Is Economic Growth Environmentally Sustainable?

 

Economic growth is a question of much political interest these days. Slow growth is a major reason why Donald Trump was elected President in 2016.  The main justification for the Republican tax reform plan now moving through Congress is that it will speed up economic growth.
There are many people who say that humanity must learn to live with slower growth because our planet can no longer support the high rate of growth we have enjoyed since the Industrial Revolution.  But consider:

  • World Population is likely to peak at about 9.2 billion in approximately 2075 and then start to decline. (See the Rational Optimist by Matt Ridley, page 206.)   In country after country around the world, economic progress has already led to lower mortality rates which in turn have led to lower birth rates. This demographic process is likely to continue.
  • Pollution is rapidly declining in the developed world (see above, page 279). Yes, greenhouse gas emissions (and global warming) are still increasing worldwide but the use of renewable energy is also increasing. Furthermore, the U.S. and China, working together, easily have enough clout to enact a carbon tax, which would provide an economic incentive for industry to get carbon emissions under control.

  • Natural Resources aren’t running out.  Take phosphorous for example, which is vital to agricultural fertility. When the richest mines are depleted, there are extensive lower grade deposits still available. The fracking revolution means that oil and natural gas will be available for hundreds of years to come. The earth is finite, of course, but it is also a vast storehouse of resources.

Conclusion. The economic growth that is needed to create more jobs and better paying jobs is compatible with maintaining a clean and stable environment on earth.

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How to Speed Up Wage Growth in the U.S.

 

Donald Trump was elected President a year ago because the white working class is angry about a lot of things, including slow wage growth. The tax burden in the U.S. is lower than in other developed countries and wages are higher in the U.S. even if they are not rising fast enough. The Brookings Institute has carefully analyzed the wage growth issue, here and here, and has delineated several reasons for wage stagnation:

  • Compensation has lagged behind productivity growth. This is largely due to globalization and technology which has put upward pressure on skills and downward pressure on wages.
  • Benefits have grown faster than wages, thus holding down wages. The skyrocketing cost of healthcare is mostly responsible for this.
  • Labor’s share of income, compared to capital’s, has been shrinking. Technology needs less low skill labor. Also, market concentration, i.e. monopoly power, has been increasing, which increases profits and therefore return on capital.
  • Wage gains have been higher in the higher wage quintiles. This is explained by the increasing wage benefit of more education and higher skill levels.
  • Manufacturing output is up and employment is down. High technology needs fewer low skill workers and high skill workers are in short supply.
  • Entrepreneurship, i.e. new business formation, has declined over the past several decades. This is caused by increased business consolidation and would also be relieved by more immigration of high skilled workers.
  • Labor market slack has declined since the Great Recession. This bodes well for wage increases which are now starting to occur.

  • Labor productivity growth since the Great Recession has been especially slow. What is needed is increased business investment which is the justification for the current push for lower corporate and business tax rates.

Conclusion. In short, what is needed to boost wages is better education and skills, more business investment, control of the surging cost of healthcare, better trust busting to break up monopolies, and more high level immigration.

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Why Wage Growth Has Been So Slow in Recent Years

 

My last post pointed out that there appears to be an inverse correlation between tax rates and economic growth in developed countries.  In particular:

  • Tax levels in the U.S. have stayed relatively constant since 1965 while they have grown significantly in other O.E.C.D. countries.
  • GDP, on the contrary, has been growing faster in the U.S. than it has in these same countries.
  • Median wages, while growing more slowly in the U.S., are still much higher than in the other major O.E.C.D. countries.

A new report from the Brookings Institute analyzes the factors which have contributed to relatively slow wage growth in the U.S.


For example:

  • Labor productivity has been growing faster than hourly compensation since the mid-1970s.

  • Benefits have grown much faster than wages in recent years.

  • Labor’s share of income, compared to capital’s share, has been dropping in recent years.

  • Wage gains have been greater in the higher wage quintiles.

  • Domestic manufacturing output has increased even as manufacturing employment has decreased.

  • Entrepreneurship (i.e. new business formation) has declined in recent years even though it may now be starting to pick up.

  • Labor market slack has declined since the Great Recession though some still remains (measured as the share of the work force that works part time for economic reasons).

  • Recent labor productivity growth has been especially slow, restraining wage growth.

Conclusion. As everyone knows, slow wage growth is a highly contentious issue in the U.S. In addition to being a fundamental measure of a society’s wellbeing, it played a central role in the outcome of the 2016 Presidential election.
What can and should be done to speed up wage growth in the U.S.?  Stay tuned!

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Donald Trump and Isolationism, Protectionism and Nativism

 

Most of the time on this blog I write about the pros and cons of various policy measures, independently of which individuals or parties are supporting them. But, of course, the U.S. President is the most important single actor on the political stage so it does matter immensely what the President thinks on any particular issue.


The three biggest quagmires for Republican presidents are nativism, protectionism and isolationism. Where does President Trump come down on these major policy threads?

  • Isolationism. Mr. Trump is not an isolationist.  He is working with China and other Asian countries to contain North Korea. He is working with several Mideast powers to defeat ISIS. We have beefed up forces in Afghanistan to neutralize the Taliban. He has clearly backed down on his threat to withdraw from NATO.
  • Protectionism. Unfortunately, Mr. Trump is too much of a protectionist. He is not against trade per se but he wants to replace broad multilateral trade agreements with separate bilateral trade agreements with lots of different countries. This will simply create an “insanely complicated mishmash of rules.”  Instead he should focus on bargaining with China to get much better access for American products into Chinese markets.
  • Nativism. Again, Mr. Trump (and many of his supporters) apparently doesn’t appreciate the enormous contributions which immigrants make to the U.S. economy at both the high end (skilled workers and entrepreneurs) and the low end (willingness to provide hard physical labor in agriculture, meatpacking, construction and personal care). Especially with our currently low unemployment rate of 4.1% we should take the opportunity to solve our illegal immigration problem by expanding our guest worker visa program.

Conclusion. President Trump is clearly not an isolationist but smarter trade and immigration policies would help to speed up economic growth and create more jobs and higher wages for the blue-collar workers who are Mr. Trump’s main base of support.

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Democrats Need to Get More Serious about Economics

 

My last post makes the case that the “American Idea” is thriving, contrary to a sense of gloom from many quarters. For example, the Democratic Party is so tied up with complaining about Donald Trump, that it is failing to address the fundamental reason why Mr. Trump was elected President last fall: the plight of blue-collar workers.
For well-known reasons (globalization and the growth of technology), blue-collar workers are not yet enjoying the full benefits of rising prosperity as much as the college educated managerial and professional classes. The basic reason for this is:

  • Slow economic growth, averaging just 2% of GDP per year since the end of the Great Recession in June 2009. Our currently low unemployment rate of 4.2% and the prospects for regulatory reform and tax reform suggest that growth might start picking up soon.

Faster growth is already occurring in the area of ecommerce, see here and here.


Consider:

  • Fulfillment center weekly wages are 31% higher on average than for brick-and-mortar retail in the same area.
  • Ecommerce workers are not likely to be college graduates but need a mixture of physical and cognitive skills.
  • In the past two years the ecommerce industry has added 178,000 jobs in electronic shopping firms and another 58,000 jobs for express delivery companies. At the same time brick-and-mortar retail full time equivalent jobs have dropped by 123,000.
  • Americans spend 1.2 billion hours per week shopping in brick-and-mortar stores. Since 2007, roughly 64 million hours per week of these “unpaid hours” have shifted to fulfillment center workers and truck drivers. In this way unpaid household shopping hours are turning into paid market work.
  • The economics of manufacturing will likely soon be changed in a similar manner from producing and distributing goods in bulk to small-batch manufacturing closer to the customer.

Conclusion. “The internet of goods,” spearheaded by Amazon, has already increased the productivity and wages of many retail (fulfillment center) workers and will soon do the same thing in manufacturing. This is private enterprise at its finest.

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The American Idea Is Far from Doomed!

 

The Atlantic monthly magazine is celebrating its 160th anniversary this year.  In 1857 its founders envisioned that the magazine would “honestly endeavor to be the exponent of what its conductors believe to be the American idea.”  In the current issue one of its writers asks, “Is the American Idea Doomed?” and claims that it has few supporters on either the left or the right.  Well, I happen to be in the middle and I think the American idea is doing very well indeed.

Consider:

  • The World Economic Forum ranks the U.S. as the world’s most competitive large economy and, in fact, the U.S. is getting richer faster than anybody else.
  • Productivity growth in the digital industries has grown at the annual rate of 2.7% over the past 15 years compared with only an anemic .7% annual growth in productivity in the physical industries. The U.S. economy is becoming more digital all the time.
  • The four U.S. companies, Amazon, Apple, Facebook and Google are in the process of revolutionizing all aspects of life not only in America but all around the world.
  • According to the Kauffman Foundation  entrepreneurship is flourishing in the U.S. (see chart), and not just in Silicon Valley.

  • According to Freedom House  democracy has made much progress around the world in the last 30 years, even if further growth has stalled for the past ten years. Other democratic countries are our best friends and so we want more of them.
  • Granted Donald Trump is a wild card. So far his record is mixed but he hasn’t made any big mistakes (liking dragging us into war or hurting the economy). It is unlikely that he’ll slow our huge forward momentum whether or not he helps it.

Conclusion. “The democratic experiment is fragile” (perhaps!) but it’s also got a lot going for it right now. We can never afford to be complacent but we need not be pessimistic either.

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The GOP Congress Needs to Get Back to Fundamentals

 

Granted that it is hard to implement good policy with a populist President like Donald Trump who is most interested in stirring up his base, nevertheless the Republican Congress is making some serious policy mistakes:

  • Healthcare. The GOP should accept the fact that universal healthcare is a desirable societal goal and is here to stay. The Graham-Cassidy bill is bad policy because some states, such as debt-ridden Illinois, can’t possibly handle healthcare on their own. The fact that the ACA needs operational fixes gives the Republicans leverage for insisting on cost lowering changes in a bipartisan bill.
  • Tax Reform. The GOP should focus on the most serious problems in our tax system. The complexity of the tax code is partly responsible for the fact that taxes paid lag true tax liabilities by an estimated 16% or $406 billion per year.  As an example of waste, the IRS has paid out $132 billion in EITC benefits over the last decade to people who were ineligible.
    Our uncompetitive corporate tax rate of 35% encourages multinational companies to leave their profits overseas rather than bringing them back home for reinvestment.  Even so, corporate tax revenue as a share of GDP is less than in most other developed countries.
    Republicans claim to be the party of fiscal responsibility and should therefore be highly uncomfortable with any tax plan which reduces federal revenue and increases our already very large annual deficits.  With a low unemployment rate of 4.4%, any additional artificial (deficit financed) fiscal stimulus is likely to kick off a new round of inflation.

Conclusion. Republicans have a relatively short window of opportunity to enact policy changes beneficial for the country. They need to get serious about what is really important before time runs out.

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