A Pessimistic View of America’s Future III. What, Me Worry?

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This week’s cover story in Barron’s, by Gene Epstein, “What, Me Worry?”, attempts to create more attention for our impending fiscal crisis.  “Stop all the dithering, D.C.  The baby-boom budget bomb could destroy the economy within 25 years.  The time to act is now.”  As Mr. Epstein says:

  • Obamacare is part of the problem but so are Medicaid, Medicare and Social Security.
  • The latest budget report from the Congressional Budget Office, published on September 17, makes an “optimistic” forecast that the federal debt will grow to 100% of GDP by 2038 from an already high 73% today.
  • But its more realistic forecast is a debt of 190% of GDP by 2038, worse than the current debt of Greece, which has a 27% unemployment rate.

“By 2038 there will be 79.1 million U.S. residents 65 and older, up from 44.7 million today.  The working age population, 18 to 64, will grow at a much slower rate, to 214.7 million from 197.8 million today.  As a result the dependency ratio will plummet to 2.7 working age people to support each senior in 2038, from 4.4 today.”
“Since the elderly population won’t begin to reach critical mass until the mid-2020’s, the rising tide of red ink will be relatively modest over the next ten years.”
“The nation thus might be likened to a family with about 10 good working years left which needs to cut spending in order to save for a rapidly approaching old age.  But alas, it’s a dysfunctional family incapable of rational planning.”
Today we have the option of simply containing the growth of entitlement spending.  If we don’t act now, tomorrow we will be forced to make deep cuts in entitlement spending.  Today we have the option of making intelligent cuts in discretionary spending.  Tomorrow we’ll be forced to make drastic cuts across the board which will make the slowdown in the economy due to the budget sequester “look like a Sunday afternoon walk in the park” (Bill Clinton, May 2013).
What does it take to knock common sense into our national leaders?

A Pessimistic View of America’s Future II. What Does Everyone Want?

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In my previous post I laid out the view of the economist, Tyler Cowen, in his new book “Average is Over”, that the powerful trends of globalization, technology, and ever increasing machine intelligence (such as Google’s search engines), will lead to a super elite 10-15% of American’s who will have the ability and self-discipline to master tomorrow’s technology and profit from it.  The average middle class worker will be increasingly replaced or downgraded by intelligent machines.  Social and economic inequality will continue to grow and this new trend will be very hard to overcome.  This is a bleak prospect for the future of America.
What can be done to resist this trend and to try to turn it around?  Jim Clifton, the CEO of the Gallup Organization, says in “The Coming Jobs War”, that “what everyone in the world wants is a good job” and he has many ideas about how to boost the economy in order to produce more good jobs.  According to Mr. Clifton, there is no shortage in this country of creativity, new inventions and innovation.  What is lacking are successful business models to commercialize the good ideas which are already out there and create customers for new products.  We need entrepreneurship.  “Entrepreneurship has a direct impact on supply and demand, but with a distinction.  It doesn’t just provide supply, it builds demand.”
Next question: how do we boost entrepreneurship?  We get government out of the way as much as possible.  This means the lowest possible tax rates (offset by eliminating tax loopholes for the wealthy) and fewer burdensome regulations (such as the employer mandate for health insurance).
 As a society we have to decide which is more important:  creating more and better jobs by growing the economy faster or making everyone more equal with higher taxes and more income redistribution.  We can’t have it both ways.  To reverse or at least slow down the trends which are now shrinking the middle class,  the best policy is to go all out for entrepreneurship and investment!

A Pessimistic View of America’s Future

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The George Mason University economist, Tyler Cowen, has written a provocative new book entitled “Average is Over”, which has just been reviewed by the Economist: “The American Dream, RIP?” .  His thesis is that the slow recovery of middle class jobs following the Great Recession of 2008-2009 portends a new economy more and more devoid of middle class jobs and broad prosperity.
Mr. Tyler says that “An elite 10-15% of Americans will have the brains and self-discipline to master tomorrow’s technology and extract profit from it.  They will enjoy great wealth and stimulating lives.  Others will endure stagnant or even falling wages as employers measure their output with ‘oppressive precision’.  Some will thrive as service providers to the rich….Young men will struggle in a labor market which rewards conscientiousness over muscle.”  Some highly motivated individuals, born poor, will be able to move into the elite group with cheap online education.  This creates overall a sense of “hyper-meritocracy” at the top which “will make it easier to ignore those left behind.”
What Mr. Cowen has done is to take the strong social and economic forces of globalization and technology, add to this mix emerging machine intelligence (Google is a prime example) and then to use his vivid imagination to conjure up an image of what life will be like in the not so distant future.  America will still likely be the dominant country in the world but the historically strong middle class will shrink as the rich become richer and the poor become poorer.
Is this pessimistic vision of America’s future inevitable?  Is there anything we can do to at least slow down if not to reverse these trends?
Speeding up economic growth is our only chance to turn things around and mitigate this grim future.  Better K-12 education (and therefore early child education as well) will help in the long run.  In the short run, broad based tax reform, healthcare cost control, relaxing overly burdensome regulations, and immigration reform are the four things which will help the most.  The same old basic stuff is what we need to do!  Tyler Cowen’s story just makes the need for such changes more compelling and more urgent!

A Much Better Republican Strategy for Obama Care

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On the eve of its implementation, the Affordable Care Act (aka Obama Care) is more unpopular than ever amongst the general public.  But the House Republican strategy of trying to defund the ACA as part of a continuing resolution to fund the government for the new fiscal year is a very poor idea.  It will never pass both houses of Congress and be signed by the President.  All it can possibly do is lead to a temporary shutdown of the government and therefore cause mass confusion.
The Wall Street Journal recently suggested a much more effective way for the House Republicans to proceed in “Carve-0uts for Congress”.  The legislation establishing the ACA contains a provision requiring all members of Congress and their staffs (11,000 people in all) to purchase their own health insurance on the new exchanges which are being set up to enroll uninsured Americans.  The idea behind this provision is to insure that members of Congress and their staffs and their families will obtain their insurance just like everyone else so that they will fully experience how healthcare reform actually works in practice.
But just a month ago the Administration personnel team issued a regulation exempting all Members and aides from the requirement to use the exchanges.  A recent poll taken by Independent Women’s Voice shows that 92% of likely voters, regardless of their views of the ACA, think that this exemption is unfair.
The implication is clear.  Republicans should show their dissatisfaction with the ACA by attaching the repeal of this exemption, which is contrary to law, as well as highly unpopular, to the continuing resolution to fund the government for the next fiscal year.  Let the Democratic Senate defend this exemption if it wants too.  It’s an opportunity for the House Republicans to do the right thing and also to stand with the “little guy” against the Washington elite.

Our Dire Fiscal Situation II A Promising Solution

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As I discussed in my last post, the Congressional Budget Office has shown very clearly that the U.S. is on an unsustainable fiscal path which must be reversed in order to avoid calamity.  We are spending too much money and not taking in enough tax revenue.  In a recent Wall Street Journal Op Ed column, the economist Martin Feldstein describes “How to Create a Real Economic Stimulus”.  “A successful growth and employment strategy would combine substantial reductions in the relative size of the future national debt with immediate permanent tax rate cuts and a multiyear program of infrastructure spending…….The only way to reduce future deficits without weakening incentives and growth is by cutting future government spending.”
Mr. Feldstein proposes slowing the growth of benefits of middleclass retirees by gradually raising the full benefit retirement age for Social Security from 67 to 70 and also raising the age of Medicare eligibility to the same level.  This would create a budget savings of 1% of GDP, or $200 billion, by 2020.   Rather than eliminating such popular tax deductions as the one for mortgage interest or the exclusion of employer payments for health insurance, he recommends limiting the amount by which individuals can reduce their tax liabilities to 2% of adjusted gross income.  This single change to the tax code would, for example, reduce the 2013 deficit by $140 billion.
In addition to lowering tax rates for individuals, corporate tax rates should be cut from 35% to about 25% in order to be competitive with other industrial countries.  We should also adopt the internationally common “territorial” system which doesn’t tax foreign earnings brought back home.
In short, we decrease spending and raise revenue with entitlement reforms and a limit on tax expenditures thereby creating a framework for tax rate reductions and infrastructure spending.  These are the sorts of bold measures needed to produce a real stimulus and thereby get our economy back on track!

Our Dire Fiscal Situation I. The Facts

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Take a look at the front page of a new report from the Congressional Budget Office, “The 2013 Long-Term Budget Outlook”.  It shows very clearly the huge fiscal mess confronting our country in the near future.
First of all, our national debt has almost doubled as a percentage of GDP in the last five years, from about 38% of GDP at the end of 2008 to 73% today.  Although the debt is actually projected to dip to 68% of GDP in 2018, it then begins a steady climb because of increasing interest costs as well as increasing spending on Social Security and government healthcare programs (Medicare, Medicaid and the Affordable Care Act).  The debt will be back to 71% of GDP by 2023 and then climb rapidly to about 100% of GDP by 2038.
Notice from the graph that federal tax revenues have just about recovered from the recession and will soon level off at their historical level of about 19.5% of GDP.  But federal spending will resume a steady climb, reaching 26% of GDP by 2038.  As the gap between revenue and spending gets wider and wider, the national debt grows faster and faster.  This is the enormous fiscal problem we are faced with in the next 25 years.   The worse it gets the harder it becomes to turn around.  It is imperative to address this problem without delay.
In order to reduce the debt from its current level of 73% of GDP down to the historical average of 38% by 2023, Congress would have to pass an additional $4 trillion in spending cuts or tax increases over the next decade.  The only way such enormous savings can be achieved is by reining in entitlement spending: Social Security, Medicare, Medicaid and ACA.  I will outline one way to do this in my next post!

The Link between Education and Prosperity, Part II: Educare

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In my previous post, “The Link between Education and Prosperity”, I looked at data from Paul Peterson and Eric Hanushek which show a very close connection between high school academic achievement and rate of economic growth for various countries around the world.  They point out, for example, that only 32% of U.S. high school students are proficient in mathematics, as compared to 49% in Canada, and that closing this achievement gap would boost our rate of GDP growth by almost 1%.  But they also point out that the math proficiency rate for white students in the U.S. is 42% with much lower proficiency rates for both African American and Hispanic students.  In other words, almost 2/3 of the American-Canadian math proficiency gap can be explained by poor performance of American minority students, many of whom grow up in poverty.
In yesterday’s New York Times, James Heckman, a Nobel prize winner in economics, has an article “Lifelines for Poor Children” which points out the importance of investing in effective early childhood development from birth to age 5.  “High-quality early childhood programs are great economic and social equalizers – they supplement the family lives of disadvantaged children by teaching consistent parenting and by giving children the mentoring, encouragement and support available to functioning middle-class families.”
High quality early childhood education is expensive and it is very important for all levels of government, especially at the federal level, to operate more efficiently.  How is it possible to expand early childhood education under such very tight financial constraints?
The key is to build it into our existing Head Start program on which we are currently spending over $8 billion per year.  Many experts acknowledge that academic gains from Head Start are short lived, seldom persisting even into 3rd grade.  But there are existing models for much more effective early childhood education, such as the program run by Educare in Omaha and other cities.
In short there is a cost effective way to provide “lifelines for poor children”, for their own good and also for the benefit of society as a whole, and we should expect our national leaders to move in this direction.

The Link between Education and Prosperity

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In Thursday’s Wall Street Journal, two education experts, Paul Peterson and Eric Hanushek, write about “The Vital Link of Education and Prosperity”.  They point out, for example, that only 32% of U.S. high school students are proficient in mathematics based on the National Assessment of Educational Progress test.  Comparable scores for other countries are 45% in Germany and 49% in Canada.
The authors demonstrate a close correlation between academic achievement and economic growth of many countries around the world.  The highest academic achievers, such as South Korea, Taiwan, Singapore and Hong Kong, also have the highest growth rates.
Over the past 50 years, from 1960 – 2009, the U.S. economy has grown 2/3 of a percent faster than would be predicted by our mediocre test scores.  But our relative economic advantages, such as open markets, secure property rights, universal K-12 education and favorable immigration policy, are now declining as other countries adopt these same successful social and economic practices.  In other words, we need to do better if we want to remain on top.
The authors make a good case that America’s GDP growth rate would be boosted by ¾ of a percent per year if we were able to match the educational attainment level of Canadian students (49% math proficiency vs 32%).
In their recent book, “Endangering Prosperity, a Global View of the American School,” the authors break down the overall math proficiency score by racial group:  the white proficiency rate is 41.8%, the African American rate is 11.0% and the Hispanic rate is 15.4%.  In other words, almost 2/3 of the American-Canadian math proficiency gap can be explained by the poor performance of American minority groups.
Conclusion: let’s definitely try to improve American K-12 education overall.  But in working on this difficult problem, we should concentrate on measures which will have the most impact on minority groups where the problem is greatest.  For example, providing early childhood education for all low income families will do more to raise academic achievement overall than adopting the Common Core curriculum (which will mostly benefit already high achieving students).

The College Education Bubble

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A recent article in the Wall Street Journal by the expert on the economics of higher education, Richard Vedder, “The Real Reason College Costs So Much”, points out the similarities between the government’s higher education and housing policies.  “In housing we had artificially low interest rates.  The government encouraged people with low qualifications to buy a house.  Today we have low interest rates on student loans.  The government is encouraging kids to go to college who are unqualified just as it encouraged people to buy a house who are unqualified.”
The federal government is now spending $105 billion on student loans each year.  The average student loan debt is $26,000 but goes much higher for millions of students.  The maximum annual Pell Grant (intended for low income students) is now $5350 and 20% of the recipients come from families making over $60,000 per year.
President Obama suggests capping monthly loan repayments at 10% of discretionary income and forgiving outstanding balances after 20 years.  This creates a moral hazard.  It signals to current and future loan borrowers that they don’t have to take loan repayment very seriously.  It encourages students to major in “soft” academic areas which have poorer job prospects rather than “hard” areas like engineering and technology which have good job prospects.
Innovation in higher education is not coming from government programs but from private initiatives such as massively open online courses (MOOCs).  These have the potential to greatly reduce college costs.  Community colleges have rapidly growing enrollments and prepare students for skilled jobs in high demand areas such as truck driving, machine technology and health careers.
The cost of higher education is going up much faster than the rate of inflation and the infusion of federal money is making the situation worse by encouraging students to take on excessive amounts of debt.  A cap should be placed on the amount of government money which can be borrowed by an individual student.  There are plenty of low cost options available for obtaining postsecondary education and government policy should support, rather than subvert, such common sense options.

How To Do Intelligent Budget Cutting in Washington

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The July/August 2013 issue of the Atlantic Magazine has an article “Can Government Play Moneyball?”, by two former budget officials, Peter Orszag (under President Obama) and John Bridgeland (under President Bush), which describes the very careless spending atmosphere in the federal government in recent years.  “Based on our rough calculations”, they write, “less than $1 out of every $100 of government spending is backed by even the most basic evidence that the money is being spent wisely.”  They describe in great detail their efforts to introduce mechanisms to evaluate the performance of social service programs of various types and how difficult this has been to accomplish.
“Since 1990, the federal government has put 11 large social programs, collectively costing taxpayers more than $10 billion a year, through randomized controlled trials, the gold standard of evaluation.  Ten out of the eleven – including Upward Bound and Job Corps – showed “weak or no positive effects on their participants.”  Here’s another example.  “The federal government’s long running after school program, 21st Century Community Learning Centers, has shown no effect on academic outcomes on elementary-school students – and significant increases in school suspensions and incidents requiring other forms of discipline.  The Bush administration tried to reduce funding for the program” but was overruled by Congress.  “Today the program still gets more than $1 billion a year in federal funds.”
Lots of people complain that the sequester is a “dumb” way to cut federal spending.  Of course, it would make far more sense to cut back spending in a rational way by evaluating all programs, keeping the effective ones and eliminating the ineffective ones.  As the sequester takes bigger and bigger across-the-board spending cuts each year for nine more years (it’s a program to cut $1 trillion over ten years), the big spenders in Congress are going to start crying “Uncle”! because their own favorite programs will be effected more and more deeply each year.  Maybe then, hopefully sooner than later, Congress will gain some collective common sense and accept the fact that there is a better way to make the significant budget cuts that are necessary.
Let’s hope so!