Globalization Is a Messy Process

Posted on April 28, 2015 by jackheidel

Globalization is having a dramatic effect on income distribution around the world as I discussed in a previous post. Middle incomes in the developed world are stagnating while at the same time they are growing rapidly throughout much of the rest of the world.
At the same time as western world economies are stagnating, turmoil and instability are breaking out elsewhere, especially in eastern Europe, the Middle East and northern Africa. Fortunately the U.S. and its allies are stepping in with military force to help maintain local order in many parts of the world where it is breaking down.
In short, at the same time, whether connected or not, the postwar geopolitical system is breaking down and the economic stability of the Great Moderation has given way to the Great Recession and its aftermath of macroeconomic volatility.
An interesting article by Chrystia Freeland in the latest issue of The Atlantic, “Globalization Bites Back” addresses both of these issues together. She says “I believe that capitalist democracy has proved itself to be the only compelling, universalist vision of how to live the good life. But the stable world order many of us assumed this thesis foretold has not come to pass.”
As the above chart shows, one very positive result of this messy process is likely to occur. The middle class worldwide is predicted to grow from 1.8 billion in 2009 to 4.9 billion in 2030. All of this enormous growth in the size of the middle class will occur outside of North America and Europe.
The implications for the continued prosperity and world leadership of the U.S. are clear. We need to get our own economy back on track, growing at a faster rate. We also need to get our fiscal house in order so that the dollar will continue to be the international currency of choice.
Our dominant role in world affairs is beneficial to all but it is by no means assured without much effort on our part.

One Thing Congress and the President Are Doing Right

Posted on April 26, 2015 by jackheidel

This blog is mostly devoted to a discussion of the big fiscal and economic problems facing our country. A growing and fiscally prudent economy will do the most good for the greatest number of Americans. I have also argued that “A Strong Country Requires a Strong Economy” in the sense that our adversaries take us more seriously because we have the world’s dominant economy.
In addition, I strongly believe that U.S. power plays a critical role in maintaining stability around the world. More bluntly, the world is better off because the good guys are also the strong guys. It is often said that we can’t police the whole world but whether we want to or not we have this role.
In this regard, the Wall Street Journal has just published an informative article, “New Way the U.S. Projects Power around the Globe: Commandos.” The U.S. Special Forces currently has 70,000 people in uniform and an annual budget of $10 billion. Last year they operated in 81 different countries on six continents. For example:

Navy SEALs and Army Green Berets are stationed in the Baltics, training troops from Lithuania, Estonia and Latvia for the type of proxy warfare Russia is conducting in eastern Ukraine.
U.S. forces are helping Filipino forces stymie al Qaeda aligned Abu Sayyaf Group.
The U.S. has trained Columbian troops to fight rebels and drug traffickers.
A Navy Seal raid killed Osama bin Laden in his Pakistani hideout.
U.S. special operators work with Ugandan troops to hunt the leader of the Lord’s Resistance Army.
1,300 troops from 18 western nations are training commandos from 10 African countries to fight extremist organizations such as Islamic Maghreb and Boko Haram.

The world is a messy, chaotic place. Our own wellbeing depends on maintaining at least a minimal degree of stability. We have accepted this responsibility and are meeting it head on. This represents America at its best.

How Can We Achieve a Free Market in Healthcare?

Posted on April 23, 2015 by jackheidel

My last post, “Why Is American Healthcare So Expensive?” suggests that we don’t have enough “skin in the game” because most costs are paid for by third party insurance companies. One way to alleviate this problem is to subsidize insurance coverage only for catastrophic care with a high deductible and to encourage health savings accounts to pay for routine healthcare expenses.
But the University of Chicago’s John Cochrane points out in “After the ACA: Freeing the market for health care” that getting to a true free market in healthcare “will be a long hard road” because “both supply and demand must be freed.”

Health care supply. Cost reduction only comes from new entrants into a business, not reform of old businesses. But in 36 states, for example, every new hospital or even major purchase requires a Certificate of Need issued by Hospital Equalization Boards which have explicit mandates to defend the profitability of existing hospitals.
Health care demand. True “need” is simply not a well-defined concept when a third party is paying the bills. The consumer must pay a lot closer to the full marginal cost of healthcare, or perhaps receiving the full financial benefits of any economies which he is willing to accept.

What are the objections to establishing a free market system?

The homeless and mentally ill, etc. Charity will always be needed for those who fall through the cracks. This doesn’t require a nanny state for the rest of us.
Adverse selection. In a free market sick people are more likely to buy insurance and healthy people to forgo it. Sick people would pay more but “health status” insurance and guaranteed renewability will mitigate this problem.
Shopping paternalism, i.e. people faced with serious illnesses are incapable of making cost-based decisions. These people and their families will simply have to learn to shop around. In a competitive market, a hospital which routinely overcharges cash customers will be “creamed by Yelp reviews.”

Conclusion. There are only two ways to get health care spending under control. A single payer system with rigid regulations and severe rationing or else a deregulated free market system where individuals have primary responsibility for their own care. Americans are likely to prefer the second option if given a clear choice.

Why Is American Healthcare So Expensive?

Posted on April 21, 2015 by jackheidel

The U.S. spends almost 18% of GDP on healthcare costs, double what any other developed county spends.
There are many reasons for our excessive healthcare spending. For example:

As illustrated in the above chart, many medical procedures are far more expensive here than in other countries.
Profit levels in the healthcare industry are often very high, for example: 16.4% for pharmaceuticals, health-care information 9.4%, home healthcare firms 8.5%, medical labs 8.2% and generic drug makers 6.5%.
Health insurers, on the contrary, have a very low profit margin, (2.2% in 2009), and so can hardly be blamed for the high cost of healthcare.

The Affordable Care Act greatly expands access to healthcare but does very little to control costs. The Manhattan Institute’s Avik Roy has outlined a plan, “Transcending Obamacare: A Patient Centered Plan for Near-Universal Coverage and Permanent Solvency” which would reform Obamacare by making it more like two very successful and low cost consumer-driven plans, those in Switzerland and Singapore.
These two countries feature government sponsored health savings accounts, backed up by insurance for catastrophic care. What happens is that out-of-pocket spending for healthcare per individual is higher in Switzerland and Singapore than it is in the U.S., as indicated in the chart below.
In other words, the real reason for our high cost of healthcare is that Americans don’t have enough “skin in the game.” We have very little incentive to hold down the cost of our own care because it is mostly paid for by third party insurance companies.
As the cost of healthcare continues to climb, such changes are already beginning to creep into the health insurance market place. Private companies are raising the deductibles on the insurance plans which they subsidize. The bronze, silver, gold and platinum plans on the ACA exchanges differ largely by the level of the insurance deductible.
Avik Roy’s plan referred to above in essence speeds up the process of converting the ACA into an efficient, consumer-driven healthcare system by making it more flexible and therefore more adaptable to market forces.

Providing Regulatory Relief for Main Street Banks

Posted on April 19, 2015 by jackheidel

The major congressional response to the Financial Crisis was the passage of the Dodd-Frank Act in 2010, putting many restrictions on U.S. financial institutions in hopes of ending “too big to fail.” The problem is that the new regulations often apply to the many low risk, traditional, main street banks which did not cause the financial crisis. The new regulations hamper the ability of these smaller banks to lend money to their regular customers, thereby slowing down the economic growth we need for full recovery from the recession.
Thomas Hoenig, Vice Chair of the Federal Deposit Insurance Corporation, has recently made some common sense recommendations for alleviating this problem.
He proposes to provide relief for financial institutions which meet the following criteria:

Banks that hold zero trading assets or liabilities.
Banks that hold no derivative positions other than interest rate swaps and foreign exchange derivatives.
Banks whose total value of all derivative exposures is less than $3 billion.
Banks which have a ratio of equity-to-assets of at least 10%. Most community banks meet this criteria and the number is within reach for those which do not.

Of more than 6500 commercial banks, only about 400 do not meet the first three criteria. None of the banks with more than $100 billion in total assets meet these criteria. Banks which qualify could receive relief such as:

Exemptions from Basel capital standards and risk-weighted asset calculations.
Allowing for examiner judgment in eliminating requirements to refer “all possible or apparent fair lending violations to Justice” if judged to be de-minimis or inadvertent.
Exemptions from appraisal and stress test requirements.
Allowing an 18-month examination cycle as opposed to the current 12-month cycle.

Mr. Hoenig’s conclusion: “For the vast majority of commercial banks that stick to traditional banking activities, and conduct their activities in a safe and sound manner with sufficient capital reserves, the regulatory burden would be eased. For the small handful of firms that have elected to expand their activities beyond commercial banking, the additional regulatory burden is theirs to bear.”

Should We Raise Taxes or Cut Spending?

Posted on April 16, 2015 by jackheidel

Tax Day is a good time to remind ourselves about our perilous fiscal situation. With a public debt (on which we pay interest) of $13 trillion and with annual deficits of just under $500 billion adding to the debt each year, we have a huge problem which is not being adequately addressed by Congress. The solution is to either raise taxes or cut spending or do a combination of both.
Is it feasible to raise taxes, presumably on the rich? The problem in doing this is that our tax code is already very progressive as indicated by the above chart. The top 20% already pay 84% of all income taxes. It’s just not feasible to expect to be able to raise their taxes by a very large amount. In addition, Middle- and lower-income people are in a tight fiscal situation, because of the slow economy, and can hardly be expected to see their own taxes increase.
The alternative to raising taxes is to cut spending and there are many opportunities to do this. The organization Citizens Against Government Waste has just identified a collection of government programs whose elimination would save $639 billion in the first year alone. Taxpayers for Common Sense has a long list of potential spending cuts which would save $267 billion in the first year.
Amazingly, neither of these lists of possible cuts includes any mention of entitlement programs. Before very long, major savings in entitlement programs must certainly be achieved in order to put the federal government on a sustainable fiscal course.
In fact, spending should be trimmed all across the board, wherever possible, in order to get our annual deficits on a steadily downward course. It is critical for this process to get under way as soon as possible and to continue until fiscal balance is achieved by entirely eliminating deficit spending altogether.

Are We Doing Enough to Help the Poor?

Posted on April 14, 2015 by jackheidel

Income inequality in the U.S. is getting worse and one reason is that the middle class is being “hollowed out” by a lack of sufficient job opportunities.
The result is more people at the bottom end of the income scale. Not surprisingly, it turns out that many of these low-wage workers are receiving public assistance, as documented by the UC Berkeley Labor Center, and the New York Times.
The authors point out that if these workers received higher wages, they would not require as much public support which, in turn, would save money for the taxpayers. This is a true but not a practical means for helping the poor. Employees are paid what they’re worth based on the law of supply and demand. Companies will pay as much as they have to in order to find and retain well qualified workers. Furthermore, a minimum wage which is too high will simply lead to a higher rate of unemployment.
There is really only one good way to raise the overall wage level, especially at the bottom end of the scale. It is to speed up economic growth, thereby lowering the unemployment rate and creating more demand for workers.
This is exactly what has happened in Omaha NE where I live. The official unemployment rate is 3.2% and there is a labor shortage. A new minimum wage ($8/hour now, $9/hour next January) was approved by the voters last November. But low-skill entry level jobs are paying $10/hour or more because of the scarcity of workers.
There are plenty of opportunities to succeed in Omaha. Support yourself with a low-wage job and go to Metropolitan Community College to learn a high-skill, high-wage trade. Most people are capable of following this route to a better life!

“We’ve Got to Do Something about Income Inequality”

Posted on April 12, 2015 by jackheidel

This is what I hear over and over again from my liberal-minded friends. Their solution is to raise taxes on the rich and give to the poor. This might help a little but not nearly enough.
The best way to help middle- and lower-income people is to give them more opportunities for self-advancement by providing more upward mobility in society. Right now the middle class is being “hollowed out” as shown in the chart just below.
There are three major reasons for this:

Economic Globalization which provides low cost goods from around the world and thus puts pressure on low- and semi-skilled workers in the U.S.
Rapid technological advancement which puts a higher premium on educational attainment and advanced skill acquisition.
Slow economic growth averaging only 2.3% since the end of the Great Recession in June 2009.

Globalization and technological advancement are strong worldwide forces likely to continue indefinitely. We will simply have to adapt to them with long term strategies such as improved educational outcomes at all levels (early childhood, K-12 and post-secondary). But speeding up economic growth is under our direct control with tried and true methods which are not being fully utilized at the present time. Such as:

Tax Reform. We should lower tax rates for individuals across the board, paid for by shrinking deductions for the wealthy. This will give middle- and lower-income workers, as well as new entrepreneurs, more money to spend, thereby boosting both supply and demand in the economy.
Increasing the Earned Income Tax Credit paid for by using some of the increased revenues from shrinking deductions for the wealthy. This would encourage more people to take and hold onto entry level jobs, thus boosting the economy by increasing the size of the workforce.

In other words, much can be done to reduce income inequality. Redistribution of tax revenue is fine as long as it is done in a way which increases economic growth, rather than just punishing the rich.

How the American Higher Education System Contributes to Inequality

Posted on April 9, 2015 by jackheidel

Income inequality in the U.S. is a major problem, getting worse all the time. There are many reasons why this is happening and many suggestions for how to deal with it. On the other hand, it is well appreciated that a college degree is one of the best tickets for upward mobility into the middle class. A new book by Suzanne Mettler, “Degrees of Inequality,” shows how American higher education is actually increasing the divide between the haves and have-nots. She points out that:

There are too few college graduates in the U.S. In 2010 Americans between ages 25 and 34 had a college graduation rate of 33%. At least 10 OECD nations have higher rates (see below). American world leadership in the future will be jeopardized if we don’t continue to be an educational leader as we have been in the past.

America is graduating inequality. College degree attainment has increased between 1970 and 2011 for all income groups. However this is happening much more quickly for higher income groups. 83% of 18 to 24 year olds now have a high school diploma and 75% of this group start college. But the completion rate by age 24 is only 47%, mostly from the higher income groups (see below).

Not all college degrees are created equal. Students at private, nonprofit institutions graduate at higher rates than students from public institutions who, in turn, graduate at much higher rates than students from for-profit institutions. And graduates of the for-profits have larger loan debt than for graduates from private nonprofit and public institutions.

Students at for-profit educational institutions tend to be from lower-income families. As noted, they have lower graduation rates and end up with higher debt levels. Clearly the three tier system of American higher education has a harmful effect on the young adults who need the most help in moving up the economic ladder.
How should society address this major problem in an era of tight public spending? One answer is to increase regulation of the government-run student loan program. All educational institutions should be held at least partially responsible for the defaulted loans of their former students.
Another approach is to increase financial support for community colleges so that they can provide more programs for the low-income students who are most likely to attend them.

How Do We Boost Middle Class Jobs?

Posted on April 7, 2015 by jackheidel

Income inequality is a serious political issue these days as it should be. America’s future well-being depends on widely shared prosperity. One of the very best ways to lessen inequality is to increase mobility into the middle class.
The political and economic analysis group, FiveThirtyEight, has just reported new data (see above) that “Mid-tier Jobs Are Seeing Less Growth.” The middle class has already been hollowed out by the gale-wind forces of globalization and technological advancement. Now the Great Recession, and the slow recovery from it, has made things that much worse. It’s long past time to focus on middle class recovery.
The best way to do this is to make the economy grow faster as follows:

Tax Reform. Lowering individual rates should be the first priority, paid for by closing loopholes and shrinking deductions for the wealthy. This will give middle- and lower-income workers more money to spend and encourage startup small businesses. Lowering corporate tax rates, again offset by shrinking deductions, will incentivize multi-national corporations to bring their profits back home for distribution or reinvestment.

Increase the Earned Income Tax Credit, paid for with some of the increased revenues from shrinking deductions for the well-to-do. This will encourage more people to take and hold onto entry level low-wage jobs, thus increasing the size of the workforce.

Putting More Emphasis on Career Education in High School. Not everyone wants to or needs to go to college. There are lots of well-paying middle class jobs for high skilled workers and a shortage of workers for these jobs in many labor markets.

Miscellaneous. Immigration reform, trade expansion, and easing regulations on small business would also help grow the economy.

Economic growth since the end of the Great Recession in June 2009 has averaged a meager 2.3%. Speeding up growth is the best way to raise wages and lower unemployment at a much faster rate. This is the best way to boost middle class jobs!

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility