Donald Trump Needs a More Positive Message

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As regular readers of my blog posts know, I am not enthusiastic about either of our two main presidential candidates because neither of them has a good grasp of our two biggest economic problems which are:

  • Slow economic growth, averaging just 2% per year since the end of the Great Recession in June 2009. Faster growth would solve or alleviate many other problems, especially by creating more new jobs as well as delivering faster wage growth for all middle- and lower-income workers.
  • Massive debt now at 75% of GDP, the highest it has been since right after WWII, and projected by the Congressional Budget Office to get steadily worse unless big changes are made in spending and tax policies. Such major changes are difficult to make without presidential leadership.

Hillary Clinton promises “equitable” growth but her policy proposals will lead to a big increase in spending (bad idea) on projects of dubious value in speeding up economic growth. Donald Trump would hurt the economy with immigration controls and trade restrictions.  His proposal for lower tax rates (good idea) needs much improvement to avoid increasing annual deficits.
capture40Mr. Trump’s biggest problem, however, is his negative message about life in America today. Yes, we need stronger border security but we don’t need a Fortress America.  As the American Enterprise Institute has just reported, worker satisfaction is greatly improved since 2009 and workers are now much less anxious about job security than just a few years ago.
There is a really good way for Mr. Trump to sound a more positive note.  He could very easily take up the major themes of the Republican House Plan, “A Better Way” for solving America’s major economic problems.
Conclusion. There is an overwhelming desire for change in America, for new leadership which breaks out of the corruption, cronyism and elitism so rampant in Washington DC today.  But Americans are natural optimists and want a leader who can look forward to a bright future for our country.

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Can U.S. Economic Growth Be Speeded Up? II. A Major Roadblock

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In my last post, “Can U.S. Economic Growth Be Speeded Up?”  I pointed out that:

  • 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.Capture39
  • 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.

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Can U.S. Economic Growth Be Speeded Up?

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It is widely recognized and deplored, see here and here, that economic growth in the U.S. has been very slow, averaging only 2% per year, since the end of the Great Recession in June 2009.
The Federal Reserve has taken unprecedented steps to limit the severity of the recession by holding down both short term and long term interest rates.  But these efforts are only partially working and are, unfortunately, having a number of negative effects as well.
It also has been made quite clear that the problem is supply side and not demand side.  This is because, on the one hand, wages are beginning to rise more quickly and consumers are spending more money but, on the other hand, business investment is shrinking which is leading to slow productivity growth.
Capture38The American Enterprise Institute’s James Pethoukoukis has just provided new data  on the current weakness of business investment as illustrated in the above chart. Furthermore he quotes the economist, Robert Gordon, who has clearly described the many headwinds holding back the U.S. economy to the effect that:

“The American tax code exerts a downward pressure on capital formation and therefore on economic growth. It is now 30 years since the passage of comprehensive federal tax reform in the U.S.  In the intervening years, nearly every developed country has reformed its tax codes to make them more competitive than that of America.  Meanwhile the U.S. has allowed its tax code to atrophy.”

Conclusion. Yes, economic growth can be speeded up. But monetary policy won’t do the trick.  Congress must intervene with the right changes to fiscal policy, i.e. lowering tax rates for both individuals and corporations, paid for by closing loopholes and shrinking deductions.

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The Economic Damage Caused by Very Low Interest Rates

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As is well known, the Federal Reserve’s main tool in responding to the Financial Crisis in 2007 – 2009 has been quantitative easing (to lower long term interest rates) and direct reduction of the Federal Funds Rate (to lower short term interest rates). These measures definitely limited the severity of the Great Recession resulting from the Financial Crisis.  But the recession ended in June 2009, more than seven years ago.
Capture37In the meantime the continuation of such low interest rates is having many detrimental effects such as:

  • Pension funds, both public and private, have become greatly underfunded,  creating crises especially for state and local governments with defined contribution plans.
  • Retirement plans for millions of seniors have been upset by erosion of savings.
  • Inequality has increased as affluent stock owners benefit from the rapid increase of asset prices as investors reach for yield.
  • An immense misallocation of capital towards bond issuers at the expense of small business is taking place.
  • Federal debt is soaring as low interest rates make it much easier for Congress to ignore large budget deficits.
  • The next recession, when it inevitably arrives, will leave the Fed in a bind. The only tools remaining are a new round of quantitative easing (additional bond purchases) and even lower (i.e. negative) interest rates.
  • The Fed’s dual mandate of low unemployment (currently 4.9%) and price stability (low inflation) is being met but is accompanied by anemic GDP growth averaging only 2% since the end of the Great Recession. Such slow economic growth is largely responsible for the populist revolt in the 2016 presidential race.

Conclusion. Monetary policy can only accomplish so much. It is critical for the Fed to wind down its $4.5 trillion balance sheet as its bond holdings mature and to keep raising short term interest rates.  This will force Congress to step up to the plate with the changes in fiscal policy which are needed to stimulate economic growth.

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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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Is Single-Payer Health Care a Good Idea?

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My last two posts, here and here, have discussed major intrinsic problems with the Affordable Care Act.  It has been set up in an actuarially unsound manner and the cost of insurance coverage through the exchanges is growing very fast.
CaptureThe rapidly rising cost of American health care, public and private, is in fact one of our country’s biggest problems.  It is an affordability issue for millions of American households.  Furthermore the rapidly rising cost of the entitlement programs of Medicare and Medicaid is the fundamental driver of our exploding national debt problem.
As I see it there are two different routes we can take to solve this problem.  One way is to move towards a true free-market approach where healthcare consumers (all of us!) have more “skin in the game” in the sense that we move away from third party payment for routine care.  It is quite interesting that this is already starting to happen under Obamacare!
The other way of getting costs under control is to adopt a single-payer system, like much of the rest of the developed world.  But this would necessarily involve stringent cost controls and severe rationing and would be a lot more difficult than just enrolling everyone in Medicare. For example:

  • American doctors and nurses are very well paid. The average family physician in the U.S. earns $207,000, double the rate for general practitioners in Great Britain, which has a single-payer system. Are we going to arbitrarily chop doctor salaries in half in order to control costs?
  • The State of Vermont recently backed away from implementing its own single-payer system because the needed tax increases would have more than doubled Vermont’s annual budget. Colorado will vote in November on a petition-supported single-payer proposal, ColoradoCare, which would be paid for by a $26 billion annual state tax increase, and is therefore unlikely to pass. For a state to implement its own single-payer system at least requires budget honesty, since all states are required to balance their budgets. There is no such requirement for our federal government and so a single-payer system would be financed just like Medicare, with deficit spending. Bad idea!

Conclusion. American healthcare needs radical reform but adopting a single-payer system is not the best way to do it.

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How to Improve Obamacare and Lower It’s Costs

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I have been making the case for some time now that the rapidly increasing costs of U.S. health care, especially for the entitlement programs of Medicare and Medicaid, is the fundamental cause of our exploding national debt, and therefore these costs must be curtailed.  The only way to fix this problem is for Americans to have more “skin in the game” regarding these costs.
Capture10My last post, “The Inherent Instability of Obamacare,” discusses the separate but related problem that the Affordable Care Act is actuarially unsound because it misprices the basic risks involved in health insurance.  This is why costs on the exchanges are going up so fast which, in turn, leads to fewer enrollees.
A good way to address this double whammy of problems is to use a plan developed (mostly) by the American Enterprise Institute in December, 2015.  The main features are:

  • ACA Mandates, for both individuals and employers, would be abolished.
  • Retain tax preferences for employer-paid premiums, with an upper limit comparable to the cost of catastrophic health insurance.
  • Provide refundable tax credits to households without access to employer coverage, gradually replacing subsidies provided by ACA exchanges.
  • Persons with pre-existing conditions would have continuous coverage protection.
  • Medicare would migrate to a defined contribution, refundable tax credit model as above, with eligibility gradually rising to age 67.
  • Medicaid would be financed with block grants to the states and would supplement the refundable tax credit model.
  • Health Savings Accounts, to accompany high deductible plans, would be encouraged with a one-time federal tax credit matching enrollee contributions.
  • Health Care for Veterans would be integrated into mainstream care.

Summary. Abolishing the mandates means that coverage levels and price would be actuarially determined in the market place. Equal tax credits for insurance and help in setting up health savings accounts ensure fairness and widespread accessibility.  The overall free market model will guarantee both low cost and the greatest possible degree of flexibility, innovation and quality of care.

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The Inherent Instability of Obamacare

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The recent announcement by Aetna Insurance Company that it will exit the health insurance market in most of the states where it now operates raises a fundamental question about the stability of the Affordable Care Act. As shown by the following map  from yesterday’s New York Times, it appears that at least five states with 17% of the American population will have only one health insurer to choose from next year.
Capture33As the Wall Street Journal’s Greg Ip points out in a recent article, “the problem isn’t technical or temporary, it is intrinsic to how the law was written”  Specifically:

  • Insurance is supposed to price risk but the ACA changed this. Insurers can no longer charge or exclude coverage for pre-existing conditions, charge men and women different rates, or charge older customers more than three times as much as the young.
  • For example, a 64-year-old consumes six times as much health care as the average 21-year-old. Adhering to the 3-to-1 maximum ratio, the insurer would have to greatly overcharge the 21-year-old than his actual cost and/or greatly undercharge the 64-year-old.
  • The rational response for unsound pricing is for young and healthy customers to stay away and sick, older customers to flock to the exchanges. ACA mechanisms to prevent this type of behavior aren’t working very well.Capture32
  • One example of this is that the ACA exchanges, which provide income-based subsidies for those without employer provided health insurance, are mainly attracting those people just slightly above the poverty line who get the biggest subsidies (see chart).

I have pointed out many times that the cost of health care, especially for the entitlement programs of Medicare and Medicaid, is the fundamental driver of our exploding national debt and therefore must be curtailed.  But now, in addition to the cost problem, we are discovering that the ACA also has a fundamental access problem as well. Big changes are clearly needed in the ACA.  More details later!

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Rising Prosperity around the World

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My last post responds to a reader who is pessimistic about the future of our country and in fact of the whole world.  He thinks that the environment is deteriorating, that rapid economic growth is unsustainable and that there is too much income inequality between high and low wage earners.
My response to him is to refer to the recent book, “The Rational Optimist: how prosperity evolves” by Matt Ridley.  Mr. Ridley persuasively argues that not only has the human race made huge strides in recent times but that this progress is intrinsic to evolved human nature and is likely to continue indefinitely:

  • Since 1800 the population of the world has multiplied six times, yet average life expectancy has more than doubled and real income has risen more than nine times.
  • Between 1955 and 2005, the average human on earth earned nearly three times as much money (adjusted for inflation), ate one-third more calories of food, and could expect to live one-third longer, all this while world population doubled.
  • The rich have got richer but the poor have done even better. For example, the Chinese are ten times as rich, one-third as fecund, and 28 years longer-lived than fifty years ago. (Also see the above chart).
    Capture31
  • The spread of IQ scores has been shrinking steadily – because the low scores have been catching up with the high ones. This is known as the Flynn effect.
  • The four most basic human needs – food, clothing, fuel and shelter – have grown markedly cheaper during the past two centuries.
  • The most notorious robber barons of the late 19th century: Cornelius Vanderbilt, John D. Rockefeller, and Andrew Carnegie, got rich by making things cheaper.
  • Exchange and specialization, not self-sufficiency, is the route to prosperity.

Conclusion. As long as human beings are free to engage in exchange (trade) and specialization (acquisition of skills), prosperity will continue to evolve and human life will become better and better.

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Optimism or Pessimism for the Future: Which Is More Justified?

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Comments from a blog reader:

I also am concerned about consumption and waste/pollution – plastic in oceans getting into the food chain, CO2 affecting climate with animals not adapting quickly enough so that we are in the 6th great extinction. Is there a non-debt based economy, or conservation/conserve (vs consumption encouraged) economy that we can transition to?

I am a financial conservative, but have lost faith in the business community and financial sector because of the obscene multiples of pay for upper management vs worker pay. Government is not efficient but there needs to be a counter weight to multinationals and the concentration of wealth. Service and products lose value when they are given to people so a monetary incentive is needed, but the current capitalist model trajectory is not sustainable.

This is why I disagree with your desire to replicate post WWII production increases and growth. The context has changed since we do not have to rebuild from the destruction and disruption of WWII. The continued push for people to consume and take on debt makes one a slave to debt.                                                                                                                             

My response to these thoughtful comments will be divided into two parts. First of all I refer to the book, “The Rational Optimist: how prosperity evolves” by Matt Ridley. Mr. Ridley makes a powerful argument that life all over the world is getting better all the time. The two evolved habits of exchange and specialization, starting thousands of years ago, have created a collective brain that sets human living standards on a rising trend.
Capture31For example, referring to the first paragraph above:

  • Emissions from U.S. air pollutants such as carbon monoxide, nitrogen oxides and sulphur dioxide have been cut in half since 1980.
  • Species extinctions are at most 2.7% per century.
  • Suppose that temperatures rise by the IPCC’s most likely scenario of 3 degrees C by 2100. This means that the sea level will rise by one foot, the Greenland ice cap will melt by 1%, fresh water will increase because of more evaporation, and in a warmer, wetter world habitat lost to cultivation will shrink from 11.6% today to 5% in 2100.
  • A revenue neutral carbon tax is by far the best way to sort out the optimal response to global warming.

Conclusion: The environment is likely to be much improved by 2100. The world will also be much more prosperous in 2100 as I will discuss in my next post.

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