Tag Archives: economic growth

“A Better Way” for Donald Trump to Make His Case

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In my last post, “Donald Trump’s Best Chance to Win in November,” I said that the best way for Mr. Trump to broaden his appeal beyond working-class whites and to have any chance of winning the presidential election is for him to endorse the reform plan, “A Better Way,”  recently developed by the Republican House of Representatives.
Capture9Here is a brief and positive summary of the Trump platform so far:

 

  • His tax plan is highly pro-growth and will not cost nearly as much as the previously advertised $10 trillion over a decade.
  • He supports legal immigration and simply wants to solve the illegal immigration problem, one way or another.
  • He is not opposed to foreign trade per se but wants to negotiate, from a position of strength, with countries that manipulate their currencies, steal intellectual property or compel companies to disclose trade secrets as a condition of entering their markets.

His policy proposals so described are completely compatible with the House’s “A Better Way” reform plan whose planks are:

 

  • Poverty. Reward work. Tailor benefits to people’s needs. Improve skills and schools. Demand results.
  • National Security. Defeat the terrorists. Protect the homeland. Defend freedom.
  • The economy. Regulate smarter. End bailouts and cronyism. Put students and workers first.
  • The constitution. Make government more accountable and more representative. Restore constitutional checks on spending.
  • Health Care. More choices and lower costs. Real protections and peace of mind. Cutting edge cures and treatments. A stronger Medicare.
  • Tax reform. Simplicity and fairness. Jobs and growth.

 

These guiding principles are being fleshed out into complete policy documents. They do indeed represent a better way forward for our national government.  Donald Trump could do far worse than to endorse this comprehensive reform plan developed by the House Republicans.  It would show that he is serious about “Making America Great Again.”

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Evaluating the 2016 House Tax Reform Plan

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The American economy is in a slow growth rut and needs to be revved up. Last week I surveyed a proposal for tax reform from the House Ways and Means Committee designed to do exactly this.
Capture11Its main features are:

  • Consolidate the seven current individual tax rate brackets into just three: 12%, 25% and 33%.
  • Dividends and capital gains are taxed at ½ of the above wage rates, depending on total income. This will encourage investment.
  • The standard deduction of $12,600 (for joint returns) is raised to $24,000 and the $4,050 personal exemption is eliminated. This means that fewer filers will itemize.
  • In fact, all itemized deductions for individuals are eliminated except for mortgage interest and charitable contributions.
  • The pass through tax rate for small businesses is capped at 25%. Full and immediate expensing for investments in new equipment and technology is allowed.
  • The corporate tax rate will drop from 35% to 20%, paid for by eliminating dozens of exemptions, including interest expensing. A territorial system will be established so that multinational firms will no longer be taxed on earnings both abroad and at home.

The non-partisan Tax Foundation has analyzed the House tax plan and concludes that:

  • The plan would significantly reduce marginal tax rates and the cost of capital which would lead over the long term to 9.1% higher GDP growth, 7.7% higher wages and an additional 1.7 million fulltime equivalent jobs.
  • The plan would reduce federal revenue over a decade by $2.4 trillion on a static basis and $191 billion on a dynamic basis.
  • On a dynamic basis, incomes for all income quintiles would increase by at least 8.4% over the long term.

Conclusion: TF’s analysis shows that the proposal is highly pro-growth.  But it should also be made revenue neutral by, for example, limiting the mortgage interest deduction as much as necessary to accomplish this. We need to make the economy grow faster but we also need to shrink our annual deficits.

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How Progress Has Led to Discord

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We were reminded by Robert Samuelson in yesterday’s Washington Post that America has made amazing progress in the last half century.
Consider that in 1960:

  • Men and Women held rigid gender roles.
  • African-Americans were restricted by legal segregation in the South and informal segregation almost everywhere else.
  • Homosexuality was virtually under the radar.
  • There was little environmental regulation.
  • Immigration was not an issue.
  • Defense made up 52% of government spending.

    Capture17

Think about all the (mostly) positive changes which have taken place in the meantime:

  • Women have taken paying jobs by the millions.
  • Racial segregation has been outlawed.
  • Gay rights have been established.
  • Environmental regulation has exploded.
  • Immigration, both legal and illegal, has increased.
  • Social spending has soared.
  • Defense is down to 16% of the federal budget in 2015.

Consider how our national politics is now stalemated:

  • The political system favors extremes.
  • Minorities live largely in big cities where they produce Democratic super-majorities.
  • Rural areas produce Republican super-majorities.
  • Incumbents are insulated from general election challenges which might pull them towards the center but are perpetually vulnerable to primary challenges from extremists who pull them towards the fringes.
  • Ideological purity trumps pragmatism. In the internet and cable-news era, politicians are constantly reassuring their constituents that they haven’t sold out.
  • The center sags and paralysis prevails.

Meanwhile serious national problems are getting much worse and not being addressed. Our public debt (on which we pay interest) is 74% of GDP, the highest since WWII.  The U.S. economy is growing only slowly at the rate of 2.1% per year ever since the end of the Great Recession seven years ago.  Neither presidential candidate has a credible plan to deal with these two most aggravating problems.
As a country we are in a huge mess.  How do we break out of it?  I wish I knew!

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What Should Brexit Mean for the U.S.?

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My two main sources of information for this blog are the New York Times and the Wall Street Journal. In particular I am always eager to read Eduardo Porter’s weekly column, Economic Scene, in the NYT.  He frames the issues very well, even though I often disagree with him on the details.
Capture17Yesterday’s column, “In Brexit and Trump, a Populist Farewell to Laissez-Faire Capitalism,” points out the similarities in the white working class support for both Brexit and for Donald Trump.  It then goes on to advocate for what the economist Larry Summers refers to vaguely as “responsible nationalism.”
I couldn’t agree more with Mr. Porter and Mr. Summers that we need policies to boost the fortunes of blue collar workers, and here are some good ways to do it:

  • Tax reform to put more disposable income in the pockets of middle- and lower-income workers, to support job creators, and to provide a big incentive for American multinational companies to bring their earnings back home for reinvestment.
  • Immigration Reform. The key here is a rigorous Guest Worker Visa program to provide immigrant employees for businesses who are unable to hire enough qualified domestic workers. At the same time, a strict eVerify enforcement system would also be established to catch illegal immigrants and deport them.
  • Free and Fair Trade. Free trade among nations has lifted hundreds of millions of people out of poverty worldwide, as well as benefitting all Americans with lower prices. What we have failed to do is to adequately help displaced workers retrain for the millions of high skilled jobs available in the U.S. which go unfilled for lack of qualified applicants.

Conclusion. Our country faces severe problems. If we don’t get deficit spending under greater control, we risk a new and more severe financial crisis.  If we can’t create more and better paying jobs for the modestly educated, we will be faced with Trump-like demagogic candidates for president every four years. It will be a huge challenge for us to extricate ourselves from this mess in a peaceful manner.

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Why Free Trade Is So Important

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My blog “It Does Not Add Up” addresses our country’s two major problems:

  • Slow Economic Growth, only 2.1% annually for the past seven years and
  • Massive Debt, now 74% of GDP, the highest it has been since the end of WWII.

These two problems are, of course, closely related.  Faster growth would bring in more tax revenue and reduce our annual deficits.  Shrinking the debt, as a percentage of GDP, will demonstrate that the world’s strongest economy will not falter when interest rates inevitably return to more normal (and higher) levels.
Capture5There is a strong correlation between trade and world-wide economic growth as shown in the above chart.  A recent Gallop poll found that 58% of Americans consider foreign trade an opportunity for economic growth and only 34% view it as a threat.  Not surprisingly, the opponents are lower-income, blue-collar workers who are the most vulnerable to economic change.  Consider:

  • It is technology, not trade, which is behind the loss of manufacturing jobs. Between 2000 and 2010, employment in manufacturing fell by 5.6 million. But productivity growth accounted for 85% of the job loss. Only 13% resulted from trade.
  • Since trade is not the underlying cause of job loss, protectionism is not the solution. If, for example, the U.S. imposes 45% tariffs on imports from China, production would merely shift to other low-wage developing countries in Asia. Pretty soon we’d have a massive trade war.
  • Trade Adjustment Assistance consists of extended unemployment compensation as well as retraining programs. This program misses the millions more who are unemployed due to technological change. Furthermore, extended unemployment compensation leads to deterioration of work skills. A better way to help displaced workers is to expand the Earned Income Tax Credit which supplements all low-income work.
  • NAFTA is a huge economic and foreign policy success. Trade between the U.S. and Mexico has greatly increased sine 1994 and 40% of the value of imports from Mexico consists of content originally made in the U.S. Furthermore NAFTA has promoted the growth of a large middle class in Mexico.
  • Starting in 2001 when China became a WTO member, U.S. companies became more interested in foreign investment in China and other countries and offshoring has proliferated since then. Substantially reducing the corporate tax rate would bring many of these foreign operations back to the U.S.

Trade is win-win for everyone except the production workers who lose their jobs to foreign competition. We can clearly do much more to help them maintain their standard of living.

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Tax Reform for Faster Economic Growth

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Several of my recent posts have been devoted to the topic of faster economic growth, see, for example, here. One way to do this is by making it easier to start and grow a small business.  Another way is with broad-based tax reform.
Capture11House Republicans have just released the outline of a plan for fundamental tax reform, “A Better Way: A Pro-Growth Tax Code for All Americans.”  It has the following main features:

  • The current seven tax brackets for individuals are condensed to just three: 12%, 25% and 33%.
  • The standard deduction of $12,600 (for joint returns) is raised to $24,000 and the $4,050 personal exemption is eliminated. This feature means that fewer filers will need to itemize deductions.
  • In fact, all itemized deductions for individuals are eliminated except for mortgage interest and charitable contributions.
  • To encourage business creation and expansion, the pass through tax rate for small business will be 25%. Full and immediate expensing for investments in new equipment and technology will be allowed.
  • The corporate tax rate will drop from 35% to 20%, paid for by eliminating dozens of tax carve-outs and deductions, including net interest expensing. A territorial system will be established whereby multinational firms will no longer be taxed both abroad and at home for the same dollar of income. This will encourage the multinationals to keep production facilities in the U.S. and to bring home foreign profits for reinvestment here.

The purpose of this plan, according to Kevin Brady, Chair of the House Ways and Means Committee, is “to rev up the economy, cut taxes on business, simplify the code and let American families file on a postcard.” The authors of the report claim that this tax proposal is revenue neutral, i.e. will not lower tax revenue, on a dynamic scoring basis, taking resulting economic growth into account.  If this assertion holds up under nonpartisan analysis, then this is an excellent proposal which deserves broad support.

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The U.S. Middle Class Is Growing, Not Shrinking

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One of the topics I discuss on this blog is income inequality (here, here, and here).  An interesting article in yesterday’s Wall Street Journal, “Upper Middle Class Sees Big Gains, Research Finds,” is highly pertinent to the inequality issue.
Capture1As can be seen in the above chart, the percentage of people in the middle class or above has greatly expanded between 1979 and 2014.  Furthermore, the basic research on this issue,by Stephen Rose at the Urban Institute, shows very clearly (in the chart below) what is happening: the higher is a family income, the faster it is increasing.
Capture3The best policy response to this phenomenon should be clear.  Rather than trying to decrease inequality with higher taxes on the wealthy, we should be trying to boost the less wealthy into higher income classes. The way to accomplish this is to:

  • Grow the economy faster with broad-based tax reform (lower tax rates paid for by shrinking deductions), immigration (guest worker) reform, (fair) trade expansion, and regulation reform (to help more small businesses get started). This will create more jobs and better paying jobs.
  • Improve education with early childhood education (to get minorities off to a better start in school), boosting high school graduation rates above the current 80% average (with better career and vocational education) and making college more affordable by putting more resources into community colleges and scholarships for low-income students.
  • Combat social inequality. The fraction of children with a single parent is the best predictor of upward economic mobility. The lower-income class marriage rate has dropped from 84% in 1960 to 48% in 2010. Policy should therefore focus on removing the marriage penalty in all government programs.

The basic forces of globalization and growing technology use are driving this societal change. The best way to respond is to enable more people to benefit from these basic trends.

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Can the U.S. Economy Do Better VI. Does the President Matter?

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My last five posts have discussed several different aspects of the question, “Can the U.S. Economy Do Better?”  Our economy has been doing especially poorly since the end of the Great Recession seven years ago (see the chart below).  Many people claim that the President doesn’t really have all that much control over the economy.
Capture6 Here is what the2016 presidential candidates are saying on economic policy so far:

  • Hillary Clinton. She wants national paid family leave, a national minimum wage increase and more government spending on infrastructure projects. She would raise taxes by about $100 billion per year to pay for these initiatives. She is opposed to the Trans Pacific Partnership to expand trade with 11 other Pacific Rim countries.
  • Donald Trump. His top priorities are trade and immigration policy. Would he be able to successfully address China’s currency manipulation without starting a trade war? How would he be able to round up and deport millions of illegal immigrants without destroying millions of jobs and thereby crippling many businesses? His plan to slash tax rates would boost the economy but also add trillions of dollars to the debt.

As I have discussed over and over again on this blog, see, for example, here and here,  there are several fundamental policy changes needed to make our economy grow faster and create more and better paying jobs.  We need to:

  • Make it easier to start a small business by simplifying regulations at all levels.
  • Lower tax rates and simplify the tax code, paid for by shrinking deductions and closing loopholes.
  • Respond to globalization and new technology by helping its victims rather than blocking progress.

Our two presidential candidates are appealing to the fears of the voters rather than to their hopes and aspirations. Neither of them is espousing policies which will help the economy really grow in a healthy way.

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Can the U.S. Economy Do Better? V. Entitlement Reform

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My last several posts, e.g. here, have discussed the question as to whether or not the U.S. economy can grow faster. Even though there are many headwinds to faster growth, there are still various measures to take which will help significantly. Beyond specific policy directions, such as aiding small business and cleaning up and simplifying our tax code, another very important step is to get our fiscal problems, i.e. massive debt, under much better control.
Capture7As made clear in the above chart, there is really only one way to do this.  It is entitlement reform.  In the last 50 years, from 1965 – 2015, mandatory, i.e. entitlement, spending has grown from 26% of the federal budget to 62% and this percentage will just keep growing until something is done to stop it. Along this line, an excellent new report from the American Enterprise Institute, “Increasing the Effectiveness and Sustainability of the Nation’s Entitlement Programs” lays out some basic principles for entitlement reform. They are:

  • Personal Responsibility for Retirement Savings. The idea is to move toward turning Social Security into a universal flat benefit for all U.S. residents age 65 and older. Anyone could supplement this basic income with additional private savings.
  • Market Discipline in Health Care. The idea here is to keep the ACA exchanges with subsidies for low-income households. Employer provided care would have no mandates and a rational and equal tax credit for all. Health Savings Accounts would be liberalized to encourage widespread participation. Both Medicare and Medicaid would provide premium support for basic care. The point is to bolster the consumer’s role in the marketplace in order to slow down the rising cost of healthcare.
  • Promotion of Work for Safety-Net Programs. The federal government spends about $400 billion annually to fight poverty (not counting healthcare programs) with much overlap of federal and state programs. Reform efforts should emphasize work as the key to improved economic prospects as well as greater state control over resources to allow for better coordination of efforts. Two major reform concepts, block grants to states as well as wage subsidies, should be implemented.

 

We have to get our fiscal house in order, so entitlement reform is not optional. Delay, moreover, could be catastrophic.  If we wait until another crisis hits, then it will no longer be possible to design reforms with gradual adjustments. Now is the time to act!

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Can the U.S. Economy Do Better? III. Yes, and Here’s How

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Almost everyone agrees that faster economic growth would be beneficial. It would provide more new jobs as well as bigger raises for the already employed.  It would also bring in more tax revenue which would help greatly to shrink our large annual spending deficits.
My last two posts, here and here, present first an optimistic and then a very pessimistic view about the chances of speeding up growth.  In particular, the banker Satyajit Das, thinks that even the fairly anemic 2.1% average growth of the past few years will be impossible to maintain in the years ahead.
My next few posts will focus on exploring several specific ways in which growth could be speeded up.  First of all, I refer to a report from Babson College, “The State of Small Business 2016” which is the basis of a recent article in USA Today by Warren Buffett and others, “To grow the economy, grow small business.”
Capture1Key points are:

  • Capital. Securing financing remains a major barrier to growth. Small business owners overwhelmingly rely on banks for funding but banks face more stringent regulatory requirements. The median funding request for small businesses is $100,000 but businesses typically secure jus $40,500.
  • Regulation. The typical small business owner spends 200 hours per year on regulatory compliance. Streamlining approval processes would help immensely.
  • Skills. 70% of small businesses find it difficult to hire qualified employees. Furthermore there are currently 5.8 million job openings in the U.S. This reflects a mismatch between company needs and applicants’ skills. School districts and community colleges could help alleviate this problem.
  • Technology. Accessing better technology is perceived as costly and requires skills that many businesses lack. Cybersecurity and protecting intellectual property are two significant areas of exposure for small business, which 40% are ill-prepared to address.

Small businesses create over 60% of net new private-sector jobs. Helping them expand is one of the best ways to support economic growth.

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