Tag Archives: economic growth

Can the U.S. Economy Do Better? II. It Won’t Be Easy

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In my last post, “Can the U.S. Economy Do Better?” I laid out the view of the Hoover Institution economist John Cochrane that a few basic changes such as deep tax reform, a thorough overhaul of social programs, more educational competition and regulatory simplification would go a long way towards perking up the economy.
Capture6The banker and financial analyst, Satyajit Das, presents a contrary point of view in, “The Age of Stagnation: Why Perpetual Growth is Unattainable.”  According to Mr. Das:

  • The Global Financial Crisis (GFC) was not part of the normal boom and bust cycle, but rather the collapse of the postwar economic expansion under the weight of four main factors: high debt levels, large global imbalances, excessive financialization and an unsound build-up of future entitlements.
  • The economy risks becoming trapped in a QE-forever cycle. A weak economy leads to expansionary fiscal measures and Quantitative Easing (QE). If the economy responds then interest rates will go up and lead to a debt crisis. If the economy does not respond, then there is pressure for additional stimuli.
  • The economist Robert Gordon predicts that the future U.S. growth rate, adjusted for six big headwinds (demographics, declining educational attainment, rising inequality, effects of globalization, environmental costs, and debt overhang) may only be .2%, well below the 2.1% growth rate of the past few years.
  • The GFC may signal the zenith of globalization. The U.S. could function successfully as a closed economy, with foreign trade making up only 15% of GDP. The European Union and China could also turn inward. The rise of autarky and nationalism is a dangerous cocktail.
  • Financialization drives inequality. QE and low interest rates encourages high-income households to increase investments and therefore boosts the stock market. The increasing cost of healthcare, higher education and childcare is a big burden on low-income households.
  • Financial repression is increasingly accompanied by political repression which engenders lack of trust which in turn drives political disengagement and social disorder.

Ouch, ouch, ouch! This is a very negative assessment of the U.S. economic and social scene today.  But I report the views of Mr. Das because they are reality based and need to be dealt with.

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Can the U.S. Economy Do Better?

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In my last post I discussed the differing views of the U.S. economy held by Federal Reserve Chair Janet Yellen and her rival for the post, Larry Summers:

  • Janet Yellen thinks that the U.S. economy is steadily recovering from the Great Recession and that there is no hurry to raise interest rates back to normal levels.
  • Larry Summers thinks that the U.S. economy is suffering from secular stagnation and that there is a great need for more fiscal stimulus by the federal government.

There is another point-of-view, perhaps best expressed by the Hoover Institution’s John Cochrane in a recent Wall Street Journal Op Ed.  Let me try to summarize Mr. Cochrane’s argument:

Capture1

  • From 1950 – 2000 the U.S. economy grew at an average rate of 3.5% per year. Since 2000 it has grown at only half this rate, 1.76% annually. By 2008 the average American was more than three times better off than in 1952. Real average GDP per person grew from $16,000 to $49,000 during this period.
  • The U.S. economy is now overrun by an out-of-control and increasingly politicized regulatory state. America is now middle-aged and overweight. The solution is to eat better and exercise.
  • Consider the above chart, the World Bank’s “Distance to Frontier” ease-of-doing-business measure for 2014. The U.S. is near the top but there is plenty of room for improvement.
  • Here is what a growth agenda would involve: deep tax reform, cleaning out the insane complexity and cronyism; a thorough overhaul of social programs, getting rid of all the perverse incentives; better schools that come from increased choice and competition; a dramatic legal and regulatory simplification, restoring a transparent rule of law.
  • Growth-oriented policies will be resisted. Growth comes from productivity which comes from new disruptive technologies and businesses.

Can our political system deliver the changes that are needed? The rise of Donald Trump and Bernie Sanders show that the people want big changes and are willing to disrupt the status quo to achieve them.  This means change is possible but it won’t come easily.

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How Will America Solve Its Biggest Problems?

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As I repeat over and over again, our two biggest national problems, in my opinion, are slow economic growth (only 2.1% annual increases in GDP for the past seven years) and massive public debt (now 74% of GDP, the highest it has been since right after WWII).
Capture11Are these problems being addressed by our political system?

  • Our 2016 presidential race is clearly touching on them to some extent. The “Sandernistas” think that the Obama economic policies are not progressive enough and need to be doubled down on. Middle-income “Trumpsters” are revolting against the stagnant and falling wage growth of the past fifteen years.
  • The political scientist James Piereson thinks that the Democratic-welfare regime, in place since 1932, has now run its course and will necessarily be superseded by America’s Fourth Revolution which is imminent.
  • The social scientist Yuval Levin thinks that our “Fractured Republic” can heal itself peacefully if the left is willing to accept a less centralized, more federalist, governmental approach to solving economic and fiscal problems and the right is willing to accept that modern America is highly diverse and individualistic and where a significant degree of cultural fracturing, family breakdown and estrangement from tradition are inevitable.

My own opinion is that our huge and rapidly growing public debt (on which we pay interest) is unsustainable and will lead to another crisis much worse than the Great Recession of 2008-2009 unless it is curtailed. Without an adequate response in the meantime, the new crisis will occur when interest rates inevitably rise significantly and therefore lead to huge increases in interest payments on our larger and larger accumulated debt.
To avoid such a calamity we need to do a much better job of controlling federal spending.  It would also help to speed up economic growth in order to increase tax revenue.  Furthermore, faster growth would create more jobs and better paying jobs.  This would take much of the steam out of the appeal of populist candidates such as Bernie Sanders and Donald Trump.
I can’t foresee exactly how we will be forced to change course but it’s going to happen fairly soon.

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Why Is the U.S. Economy Growing So Slowly?

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The U.S. economy has only been growing at the rate of 2.1% since the end of the Great Recession in June 2009, almost seven years ago. Such a slow rate of growth means millions of unemployed and underemployed workers and only small salary raises for tens of millions of others.
Capture5The New York Times economic journalist, Eduardo Porter, observes that we have “A Growth Rate Weighted Down by Inaction.”  He points out that:

  • Our economy is adversely affected by the gradual shrinkage of the work force as a share of population as baby boomers retire and the one time surge of women into the workforce in the 20th century has ended.
  • A second factor is a persistent decline in productivity growth over the last dozen years.
  • A pessimistic forecast by the Economic Cycle Research Institute foresees growth of only 1% per year for the next five years. The Congressional Budget Office projects more optimistic productivity growth at 1.5% per year, which added to workforce growth of .5% per year, would amount to total growth of 2% per year for the next ten years.

Mr. Porter goes on to say that there are concrete reasons why productivity growth is so slow:

  • Hiring is growing faster than capital investment. This is because most job growth in the last decade has been in (low productivity) services instead of (high productivity) manufacturing.
  • Too many restrictions on educated immigrants. Relaxing these restrictions would increase entrepreneurship.
  • Too many onerous regulations.
  • Under training of skilled workers. We need more vocational and career education.

Many people, including myself, have pointed out ways to alleviate these problems and speed up economic growth, for example see here. It is most unfortunate that our dysfunctional national leadership cannot figure out how to work together to get this done.

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Economic Freedom and Economic Growth

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I have written several posts recently, here and here, about America’s current very slow rate of economic growth.  In fact:

  • From 1970 – 2000 our economy grew on average at the rate of 3.5%.
  • Since 2000 it has grown at only half this rate, 1.76% annually.Capture4

The economics journalist, Gene Epstein, writing in Barron’s, “The Real Reason Behind Slowing U.S. Growth,” points out the very strong correlation between our rate of GDP growth and the Fraser Institute’s Index of Economic Freedom in the U.S. This index is based on ratings in the five categories:

  • Size of Government.
  • Legal System and Security of Property Rights.
  • Soundness of Money.
  • Freedom to Trade Internationally.
  • Regulation of Credit, Labor and Business.

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As shown in the chart above, the biggest reductions have occurred in the (2nd) Legal System, (4th) International Trade and (5th) Regulation areas.  Examples of freedom declines in the Legal System area are:

  • Judicial Independence: political interference in the bankruptcy proceedings of GM and Chrysler.
  • Impartial Courts: expanded use of Foreign Intelligence Surveillance Courts (FISA) where government requests are rubber stamped.
  • Property Rights: eminent domain made easier by the Supreme Court’s Kelo vs City of New London decision in 2005. The expanded use of civil asset forfeiture.
  • Military Interference in the Political Process: local police officers using excess military equipment.

According to the Fraser Institute, ”The effects of the Reagan and Thatcher political revolutions … led to increases in economic freedom and convergence among OECD nations. The so-called Washington Consensus of lower taxes, lower trade barriers, privatization and deregulation is quite evident in the data in the EF index.  The last decade has not been as kind to the cause of economic freedom.”
Such a huge correlation between the rise and decline of economic freedom and the concurrent rise and decline of economic growth is unlikely to be a coincidence.  Government policies strongly effect economic growth.  To ignore this self-evident truth is to invite economic decline.

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Thank God for the Republican House of Representatives

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It is now almost certain that Hillary Clinton will be the Democratic nominee for President and that Donald Trump will be the Republican nominee. The two biggest problems facing our country today are:

  • Slow economic growth, averaging just 2.1% since the end of the recession in June 2009, seven years ago. Even though unemployment is down to 5%, stagnant wages for the middle class have not nearly recovered from their pre-recession high.
  • Massive debt. The public debt (on which we pay interest) is now at 74% of GDP and rising. When interest rates go up, as they surely will eventually, debt payment will rise by hundreds of billions of dollars per year and be a huge drain on government revenues.

The likely Presidential nominees are not adequately addressing these problems:

  • Hillary Clinton wants to increase government spending by about $100 billion per year to be spent on various new programs and raise the top tax rate to 45% to pay for them. This will do nothing to either grow the economy faster or shrink our already sizable deficit.
  • Donald Trump has promised to keep entitlements as they are and spend more on infrastructure and defense. He also sees debt as useful. “I probably understand debt better than anybody” he has stated. His tax plan (which he says is negotiable) will create massive new debt.

If Clinton is elected, she may pull the Senate Democratic along with her. But either way the House of Representatives will likely remain Republican with Speaker Paul Ryan.
Capture3Since the Republicans took over the House in 2010, they have consistently proposed budgets each year to shrink the deficit and produced a balanced budget within ten years.  The new President, either Clinton or Trump, will have to negotiate their own ideas on spending and taxes with a fiscally conservative House.
The country is indeed very fortunate for this circumstance.

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Ten Thousand Commandments 2016

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I have written several posts recently, here and here, about the need for faster economic growth in the U.S. and how to achieve it. Part of the problem is the huge size of the federal bureaucracy and the enormous and rapidly growing number of rules which they issue each year.
Capture3The magnitude of this problem is clearly shown in the above chart included in the latest annual report of the Competitive Enterprise Institute.  According to the CEI:

  • Federal regulatory cost reached $1.885 trillion in 2015, which averages out to $15,000 per U.S. household for just one year. This exceeds the $1.82 trillion which the IRS is expected to collect in both individual and corporate income taxes in 2015.
  • In 2015, 114 laws were enacted by Congress while 3,410 rules were issued by agencies, 30 rules for each law enacted.
  • Some 60 federal departments, agencies and commissions have 3,297 regulations in development at various stages in the pipeline.
  • The 2015 Federal Register contains 80,260 pages, the third highest page count in history.
  • The George W. Bush administration averaged 62 major (having an economic impact exceeding $100 million) regulations annually, while the Obama administration has averaged 81 major regulations annually over seven years.

One way to do something about out-of-control regulation is a recently proposed Regulation Freedom Amendment to the U.S. Constitution:

  • “Whenever one quarter of the Members of the U.S. House of Representatives or the U.S. Senate transmit to the President their written declaration of opposition to a proposed federal regulation, it shall require a majority vote of both the House and Senate to adopt that regulation.”

Another intriguing approach to attacking regulatory overkill is given by Charles Murray in his new book, “By the People, rebuilding liberty without permission.”  The point is that there are measures which can be taken to address this particular aspect of our slow growth problem.

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Ending America’s Slow Growth Tailspin II. What It Will Take.

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One of the biggest problems facing the U.S. today is the slow growth of our economy, averaging just 2.1% per year since the end of the Great Recession seven years ago, well below the 3.5% average from 1950 – 2000.
Capture11My last post introduced an excellent Wall Street Journal Op Ed by the Hoover Institution economist John Cochrane.  He says that “the U.S. economy needs a dramatic legal and regulatory simplification.”  In particular:

  • Tax reform. Instead of arguing over tax rates, what’s really needed is deep tax reform, cleaning out the insane complexity and cronyism.
  • Social programs. Rather than arguing over whether to increase or cut spending, what’s needed is a thorough overhaul of the programs’ pernicious incentives. For example, Social Security disability (almost 9 million beneficiaries in March 2016) needs to remove its disincentives to work, move or change careers.
  • Education spending. Rather than arguing about the level of public spending, America needs the better schools that come from increased choice and competition.
  • Over-regulation. Most of all the country needs a dramatic legal and regulatory simplification. Middle-aged America is living in a hoarder’s house of a legal system, including state and local impediments such as excessive occupational licensing.
  • Growth-oriented policies will be resisted. Growth comes from productivity which comes from new technology and new companies. These displace the profits of old companies, and the hefty pay and settled lives of their managers and workers.
  • The presidential frontrunners are not championing economic growth. But the House of Representatives, under Speaker Paul Ryan, is doing exactly this. Perhaps economic policy leadership can be transferred from the Presidency to Congress.

After two disappointing presidencies our economy is lagging far behind where it could and should be. This is the reason for the rise of Bernie Sanders and Donald Trump.  Regardless of the outcome of the 2016 presidential election, there is hope for better days ahead!

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How to End America’s Slow-Growth Tailspin

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My last three posts, here, here, and here address America’s slow economic growth for the past 15 years and why it is such a serious problem.  Today I begin to discuss how we can turn this around.
In today’s Wall Street Journal, the economist John Cochrane has a very informative Op Ed, “Ending America’s Slow-Growth Tailspin” which describes a clear path to speed up economic growth.  Says Mr. Cochrane:

  • From 1950 – 2000 the U.S. economy grew at an average rate of 3.5% annually. Since 2000 it has grown at only half this rate, 1.76% annually. By 2008 the average American was more than three times better off than in 1952. Real GDP per person grew from $16,000 to $49,000 during this time period.
  • There are three main theories as to why growth is slowing down.
  1. We’ve run out of new ideas.  Get used to it and start fighting over the shrinking pie.
  2. The culprit is “secular stagnation” which the Federal Reserve is unsuccessfully trying to overcome with low interest rates and quantitative easing. The only other solution is vast new stimulus spending.
  3. The U.S. economy is overrun by an out-of-control and increasingly politicized regulatory state. America is middle-aged and overweight. The solution is to eat better and exercise.
    Capture3
  • The first two camps are doubtful that better policies will produce faster growth. But the examples of North Korea vs South Korea and East Germany vs West Germany show that government policy matters for economic growth. In fact Mr. Cochrane’s chart (above) shows how a country’s “ease of doing business” score, compiled by the World Bank, correlates with increased average income. Even though the U.S. is near the top by this measure, there is still plenty of room for improvement.

In my next post I will delineate specifically how to streamline our oversized regulatory state. In the meantime, take a look at Mr. Cochrane’s article in today’s WSJ.

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Why Faster Economic Growth Is So Important III. Speeding Up Anemic Wage Growth

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The U.S. economy is in a peculiar and potentially perilous situation:

  • On the one hand, overall economic growth has averaged only 2.1% since the end of the Great Recession in June 2009.
  • On the other hand, the unemployment rate has dropped from 8% in early 2012 to 5% today.
  • But wages and salaries have grown by only 2% in the past year and near that rate for the past four years.

What explains our relatively low, and steadily dropping, unemployment rate when overall economic growth, and wage growth in particular, are so slow?
Capture2It is low productivity growth as the New York Times’ Neil Irwin, has recently pointed out: here  and here.

  • GDP is up 1.9% in the past year. But the number of hours worked by Americans is also up 1.9% in the past year. This means no increase in labor productivity in the past year.
  • For the past five years labor productivity has only advanced by .4% annually, far below the 2.3% average annual growth since the 1950s.
  • Most job growth in the last decade has been in (low productivity) services rather than (high productivity) manufacturing.

We do not have to accept low productivity growth as immutable. As I have recently discussed here, and here, better government policies can boost labor productivity and therefore boost economic growth as well.  Here is a brief summary of what needs to be done:

  • Decrease regulation: the Dodd-Frank Act and Affordable Care Act, for example, are hampering growth by increasing the inefficiency of the financial and healthcare sectors of the economy.
  • Reform taxation: growth oriented taxation would have the lowest possible rates paid for by shrinking deductions.
  • Reform immigration: giving legal status to millions of illegal immigrants would turn them into far more productive citizens.

In other words, our severe slow growth predicament can be greatly ameliorated if we would adopt more sensible economic policies. It is a shame that this is so hard to do!

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