Category Archives: Wall Street Journal

What Is the Best Way to Help the Middle Class?

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An article in yesterday’s New York Times, “Obama Says Income Gap Is Fraying U.S. Social Fabric”, quotes the President that “If we don’t do anything, then growth will be slower than it should be.  Unemployment will not go down as fast as it should.  Income inequality will continue to rise.  That’s not a future that we should accept.”  He says that “I will seize any opportunity I can to work with Congress to strengthen the middle class, improve their prospects, improve their security.”
A recent editorial in The Wall Street Journal, “The Inequality President”, shows with a chart that median household incomes have fallen from $54,218 in June 2009 as the recession ended to $51,500 in May 2013.  As the WSJ says, “For four and a half years, Mr. Obama has focused his policies  on reducing inequality rather than increasing growth.  The predictable result has been more inequality and less growth. … The rich have done well in the last few years, thanks to a rising stock market, but the middle class and poor have not.”
There are many things that Congress and the President could do to boost the economy if they were willing to work together and compromise.  Obamacare doesn’t need to be repealed, just modified by dropping the employer mandate which is a job killer.  Broad based tax reform, with lower tax rates, paid for by eliminating tax preferences, would be a big boost to investment, risk taking and entrepreneurship.  A reasonable compromise would be to use a part of the revenue raised from eliminating loopholes for deficit reduction.
But little progress will be made unless the President is willing to show leadership by rising above partisanship.  There are all sorts of ways he could do this.  One simple way would be to show that he understands the seriousness of the rapidly growing national debt by supporting some of the many thoughtful proposals for more government efficiency.
A large majority of people want our first African-American President to be successful.  But right now he is not on track to achieve this.

Get Out While the Getting Is Good!

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David Malpass, president of Encima Global LLC, has an op-ed in yesterday’s Wall Street Journal, “The Economy Is Showing Signs of Life”, pointing out that business loans, auto sales and hourly earnings are up.  Mr. Malpass says that “The sequester is a bad way to set spending priorities, but it reduces the risk of future tax increases, contributing to the upturn in consumer and business confidence. … The good news is that an end to the latest version of the Fed’s quantitative easing would create space for more growth in private credit and a shift back toward market, not government allocation of credit. …Because America’s private economy is the world’s biggest net creditor and capital allocator, the United States will be the biggest beneficiary of a return to market based interest rates, with vast potential in efficiency, intellectual property and the capacity to innovate.”
Federal Reserve Chairman, Ben Bernanke, is given much credit for the fact that the Great Recession did not turn into another depression.  But now, four years after the end of the recession, we have the twin problems of a slow growth economy, which keeps the unemployment rate much too high, and the potential for huge inflation caused by the vast increase in the money supply.  Mr. Malpass makes an excellent argument that the economy has recovered enough so that further quantitative easing will now retard future growth.  It clearly also increases the chance of runaway inflation.
Current artificially low interest rates also disguise the future damage now being created by huge federal deficit spending.  When interest rates go back up, as they inevitably will, interest payments on our rapidly increasing national debt will also increase dramatically, and force far greater cuts in federal spending than are currently being caused by the sequester.
In other words, to speed up economic growth, curtail the risk of future inflation and to put more pressure on Congress to control federal spending, the Federal Reserve should begin to exit from quantitative easing in the very near future!

Is Our Economy Truly Recovering From the Recession?

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In yesterday’s Wall Street Journal, Mortimer Zuckerman, the Chairman of U.S. News and World Report, writes that “A Jobless Recovery is a Phony Recovery”.  He points out that counting the people who want full time work and can’t get it, as well as those who have stopped looking, the real unemployment rate is really 14.3% rather than the officially reported 7.6%.  Enormous fiscal (deficit spending) and monetary (quantitative easing) stimulus has been able to stimulate an average growth rate of only 2% for the past four years since the recession ended in June 2009.  During these last four years the civilian workforce-participation rate has actually declined from 65.7% to 63.5% which has never happened before in an even slowly expanding “recovery” like we have at the present time.
Keynesians and Obama Administration apologists say that we need even more fiscal stimulus (we can worry about deficits and debt later); tax reform won’t help because tax rates are already low; massive new regulations (ObamaCare, Dodd-Frank financial regulations, EPA environmental regulations) are so important that they override negative economic effects; etc.  At some point, the sooner the better, we need to recognize that current policies are not working and are, in fact, retarding the recovery from the recession.
Tax reform is the biggest single change which would help.  Removing deductions and tax preferences, and replacing them with lower tax rates, would give a big boost to investment and entrepreneurship, and thereby be a huge stimulus to the economy.  This includes eliminating the tax exemption for employer provided health insurance.  Combining this reform with repeal of ObamaCare’s Employer Mandate would also lead to getting the cost of healthcare under much better control.  The overall cost of healthcare, 18% of the American economy and growing, is a huge long term burden and must be turned around.
The massive complexity of Dodd-Frank is a huge burden on the financial industry.  Preventing banks from becoming “too big to fail” can be accomplished by having more adequate reserve requirements along with sufficient default and liquidity insurance pools, along with otherwise minimal regulation.
Only more private investment and risk taking can make the economy grow faster and bring down the unemployment rate.  The sooner our national policy makers (and the voters who elect them!) figure this out and act accordingly, the sooner that our economy will truly begin to recover from the Great Recession.

Does the Economy Need More Spending Now?

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In today’s Wall Street Journal the economist Alan Blinder writes, “The Economy Needs More Spending Now”, that the tax hikes and spending cuts agreed to in January and before are reducing GDP growth by 1.5% – 2% annually.  Mr. Blinder claims that it would be easy to design a new fiscal stimulus package that adds 2% to GDP per year as long as it lasts.  He also claims that a fundamental change like tax reform might only add a much smaller .2% to GDP per year although this much smaller annual effect would repeat indefinitely and therefore eventually amount to a large cumulative effect.  This is a sensible argument as far as it goes but is incomplete.
In the last five years there has been almost $6 trillion in (deficit) stimulus spending, coupled with a $3 trillion quantitative easing program by the Federal Reserve.  This represents an unprecedented fiscal and monetary stimulus to the economy by the federal government.  And the result has been a tepid although steady 2% annual growth in GDP, much slower than usually follows a recession.
After all of this enormous stimulus, which is having only a meager effect, what makes more sense:  to try even more stimulus or to try something different?  What else is there to try?  Immigration reform will boost the economy by drawing our 11,000,000 illegal immigrants into the main stream economy.  Note that citizenship (amnesty) is not required to accomplish this, only legal status.  Also, requiring many people receiving welfare (food stamps, disability benefits, etc.) to work would boost the economy by increasing the size of the labor force.
Broad based tax reform, greatly curtailing most, if not all, tax preferences, would be so attractive that it should not be put on a back burner, as Mr. Blinder suggests.  In fact, completely repealing the ACA’s Employer Mandate, now that it’s been postponed for a year, would give a big boost to many medium sized companies for which required health insurance is a big impediment to growth.
The point is that there are many ways to boost the economy besides even more artificial deficit stimulus, whose effect would be at most temporary anyway, as Mr. Blinder suggests.  It really is important to shrink our still very large annual deficits down to zero fairly quickly so that we stop adding to the huge burden which we have already placed on future generations.  In other words, we can likely have stronger economic growth and fiscal restraint at the same time, the best of all possible worlds!

Immigration Reform is Pro-Growth

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The lead editorial in today’s Wall Street Journal, “A Pro-Growth Reform”, is right on the money.  It challenges the GOP House to improve the Senate immigration bill, not kill it.  The emphasis in the Senate bill is to provide an eventual path to citizenship for the approximately 11,000,000 illegal immigrants currently in the US.  To offset the charge that this is amnesty, the Senate bill greatly increases enforcement by doubling the size of the border patrol, at a cost of $4 billion per year, and increasing the criminal penalties for employers who mistakenly hire an illegal.  The Senate bill also increases the quota for skilled workers from the current 65,000 per year limit to 120,000 per year but it only barely increases the annual quotas for construction and agricultural guest workers, which doesn’t nearly meet current needs.
What is needed is less emphasis on eventual citizenship (coupled with stronger enforcement) but rather more emphasis on simply having an adequate supply of both skilled and unskilled legal guest workers.  This presents an opportunity for the House of Representatives to produce a better bill.
First of all, raising the quotas for both skilled and unskilled guest workers should be the first priority for the House.  An adequate supply of legal guest workers means there will be much less demand for illegals, which, in turn, means less need for the increased enforcement measures of the Senate bill.
Secondly, what immigrant workers need most is legal status rather than a guaranteed path to citizenship.  It is the constant risk of deportation and separation from their families which adversely affects their quality of life, rather than the lack of US citizenship.
More immigrants, both skilled and unskilled, will help our economy grow faster and recover more quickly from the Great Recession.  We should provide immigrants with the legal status they need to come to our country and succeed and prosper!

Why it’s So Hard to Get the Long-term Unemployed Back to Work

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Earlier this month the economist Edward Lazear had an op-ed column in the Wall Street Journal “The Hidden Jobless Disaster”, pointing out that, even though the unemployment rate has been dropping for the past four years, the employment-to-population ratio has stayed stuck at 58.5%.  This low labor participation rate means that many workers have dropped out of the labor force and stopped looking for work.  In fact the disability rolls have grown by 13% since 2009 and the number of people receiving food stamps has grown by 39%.  These disincentives help to explain why the proportion of long-term unemployed is still so very high at 37%.
The WSJ reported in April, “Workers Stuck in Disability Stunt Economic Recovery”, that the federal disability rolls have jumped from 7.1 million in December 2007, when the recession started, to 8.9 million today, which is 5.4% of the civilian workforce.  This exodus to disability costs 0.6% of GDP, a sizable chunk when GDP is only growing at an annual rate of about 2%.  Furthermore only 0.5% of federal disability recipients return to work in a given year compared to 20% for private, employer sponsored, disability recipients.
Two conclusions can be drawn from this data.  First of all, the federal government should be much stricter in establishing and enforcing work requirements for all public welfare recipients, including those on disability.  This should be noncontroversial but it won’t happen unless Congress and the President take the initiative and make it happen.
But even more important, our national leaders need to get far more serious about boosting the economy to get many more millions of the unemployed and underemployed back to work.  Fundamental tax reform would help the most but targeted deregulation and expanded foreign trade would also help a lot.  The Republicans have the strongest, free market, argument on this basic and high priority issue and they should hammer away at any Democrats, including the President, who are dragging their heels on it!

The Urgency of the U.S. Debt Problem

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In Friday’s Wall Street Journal Kimberley Strassel has a column “Rebooting the Budget Talks” which discusses a new approach to budget planning being taken by Wisconsin Senator Ron Johnson, a Republican.  Mr. Johnson wants to go beyond the usual 10 year budget planning by using 20 and 30 year projections from the Congressional Budget Office for both tax revenue and spending.  Even assuming that current federal government spending grows only by population growth plus inflation (which would require unusual restraint), by 2043 the national debt will have increased by $72 trillion, with public debt (on which interest is paid) amounting to 139% of GDP.  See “Thirty-year deficits and debt” for more detail.
Of course, it is easy to say that 30 year projections are way too long to have real credibility, and so let’s just stick to the usual 10 year projection which shows the public debt shrinking from today’s 75.1% to 73.6% in 10 years and so therefore becoming “stabilized”.  Most of us old folks will be gone but today’s young and middle aged people will still be around 30 years from now and so should be very much concerned about our likely fiscal condition in 2043.  And the CBO 30 year projection assumes such unlikely restraint that the debt will probably be even greater by then.
The reason why a 30 year projection is so much worse than a 10 year projection is because  the entitlement explosion is much greater in the out years compared with just the next 10 years alone.  Conclusion: the mild restraint on entitlement growth (such as a chained CPI) being reluctantly offered by Democrats today is an entirely inadequate way to curtail entitlement growth for the long haul.  Let’s get real and propose real solutions to our nation’s urgent fiscal problems.  We’ve been kicking the can down the road for way too long already.  We can no longer afford to postpone significant action until some future date when conditions are more amenable for reform.  We must act now!

Fiscal Fixes for the Jobless Recovery

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The economist Alan Blinder has a column in yesterday’s Wall Street Journal entitled “Fiscal Fixes for the Jobless Recovery” where he deplores the apparent complacency about our stubbornly high unemployment rate of 7.6% after four years now of recovery from the Great Recession.  His solutions: 1) boost government employment with greater deficit spending, 2) offer businesses a tax credit equal to 10% of the increase of their wage bills over the previous year, and 3) offset the high 35% corporate tax rate by taxing a company’s repatriated profits at a super low rate, based on the increase of its wage payroll.
What Mr. Blinder describes as complacency about the high unemployment rate is rather just huge frustration about the likelihood of a divided Congress being able to reach agreement on any fundamental reforms which would be able to boost economic growth.  His proposals illustrate why the philosophical chasm between the two political parties is so great.  In the first place, boosting government employment by increasing deficit spending is a total nonstarter.  Our enormous and rapidly increasing national debt is a major part of the problem.  We need to decrease government spending, not increase it.
We need to simplify the tax code, not make it more complicated with a new 10% tax credit.  Lowering tax rates overall, offset by eliminating special tax preferences for the well connected, is the type of fundamental reform which will truly boost the economy, by giving everyone the same greater opportunity to create wealth.
Since Republicans think that a 35% corporate tax rate is too high and Democrats think that too many companies are able to shelter their profits abroad, then why can’t we just lower the rate and change the rules to the point where multinational corporations will want to bring their profits home, pay taxes and reinvest in America.  A new tax credit just makes things more complicated!
What is needed to break the log-jam is leadership from our elected representatives, not more ideological name calling.  There are practical solutions to our economic and fiscal problems if we simply had more leaders who are focused on finding solutions rather than scoring points on the opposition!

Is Medicare Out of the Woods?

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The Medicare Trustees have just released their annual report and, according to today’s Wall Street Journal, “Medicare Trustees’ Report Eases Concerns on Funding”.  In 2012 Medicare expenses, most of which are paid out of general government tax revenue, amounted to $574 billion, up 4.6% from 2011.  Although this is a smaller annual increase than usual, it still represents a rate of growth which is much too fast to be sustainable over the long run.  After all, the economy (i.e. GDP) is only growing at a rate of 2% per year and so a rate of 4.6% for Medicare is more than twice as fast as the economy is growing.  Such a rapid rate of growth for Medicare has been going on for many years and simply cannot be continued much longer.
The problem is that Medicare is an open ended entitlement program which pays whatever is needed by its currently 50.7 million retired enrollees, whose number is also increasing rapidly.  The only way that Medicare can possibly survive indefinitely is to be turned into a defined contribution program whereby each enrollee’s annual support is limited to a fixed amount.  Of course, this places responsibility on each enrollee to pay attention to the cost of her/his own medical care.  This is a big change from the present system of government responsibility and so it will take a major change of thinking to make such a big switchover.  But a new system can be phased in over time so that everyone can get used to it.
We really only have two choices.  We can postpone any action along these lines until the cost of the current system is so outlandish that the government is given the authority to severely ration healthcare for senior citizens.  The alternative is to set up, and phase in, a new system so that every enrollee bears responsibility for the cost of her/his own care.  Right now we have the luxury of deciding which of these two systems we want to adopt.  But if we put off the choice much longer, it will be forced upon us by financial necessity.