth has averaged just 2% since the end of the Great Recession in May 2009.
The Federal Reserve has taken unprecedented steps to keep interest rates low in the meantime but these efforts aren’t boosting GDP and, in addition, have quite harmful side effects.
Wages are growing and consumers are spending money but business investment is shrinking and productivity growth is slowing.
This means that the problem is supply side rather than demand side, contrary to what many economists are saying.
At least part of the problem is a lack of skilled workers. Two articles in today’s Wall Street Journal, here and here point out that:
America is now home to a vast army of jobless men, seven million of them age 25 to 54, who are no longer even looking for work. This is 15.6% of the traditional prime of working life.
Openings for manufacturing jobs this year have averaged 353,000 per month up from 311,000 per month in 2015 and 121,000 per month in 2009.
According to the Manufacturing Institute, 8 in 10 manufacturing executives say that the growing skills gap will affect their ability to keep up with customer demand.
As shown in the above chart, at the present time there are only an average of two unemployed manufacturing workers for each job opening, way down from the level in 2010.
Conclusion. Speeding up economic growth requires new business investment in order to increase worker productivity. But a lack of skilled and trained workers will greatly hamper this effort. The solution here is better vocational and career training in high schools and at community colleges.
The unemployment rate in Nebraska is now down to 2.9% and even in Omaha, a relatively large metropolitan area of 850,000, it is only 3.2%. As reported by the Omaha World Herald today, such a low unemployment rate creates big problems for employers at all levels. For example:
In fast foods, beginning salaries are up to $10 or more per hour, well above Nebraska’s new minimum wage of $8 per hour, and raises for responsible employees are frequent. Manager’s salaries are increasing rapidly. Benefits are being expanded into such areas as tuition reimbursement.
For the predominantly minority residential area of North Omaha, with a traditional unemployment rate of up to 20%, local manufacturers are beginning to provide transportation vans to pick up and drop off workers.
The Omaha Chamber of Commerce is running an ad campaign in Seattle to appeal to soon-to-be-laid-off Microsoft workers, because there are lots of vacant tech positions in Omaha.
Both the Greater Omaha Chamber of Commerce and the Lincoln Chamber of Commerce have endorsed LB 586 in the Nebraska Legislature to ban discrimination in the workplace based on sexual orientation and gender identity. The purpose, as expressed by both chambers of commerce, is to create a more attractive work environment in order to attract more workers from other states. The neighboring states of Iowa and Colorado have passed such laws.
What more can be done? The welcoming labor market should provide a bigger incentive for both high school and college students to finish their studies and graduate. Jobs will be waiting for them! The labor shortage should also help create more interest in immigration reform. This would insure that Nebraska has an adequate number of legal guest workers to meet the needs of the agricultural and meatpacking industries.
The Congressional Budget Office has a sterling reputation for collecting accurate data and making credible predictions about basic economic and fiscal trends. CBO analyses, which are based on current law, are generally accepted as valid by both liberals and conservatives. Considering the degree of hyper-partisanship in most discussions of fundamental policy, it is reassuring to at least have an unimpeachable source of basic information. CBO has just released its regular annual report, ”The Budget and Economic Outlook: 2015-2025.” There is good news for the near term. As shown above, GDP is projected to grow by 2.9% in the (budget) years 2015 and 2016, and dropping to 2.5% growth in 2017, which is still better than 2014. This means that our national debt will not grow from its current level of 74% of GDP for the next few years and might even decrease slightly. Growth will then hover around 2.2% for the remainder of the 2015 – 2025 decade, which is the average GDP since the end of the Great Recession in June 2009. Likewise, unemployment will likely not fall much below its current value of 5.6% for the next ten years. In short, under current policy, except for the next couple of years, we are stuck in the same slow-growth rut where we have been for the past five and one-half years.
It should be obvious that we need new policies to speed up growth, put more people back to work, and raise the stagnant wages endured by many middle- and lower-income workers. How can this be accomplished?
Tax reform, both individual and corporate, is the primary route to faster growth. Lower tax rates across the board, paid for by closing loopholes and shrinking deductions. This will put extra income in the pockets of the 64% of taxpayers who do not itemize deductions, which they will likely spend. It will also make it easier for potential entrepreneurs to successfully launch a new business.
Immigration reform, expanded foreign trade and deregulation will also create more business opportunities which will in turn grow the economy and create more jobs.
Hopefully the new Congress will be able to move forward in this direction. A better future depends on it!
Several months ago the Omaha World Herald reported that Nebraska has approximately 45,000 illegal immigrants, or about 2.5% of the state’s population. Nebraska’s unemployment rate has now dropped to 3.4%, the third lowest in the nation behind only North Dakota and South Dakota. Such a low unemployment rate represents a labor shortage. There simply aren’t enough Nebraskans to perform all of the physically demanding, low skill work needed in the agriculture, meatpacking and construction industries. It is this labor shortage which is attracting such a large number of illegal immigrants to Nebraska. According to the New York Times, the Tea Party has recently changed its focus from “curtailing the reach of the federal government, cutting the deficit and countering the Wall Street wing of the Republican Party to becoming largely an anti-immigration overhaul movement.” This is a very unfortunate development.
Why would it be so difficult to solve our illegal immigration problem in the following manner:
Give all businesses a limited period of time, perhaps six months, to present a list of current employees who are illegal. Everyone on this list without a criminal record would receive a guest worker visa.
Going forward, businesses would be authorized to hire additional foreign workers as needed with guest worker visas issued in their home country. This would eliminate the need for illegal entry into the U.S.
As of a certain date in the near future, all businesses would be required to periodically demonstrate the legal status of all workers on their payroll.
Guest workers would be eligible to apply for citizenship after a lengthy period of time, perhaps ten years.
Once an adequate guest worker visa program has been set up and is operating efficiently, security on our southern border with Mexico would hardly be more of a problem than is security on our northern border with Canada. Illegal immigration should be considered as an economic problem, not a law-enforcement problem.
If it were handled correctly in this way, the problem would disappear in short order!
The publication of two new books is causing a reevaluation of the financial rescue and its aftermath, e.g. “The Case Against the Bernanke-Obama Financial Rescue”. The two books are “Stress Test” by Timothy Geithner, former Treasury Secretary, and “House of Debt” by the economists Atif Mian and Amir Sufi. Mr. Mian and Mr. Sufi maintain that the government’s response to the financial crisis should have focused less on saving the banking system and more on the problem of excessive household debt. They discovered in their research that, during the housing bubble, less affluent people were spending as much as 25 – 30 cents for every dollar of increase in housing equity. When the bubble burst, and housing prices started to fall, these borrowers cut way back on spending which caused many businesses to lay off employees. The authors propose setting up a government program to help borrowers decrease what they owe in underwater mortgages.
Five years after the end of the Great Recession it would still be very helpful to speed up our lagging economy. Here are three different possible ways to do this:
The Keynesians say the best way to stimulate the economy is with more government (deficit) spending. For example, spending several hundred billion dollars a year on infra-structure would create hundreds of thousands, if not millions, of new construction jobs. I think this is a good idea, but only if it’s paid for with a new tax (e.g. a carbon tax or a wealth tax).
The Mian/Sufi plan, as described above, would alleviate mortgage debt problems for millions of middle class homeowners who are still under water, encouraging them to spend more money which would in turn boost the economy. The problem is that the M/S plan creates a moral hazard for mortgage holders unless it’s paid for by mortgage insurance which would raise costs for borrowers.
Broad-based tax reform, with lower tax rates for everyone, paid for by closing loopholes and limiting tax deductions for the wealthy, would automatically put more income in the hands of the two-thirds of tax payers who do not itemize deductions. These middle class wage earners would tend to spend this extra money thereby boosting the economy.
The point is that there very definitely are ways to boost the economy, some better than others, and it should be a top priority of Congress and the President to get this done.
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?
I am a fiscal conservative, as well as a social moderate, which means that I don’t fit very easily into a standard mold. I am non-doctrinaire, non-ideological and mostly nonpartisan. I vote for candidates from both major parties as well as independents. I prefer a balanced government with neither party in complete control.
My most direct sources of information on fiscal and economic issues are the Wall Street Journal and the New York Times, both of which I read assiduously on a daily basis. When these two newspapers disagree on a particular issue, then I usually decide that the truth lies somewhere in between. Our biggest national problem right now, in my opinion, is the stagnant economy. In today’s WSJ, the lead editorial, “The Growth Deficit”, clearly describes how bad the situation is. Since the Great Recession ended in June 2009, our rate of GDP growth has averaged 2.2% per year. This compares with a 4.1% annual rate of growth for all post-1960 recovery periods.
Such a slow rate of growth causes all sorts of problems. First of all, it explains why our unemployment rate is still so high at 6.7% after five years of recovery. This means that between 15 and 20 million people are still unemployed or underemployed. Such a large human toll means a huge increase in government welfare expenses for food stamps, unemployment insurance, etc. Higher unemployment also means less tax revenue collected by the federal government. This translates into much larger deficit spending, adding to the already massive national debt.
There are lots of things which can be done to increase growth, for example:
Lowering tax rates on individuals to put more money in the hands of the 2/3 of Americans who do not itemize deductions on their tax returns. They’ll spend this extra income and create more demand! Pay for this by closing loopholes and deductions, which are used primarily by the wealthy. Besides stimulating the economy, this will simultaneously address increasing income inequality.
Lowering tax rates on corporations to encourage multinationals to bring their foreign profits back home for reinvestment or paying dividends. Again, balanced by eliminating deductions enjoyed by privileged corporations.
Relax regulatory burdens on small businesses where most new jobs are created.
Reform immigration procedures by boosting the number of H1-B visas to attract more highly skilled, and entrepreneurial, foreign workers.
Grant trade promotion authority to the President to speed up new trade agreements.
We should be clamoring for our national leaders to be acting on these fronts. A strong economy is the very backbone of our success as a nation!