Tag Archives: congress

Labor’s Share of National Income Is Falling

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The latest issue of the Economist shows quite dramatically in the article “Labour Pains” that labor’s share of national income is dropping.  In the U.S. workers’ wages have historically been about 70% of GDP.  In the early 1980s this figure started falling and is now 64%.  Similar declines are occurring in many other countries.
This phenomenon is closely related to what others are observing as I have reported recently.  Tyler Cowen’s new book “Average is Over” discusses the threat of technology to the middle class.  Daniel Alpert in “The Age of Oversupply” talks about the increase of competition from various global forces.  Stephen King’s “When the Money Runs Out” makes the case that “a half-century of one-off developments in the industrialized world will not be repeated.”
Historically the stability of the wage to GDP ratio “provides the link between productivity and prosperity.  If workers always get the same slice of the economic pie, then an improvement in their average productivity – which boosts growth – should translate into higher average earnings. … A falling labour share implies that productivity gains no longer translate into broad rises in pay.  Instead, an ever larger share of the benefits of growth accrues to the owners of capital.”
A shrinking share of a GDP which itself is slowing down is a double whammy.  The only way to address the problem effectively is to deal with the root causes.
First of all, we need to boost overall economic growth by the proven methods of broad based tax reform, especially including much lower corporate tax rates, making regulations less onerous, carrying out immigration reform, and giving special attention to helping entrepreneurs create new businesses.
How can we, additionally, help low skilled and low waged workers move up the ladder?  Long term the most worthwhile action is to change K-12 education by putting more emphasis on career education to produce more highly skilled workers.  Short term, we should provide crash job training for the estimated three million current job openings in the U.S. which require skilled workers.
Economic inequality in the U.S. is becoming progressively worse all the time.  There are fiscally sound ways to address this alarming problem and it is important that they be clearly and forcefully advocated.

Is Expanding The Social Safety Net Compatible With Fiscal Restraint?

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Yesterday’s New York Times addresses this issue with an article “Ohio Governor Defies G.O.P. With Defense of Social Safety Net”.  It describes how Republican Governor John Kasich has maneuvered to expand Medicaid coverage in Ohio to 275,000 low income Ohioans under the new healthcare law, over the objections of his own Republican dominated state legislature.
Mr. Kasich is a former congressional deficit hawk and there is little doubt about his fiscal conservatism.  He recently balanced his state budget by cutting revenues to local government by $720 million.  But he has also expanded state aid for the mentally ill and supported efforts to raise local taxes for improving education.  He says “for those who live in the shadows of life, for those who are the least among us, I will not accept the fact that the most vulnerable in our state should be ignored.”
Especially after the disastrous debt ceiling debate, with Tea Party Republicans willing to default on our national debt in order to defund Obama Care, it is critical for fiscal conservatives to publicly demonstrate that they are not opposed to helping the poor in a reasonable manner, as long as it is cost effective.
To be in favor of controlling entitlement spending is not the same thing as wanting to abolish entitlement programs.  In fact, it is just the opposite.  We must control their costs so that the government will have the means to continue to support them.  It is just plain ordinary common sense.  If our national debt continues to grow unchecked, we risk not only entitlement programs but our entire way of life.
Take Medicaid as a concrete example.  Right now the federal government pays a percentage of the costs incurred by state governments in running the program.  The more a state spends for Medicaid, the greater the reimbursement from the federal government. This increases spending for both the states and the federal government.  A more cost effective approach is to give each state a block grant from the federal government and enough leeway to operate its own program as efficiently as it can.  Exactly this approach is being used in Rhode Island and is working very well at a much lower overall cost.
Being a fiscal conservative is not the same thing as being mean spirited!  The future of our country depends on getting this crucial message out far and wide!

Must America Resign Itself to Much Slower Economic Growth?

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The cover story in this week’s Barron’s, by Jonathan Laing, “The Snail Economy, Slowing to a Crawl”, makes a well-documented argument that “over the next 20 years, the U.S. economy is likely to grow only 2% a year.  That’s down from 3% or better since World War II.  Blame it on an aging population and sluggish productivity growth.  Bad news for stocks and social harmony.”
Here’s an example of the argument he makes.  “Mean incomes of minorities in the U.S. population have remained at about 60% of white incomes in recent decades.  Unless that pattern changes, and minorities earn bigger incomes, that augers slower income growth for the overall population as the baby boomers, predominately white, retire over the next 20 years. …At the same time the minority population, particularly Hispanic, will expand. …If income relationships remain the same, U.S. median income growth will drop by an estimated 0.43% a year through 2020 and 0.52% a year over the succeeding decade.”
This demographic trend can be offset to some extent by boosting the ages at which Social Security benefits are received in order to lighten the burden on those who are working.  Immigration policy could be reformed to attract more highly skilled (and therefore more highly paid as well) workers to further offset the growing number of retirees.  “And most of all, the U.S. should engage in a crash educational program to close the gap in skills and income levels among different parts of the American population.”
In addition to the demographic challenge well described by Mr. Laing, there is the problem that growing economic efficiency (caused by advances in technology and ever more globalization) will continue to replace American workers by both machines and lower cost foreign workers.
It is imperative for us to set aside partisan ideology and dramatically confront all of these economic challenges to continued American supremacy on the world stage.  First and foremost we need fundamental tax reform, significantly lowering tax rates for all productive aspects of our economy, especially for investors, risk takers, entrepreneurs and corporations.  (Lower tax rates can be made revenue neutral by eliminating deductions and closing loopholes.)  We should simplify and streamline regulatory processes, again, to give all possible support to the businesses which can make the economy grow faster.
Our status in the world and therefore the future of our country depend on our success in this urgent endeavor!

Where Are the Jobs? II. How to Create More of Them

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My previous post, two days ago, introduced a new book by two economists, John Dearie and Courtney Geduldig, “Where the Jobs Are, Entrepreneurship and the Soul of the American Economy”.  They make a very strong case that net job creation comes primarily from businesses less than one year old, true “start-ups”.  But, unfortunately, there has been a huge drop off in the number of new businesses created each year since 2007 and, furthermore, the historical average of seven new jobs created by a firm in its first year has now fallen to less than five.
How do we reverse this alarming trend?  Here is what the authors have learned from the many entrepreneurs they have talked to:

  • “Not enough people with the skills we need”
  • “Our immigration policies are insane”
  • “Regulations are killing us”
  • “Tax payments can be the difference between survival and failure”
  • “There’s too much uncertainty and it’s Washington’s fault”

Although there are 24 million Americans either unemployed or underemployed, there are also 3 million advertised high skill job openings going begging and many more potential jobs available for qualified individuals.  A greater emphasis on STEM (Science, Technology, Engineering and Mathematics) education in the U.S. would help.  But also immigration reform is urgently needed.  The Senate has passed legislation to raise the annual cap on H1-B visas (for high skilled workers) from 65,000 currently to 110,000.  Hopefully the House will concur.
A Preferential Regulatory Framework for New Businesses could be devised to help fragile new businesses in their first five years.  A Regulatory Improvement Commission could be created to streamline the entire federal regulatory process.  Likewise a Preferential Tax Framework for New Business should be created and could, for example, recommend taxing income for the first five years at a much lower rate than normal.
Regarding policy uncertainty the authors refer to the U.S. Economic Policy Uncertainty Index which is at a very high level since the Great Recession.  Economic uncertainty obviously discourages business growth.
Conclusion:  A very good way to boost the economy and create more new jobs is to put greater emphasis on supporting entrepreneurs who are trying to start new businesses.  There are a number of concrete actions that the federal government can take to do this and doing so should be a very high priority for our national leaders.

Where Are The Jobs? I. The Basics

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Two economists, John Dearie and Courtney Geduldig, have just published a very interesting new book, “Where the Jobs Are, Entrepreneurship and the Soul of the American Economy”.   In April 2011, Mr. Dearie and Ms. Geduldig launched an effort to understand the nature and scope of the damage to the U.S. labor markets caused by the Great Recession and, if possible, identify new ways to enhance the economy’s job-creating capacity.
They quickly “learned of research that demonstrates how virtually all net new job creation in the United States over the past 30 years has come from businesses less than a year old – true ‘start-ups.’  Investigating further, they also learned that America’s job creation machine is faltering, with the rate of start-up formation declining precipitously in recent years.  To find out why, they launched an ambitious summer road trip – conducting roundtables with entrepreneurs in 12 cities across the nation.”  Here is what they learned.
First of all, the U.S. labor market is tremendously dynamic, as existing businesses create new jobs and eliminate others.  “In 2011, for example, 47.5 million separations occurred while 49.6 million Americans took new jobs.”  But “existing firms, of any age or size, in aggregate, nearly always produce more separations than hires.  … Indeed, existing businesses shed on a net basis a combined average of about 1 million jobs each year as some businesses fail, others become more efficient, and as separations simply outpace new hires.  By stark contrast, new firms in their first year of existence, create an average of 3 million new jobs.”
Unfortunately, there has been a huge drop off in the number of new businesses created annually since 2007.  Furthermore, the historical average of seven new jobs created by a new firm in its first year, has now fallen to less than five new jobs.
The obvious question which this discussion raises is: what policy changes are needed to boost the creation of new businesses?  This will be the topic of my next post in a couple of days!

The Intergenerational Financial Obligations Reform (INFORM) Act

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On page nine of today’s New York Times is published a full page letter to Congress and President Obama, “Enact The Inform Act”, signed by over one thousand economists as well as former government officials.  It would require “the Congressional Budget Office, the Government Accountability Office and the Office of Management and Budget to do fiscal gap and generational accounting on an annual basis to assess the sustainability of fiscal policy and measure, on a comprehensive basis, the fiscal obligations facing our children and future generations.
“Unlike the measurement of the official federal debt, fiscal gap and generational accounting are comprehensive.  They leave nothing off the books, be it defense spending, Medicare expenditures, or the profits of the Federal Reserve, in assessing the sustainability of fiscal policy and the size of the fiscal bills being left to our own children.”
The INFORM Act is sponsored by a nonpartisan and millennial driven organization which goes by the name, The Can Kicks Back . This is very significant because it is precisely the younger generation of Americans who should be most concerned about the fiscal irresponsibility of so many of our national leaders.  They are the ones who will be stuck with the huge national debt which is being generated by the profligacy of federal spending and also the ones who may have their own retirement benefits greatly curtailed because of it.
Young people should be especially incensed by such irresponsible behavior which will affect them so greatly.  We should support their efforts to turn around this ugly situation!

Can We Solve Our Fiscal Problems by Taxing the Rich? II. Robert Reich’s View

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One of America’s foremost liberal writers, Robert Reich, a Professor of Public Policy at UC Berkeley, argues in his latest book, “Beyond Outrage”, that “America’s economy and democracy are working for the benefit of ever-fewer privileged and powerful people.”  He presents “a plan for action for everyone who cares about the future of America.”  Mr. Reich’s tax policy:

  • Raise the tax rate on the rich to what it was before 1981

“Sixty years ago Americans earning over $1 million in today’s dollars paid 55.2 percent of it in income taxes, after taking all deductions and credits.  If they were taxed at that rate now, they’d be paying at least $80 billion more annually.”

  • Put a two percent surtax on the wealth of the richest one-half of one percent

“The richest on-half of one percent of Americans, each with over $7.2 million of assets, own 28 percent of the nation’s total wealth.  Given this almost unprecedented concentration, and considering what the nation needs to do to rebuild our schools and infrastructure, as well as tame the budget deficit, a surtax is warranted.  It would generate another $70 billion a year.”

  • Put a one-half of one percent tax on all financial transactions

“This would bring in more than $25 billion per year.”

These new tax provisions would together raise tax revenue by $175 billion per year.  But our deficit this fiscal year, ending September 30, 2013, is about $700 billion.  In a few years, without significant changes in either discretionary or entitlement spending, annual deficits will be back up over a trillion dollars per year and climbing.  Mr. Reich’s steep taxes on wealth and wealth creation are not enough to seriously tame deficit spending, let alone end it.
Let’s be honest and admit that some new tax revenue is probably going to be necessary in the future if we are ever going to be able to eliminate the deficit.  But it makes no sense to start out with a tax increase which will be strongly opposed anyway.  It is far more sensible to first wring out the hundreds of billions of dollars in wasteful federal spending which now exists.  After this is done there likely will still be a big deficit.  Then, and only then, would it be appropriate to generate significant new revenue by raising taxes.

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.

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!

Private Health Care Reform is Getting Started!

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Yesterday’s Wall Street Journal has a very interesting article, “More Employers Overhaul Health Benefits”, which describes a movement just getting started whereby employers give their employees a fixed sum of money and let them choose their own plan from an online market place.  The idea is that employers will be better able to predict and control their healthcare expenses for employees.  Furthermore, employees will be able to get better value for dollars spent by selecting their own coverage options, deductible amounts, copays, etc.
In fact, in an exchange run by Liazon Corp., which has 60,000 people enrolled, 75% of workers have chosen less expensive plans than they had before, by accepting bigger deductibles and copays, as well as smaller choices of healthcare providers and restrictions such as primary-care gatekeepers.
This is such an appealing approach to private healthcare cost control that the Accenture Management Consulting Company estimates just five years from now there will be 40,000,000 business employees receiving their healthcare benefits in this manner.  This would be a phenomenal development!
The United States spends 18% of GDP on healthcare altogether, both public and private, which is double the amount spent by any other country.  This enormous expense is a major reason why wage growth is stagnant in our country as well as why the costs of public programs like Medicare and Medicaid are so high and contributing to so much government debt.  It is critical for our country to get the rapid increase of healthcare costs under much better control.  That’s why this new movement of employers and employees working together on this critical problem is such a big step in the right direction.
If the estimate by Accenture is anywhere nearly accurate about how fast this new private healthcare selection method will grow, then there will soon be an excellent opportunity for Congress to expand its benefits to the control of Medicare and Medicaid costs as well.  This is very exciting indeed!