Light at the End of the Tunnel

Posted on June 14, 2015 by jackheidel

The Bureau of Labor Statistics has just reported very good news in its monthly Job Openings and Labor Turnover Survey. For the first time since 2000, the number of job openings now exceeds the number of new hires, as shown in the chart just below. This means that wages will start to grow faster as employers have to compete harder for new workers.
This is an early indication that our economy will likely soon resume a faster rate of growth than its average of 2.3% since the end of the Great Recession in June of 2009. There will be many benefits. The unemployment rate should continue to keep heading downward from its current level of 5.5%. More unemployed and underemployed workers will be able to find satisfactory jobs. The labor participation rate should start to head back up from its historically low current state.
The Federal Reserve is likely to begin raising short term interest rates sooner rather than later in order to keep inflation in check before it has a chance to heat up. In other words we may be breaking out of the ambiguous state of slow-growth secular stagnation in which we have been trapped for six years.
All of this is very good news as long as Congress realizes that it is now even more urgent than ever to put our massive public debt of $13 trillion on a downward path, compared to the total economy, before interest rates begin to rise substantially and eat us alive with interest payments on this huge debt.
In this regard the Budget Plan approved by Congress just this Spring, which will lead to a balanced budget over ten years, looks very attractive indeed. It will be a mammoth job to achieve such a milestone in fiscal restraint, but doing so will lead to a more secure and prosperous future for all Americans.

How to Expand Economic Mobility

Posted on June 11, 2015 by jackheidel

My blog addresses the three main economic and fiscal issues facing the U.S. today: slow growth, economic inequality and massive debt. Today I focus on inequality by referring to a recent article by the Manhattan Institute’s Scott Winship, “Up: Expanding Opportunity in America.” Mr. Winship observes that there has been little change in upward mobility over the past three generations. Furthermore the U.S. has upward earnings mobility rates quite comparable to Canada and the Scandinavian countries, which are generally regarded as having strong economies.
Nevertheless he makes several suggestions for attempting to boost upward mobility in the U.S. as follows:

Proposal 1: Wage War on Immobility through an Opportunity, Evidence and Innovation Office and an Opportunity Advisory Commission. OEIO would fund and evaluate an array of demonstration projects at the state and local levels. It would consolidate many already existing programs and have a budget of $20 billion per year.
Proposal 2: Experiment with Promising and Innovative Approaches to Mobility Promotion. Examples are: text-messaging strategies such as READY4K, Language ENvironment Analysis, and Converting Large Schools with High Drop-out Rates into Small Personalized Schools.
Proposal 3. Block-Grant Means Tested Programs and Send Them Out to the States. Such a proposal has recently been made by the House Budget Committee.
Proposal 4. Encourage Employment through Work Subsidies. This is already being done with the Earned Income Tax Credit.
Proposal 5. Encourage Delayed and Planned Childbearing through Tax Incentives. The idea is to promote marriage by expanding the current Child Tax Credit of $1000 per child for single parents to perhaps $4000 per child for married parents, but for low-income families only.
Proposal 6. Reform the Social Security Disability Insurance Program. The share of adults age 25 to 64 receiving SSDI benefits has tripled from 1.6% in 1970 to 5% in 2010. Reform of this program would put many able-bodied men and women back to work and save lots of money, some of which could be used to fund the above programs.

Conclusion: Increasing upward mobility is one very good way to combat economic inequality. Mr Winship provides an excellent discussion of several new as well as already established ways of accomplishing this goal.

How to Fix Disability Insurance

Posted on June 9, 2015 by jackheidel

The Trust Fund for Social Security Disability Insurance will run out of money by the end of 2016. If no changes are made, all SSDI benefits will have to be reduced to 81% of scheduled benefits after that. Congress must act to avoid this outcome. The easiest fix would be to merge SSDI into the larger Social Security program in which case both SSDI and SSI would run out of money about 2033.
But as the Manhattan Institute’s Scott Winship points out in National Affairs, “How to Fix Disability Insurance,” “the looming insolvency of the SSDI Trust Fund offers a rare opportunity to fundamentally reform SSDI” to better target assistance to those with debilitating impairments who truly need this support. The share of adults age 25 to 64 receiving SSDI benefits has tripled from 1.6% to 5% between 1970 and 2010 during a time when a shift from manufacturing, agriculture and mining to service work has reduced physical demands on workers.
Mr. Winship suggests the following reforms be implemented in the SSDI program:

Raise the 1.8% (out of the total 12.4% of the payroll tax going to SS) going to SSDI slightly to solve the immediate problem.
Expand the support options available to able-bodied men and women who can work, at least for a significant number of hours.
Reduce the number of people applying for benefits. For example, by increasing employer incentives for taking stricter safety measures, accommodating and rehabilitating those who become disabled and making greater use of claims management.
Use a stricter definition of disability. For example, mental and musculoskeletal conditions may be amenable to treatment.
Make it less attractive and more difficult to receive benefits for those who, while impaired, are able to work. Conditions likely to improve would be automatically subject to review after a short period of time.
Facilitate work among those with serious impairments who would still like to work. The point here is to make sure they benefit from working without feeling threatened with possible termination of benefits.

The point is that there are many practical steps which can be taken to make SSDI more cost efficient while preserving it for those who truly need it. This is a good example of the sort of changes that need to be made in all entitlement programs to shore them up for future generations by bringing their huge costs under control.

What’s Wrong With U.S. Manufacturing Policy

Posted on June 7, 2015 by jackheidel

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.
Says 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.”
According 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.

Fixing the Debt: Creating a Greater Sense of Urgency II. An Example

Posted on June 4, 2015 by jackheidel

My last post, ”Fixing the Debt: Creating a Greater Sense of Urgency,” expresses my dismay that our huge debt problem does not receive enough serious attention from the American people. Yes, most Americans deplore the national debt and the deficit spending that leads to it, but it only too seldom affects how they vote for candidates for federal office, thus giving a pass to the big spenders in Congress.
Capture Here is a good example of this refusal to take the debt seriously. The advocacy group FAIR (Fairness and Accuracy in Reporting) ridicules NPR for addressing this problem, “Look a Deficit: How NPR Distracts You From Issues That Will Actually Affect Your Life.” Here is what FAIR is saying:

Interest on the national debt is projected to be only 2% of GDP in 2016 and 3% of GDP in 2024, which is tiny. (But this is because the interest rate for the debt is now abnormally low, approximately 1.7%).

If the Fed keeps interest rates low, then interest on the debt will continue to stay low indefinitely and so the debt will continue to be a trivial problem. And the President appoints 7 of the 12 voting members of the Fed Open Market Committee which sets interest rates.

The reason the Fed raises interest rates is to slow the economy and keep people from getting jobs. (Actually the real reason is not to keep people from getting jobs but to keep inflation under control. Once inflation takes off, it is very difficult to bring it back down as we painfully discovered in the late 70s and early 80s).

Anyhow, if the Fed raises interest rates to keep the labor market from tightening, as it did in the late 1990s, this would effectively be depriving workers of the 1.0 – 1.5 percentage points in real wage growth they could expect if they were getting their share of productivity growth. (A rise in interest rates need not choke off economic growth which is primarily affected by supply and demand. Fiscal policy (tax rates and spending), established by Congress, has a far greater effect on the rate of economic growth than does monetary policy).

If our debt is not soon placed on a sustainable downward path, we will soon have another financial crisis, much worse than the Great Recession of 2008. This will affect everyone’s life in a substantial and very unpleasant way.

Fixing the Debt: Creating a Greater Sense of Urgency

Posted on June 2, 2015 by jackheidel

As I have mentioned before, I am a volunteer for the nonpartisan Washington D.C. think tank “Fix the Debt.” As such I give presentations to civic organizations in the Omaha area about our debt problem and what we can and should do about it. I have now given four such talks and have another one coming up next week.

What is most difficult for me is to try to convey a sense of urgency about addressing this problem. Most people deplore deficit spending in a general sense but not nearly enough people think that dealing with it should take priority over current presumably pressing spending needs such as, for example, depletion of the highway trust fund, expanding military spending, or improving early childhood education, just to be specific.
So here is how I am going to try to create a greater sense of urgency. Several months ago I had a post entitled, “The Slow Growth Fiscal Trap We’re Now In” in which I said (in brief summary) that our current economic condition of

slow growth means
low inflation which leads to
low interest rates which in turn leads to
massive debt which eventually leads to a new and much more severe
fiscal crisis.

This is the predicament we’re now in. Do we consciously maintain a slow growth economy, with all the unemployment pain and stagnant wages which this entails, or do we speed things up, enabling more people to go back to work, and also deal with the higher inflation and interest rates which this will entail?
Faster growth may well eventually come on its own anyway and then we’ll be forced to fix our fiscal problems at a time when they’ll be much worse than they are now.
Isn’t it clear that it is much better to act now in a responsible manner rather than to wait and have to react hurridly later on when the problem is much worse?

The Great Decoupling

Posted on May 31, 2015 by jackheidel

In the great debate over slow economic growth and falling incomes of the middle class, the usual culprits are globalization, growth of technology and income inequality.

Just published in the latest issue of the Harvard Business Review, “The Great Decoupling: an interview with Erik Brynjolfsson and Andrew McAfee” is a more focused analysis of what is happening. These two technology experts note that both labor productivity and GDP are growing much faster than the growth in the number of jobs as well as median family income. This is what they refer to as the great decoupling. They are careful to point out that the same trends are happening in other developed countries such as Finland, Germany and Sweden.
They emphasize that the best response to this decoupling is to create an economic environment that’s conducive to innovation, new business formation, and economic growth. In their opinion this means to focus on five things:

Education. Primary and secondary education systems should spend more time on things that computers are not good at such as creativity, interpersonal skills and problem solving.
Infrastructure. World-class roads, airports and networks are the foundations of growth.
More entrepreneurship. Most industries and regions are seeing fewer new companies than in recent decades.
Immigration reform. The U.S. needs to attract more of the world’s most talented people. Immigrant-founded companies have been great job-creation engines.
Basic Research. Since companies concentrate on applied research, the government needs to step up support for basic research. Both total and nondefense federal R&D spending, as percentages of GDP, have declined by more than a third since 1980.

The recommendations of Messrs. Brynjolfsson and McAfee are quite sensible. But they will be hard to implement overall. More federal funding for both infrastructure and basic research will be very difficult in an era of tight budgets.
This is the challenge of our time. We must become better prepared to prosper in an era of increasing global competition and rapidly expanding technology. And do this in a tight fiscal environment.
A very big challenge indeed!

Growth vs Equitable Growth

Posted on May 29, 2015 by jackheidel

There is a huge debate going on in political and policy circles between the advocates of increasing economic growth and the advocates of increasing income equality. I generally argue that the best way to increase income equality is to increase economic growth overall.
I have just come across a series of articles from the Nov/Dec 2014 issue of the American Monthly, “American Life: an investor’s guide ,” which are sponsored by the Washington Center for Equitable Growth, a progressive Think Tank. The fact that this group is focused on equitable growth, rather than the narrower goal of income equality, is of great interest to me.
They advocate a number of things that I agree with such as:

The incredible importance of early childhood healthcare and education.
Improving K-12 education, especially in low-income areas.
Providing much more vocational education and apprenticeship programs.
Running a “high pressure” economy in order to tighten the labor market. They recognize that lower unemployment leads to higher wages (see above).
Expand the Earned Income Tax Credit especially for workers without children.

The authors want to “pressurize” the economy with a more stimulative fiscal policy which means increased deficit spending, a very bad idea in my opinion. Much better ways to boost the economy are with policies such as tax reform, trade expansion, immigration reform and regulatory relaxation.
Yes, there is a high degree of income inequality and yes, it’s getting worse over time. But, as Warren Buffett says, the poor are not poor because the rich are rich. The best way to help the poor is to make them more productive. That is exactly the purpose of the policies enumerated above.

Economics Is a National Security Issue

Posted on May 27, 2015 by jackheidel

“Speak softly and carry a big stick” President Theodore Roosevelt, 1900

There are many foreign policy issues facing the U.S. at the present time:

Russia is stirring up unrest in Eastern Europe by threatening the independence of Moldova and the Ukraine as well as several NATO countries.
The Middle East is in turmoil stirred up by ISIS and the effort to prevent Iran from acquiring nuclear weapons.
China is working hard to assert dominance in East Asia.

The world is more stable when there is a single dominant power such as the U.S.. If the U.S. retreats from this role, it is inevitable that regional powers such as Russia, China and Iran will assert themselves to take up the slack. We don’t need to act as the world’s policeman every time a problem flares up around the world. But democracies are better actors on the world stage than are autocracies. Therefore the whole world benefits when the U.S. projects power and interest.
A column in today’s Wall Street Journal by Michele Flournoy and Richard Fontaine makes a very important point, namely that “Economic Growth Is a National Security Issue.” In other words, the stronger is our economy, the more influence and respect we will enjoy in our relations with other countries. Especially they recommend emphasizing:

Trade and Investment. It looks like Congress will give the President trade-promotion authority for negotiating a Trans-Pacific Partnership free-trade agreement. Indian, African and European trade agreements could then follow.
Energy. The ban on the export of crude oil and natural gas should be lifted.
International Institutions. A Chinese-led Asian Infrastructure Investment Bank will be much less of a threat to the U.S. one a TPP trade agreement goes into effect.

Ms. Flournoy and Mr. Fontaine are focused here on international economic growth. But all economic growth, domestic as well as international, will make the U.S. stronger and therefore better able to project power.
Conclusion: we need to focus more strongly on economic growth in all of its guises!

Are Economics and Social Progress Related to Each Other?

Posted on May 25, 2015 by jackheidel

“Your (last post) is one of the most active and positive that I have read of yours. You do put your time to where your values are. Those of us who see you as too economically focused and ourselves as more humanely concerned need to act as well. Thanks for your focus and attention.”
from a reader of my blog

I am a fiscal conservative and a social moderate. The primary reason I write this blog is because I am so concerned about the fiscal recklessness of our national leaders. Our national debt is much too large and still growing too fast. We need to either cut spending or raise taxes (or do both).
But I am also a social progressive. I voted in favor of Nebraska raising its minimum wage last fall. I support gay marriage as a civil right. I support having Nebraska expand Medicaid in order to cover more low-income people (where Medicaid needs to be fixed is at the federal level).
There is in fact a very close connection between having a sound economy and social progress. As the above chart shows, the U.S. ranks very high in both GDP per person and social progress. All of the countries which are most socially progressive also have sound economies. This is not a coincidence.
My last post talks about what society can do to help blacks improve their socio-economic status. This includes improving educational opportunity in the inner city. But improved educational opportunity needs to be closely directed toward improved economic opportunity. This means, for example, having good jobs available for new high school and community college graduates. But this, in turn, means having strong economic growth with intelligent tax and regulatory policies to encourage entrepreneurship and business expansion.
In short, a sound economy is essential for social progress.

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility