Light at the End of the Tunnel

Posted on June 14, 2015 by jackheidel

The Bureau of Labor Statistics has just reported very good news in its monthly Job Openings and Labor Turnover Survey. For the first time since 2000, the number of job openings now exceeds the number of new hires, as shown in the chart just below. This means that wages will start to grow faster as employers have to compete harder for new workers.
This is an early indication that our economy will likely soon resume a faster rate of growth than its average of 2.3% since the end of the Great Recession in June of 2009. There will be many benefits. The unemployment rate should continue to keep heading downward from its current level of 5.5%. More unemployed and underemployed workers will be able to find satisfactory jobs. The labor participation rate should start to head back up from its historically low current state.
The Federal Reserve is likely to begin raising short term interest rates sooner rather than later in order to keep inflation in check before it has a chance to heat up. In other words we may be breaking out of the ambiguous state of slow-growth secular stagnation in which we have been trapped for six years.
All of this is very good news as long as Congress realizes that it is now even more urgent than ever to put our massive public debt of $13 trillion on a downward path, compared to the total economy, before interest rates begin to rise substantially and eat us alive with interest payments on this huge debt.
In this regard the Budget Plan approved by Congress just this Spring, which will lead to a balanced budget over ten years, looks very attractive indeed. It will be a mammoth job to achieve such a milestone in fiscal restraint, but doing so will lead to a more secure and prosperous future for all Americans.

What’s Wrong With U.S. Manufacturing Policy

Posted on June 7, 2015 by jackheidel

The Brookings Institution’s Martin Baily has an informative article, “what’s wrong with U.S. manufacturing policy,” in a recent issue of the Wall Street Journal.
Says Mr. Baily, “Of the 5.7 million manufacturing jobs that disappeared in the 2000s, only 870,000 have returned so far, according to the Bureau of Labor Statistics, and the claim that millions more are coming back is nothing more than a myth. … If the U.S. is serious about promoting a recovery in manufacturing, it will stop measuring success by the number of people employed in the sector and start supporting the technological advancements that are making factories more productive, competitive and innovative.”
According to Mr. Baily the technological shift taking place is powered by three developments:

The internet of things in which machines are able to communicate with each other.
Advanced manufacturing including 3-D printing, new materials and more accurate digital logistics.
Distributed innovation in which crowdsourcing is used to find solutions to technical challenges more quickly.

Such advances must be supported even if it means putting robots in place of workers. It follows that:

there will still be good jobs in manufacturing for those with big data, programming and other specialized skills
a shortage of qualified workers means we want highly qualified immigrants to stay in the U.S. instead of returning to their home countries
propping up uncompetitive jobs with tax breaks and subsidies won’t work for long and just interferes with introducing a lower corporate tax rate to drive new investment
new trade agreements strengthen U.S. manufacturing by reducing foreign barriers to U.S. goods
Displaced workers Should be supported with retraining programs especially through community colleges
Government can further help with infrastructure improvements and expedited permitting processes.

Conclusion: U.S. manufacturing will continue to thrive in a rapidly changing environment as long as it is properly supported with intelligent government policies.

Fixing the Debt: Creating a Greater Sense of Urgency II. An Example

Posted on June 4, 2015 by jackheidel

My last post, ”Fixing the Debt: Creating a Greater Sense of Urgency,” expresses my dismay that our huge debt problem does not receive enough serious attention from the American people. Yes, most Americans deplore the national debt and the deficit spending that leads to it, but it only too seldom affects how they vote for candidates for federal office, thus giving a pass to the big spenders in Congress.
Capture Here is a good example of this refusal to take the debt seriously. The advocacy group FAIR (Fairness and Accuracy in Reporting) ridicules NPR for addressing this problem, “Look a Deficit: How NPR Distracts You From Issues That Will Actually Affect Your Life.” Here is what FAIR is saying:

Interest on the national debt is projected to be only 2% of GDP in 2016 and 3% of GDP in 2024, which is tiny. (But this is because the interest rate for the debt is now abnormally low, approximately 1.7%).

If the Fed keeps interest rates low, then interest on the debt will continue to stay low indefinitely and so the debt will continue to be a trivial problem. And the President appoints 7 of the 12 voting members of the Fed Open Market Committee which sets interest rates.

The reason the Fed raises interest rates is to slow the economy and keep people from getting jobs. (Actually the real reason is not to keep people from getting jobs but to keep inflation under control. Once inflation takes off, it is very difficult to bring it back down as we painfully discovered in the late 70s and early 80s).

Anyhow, if the Fed raises interest rates to keep the labor market from tightening, as it did in the late 1990s, this would effectively be depriving workers of the 1.0 – 1.5 percentage points in real wage growth they could expect if they were getting their share of productivity growth. (A rise in interest rates need not choke off economic growth which is primarily affected by supply and demand. Fiscal policy (tax rates and spending), established by Congress, has a far greater effect on the rate of economic growth than does monetary policy).

If our debt is not soon placed on a sustainable downward path, we will soon have another financial crisis, much worse than the Great Recession of 2008. This will affect everyone’s life in a substantial and very unpleasant way.

Fixing the Debt: Creating a Greater Sense of Urgency

Posted on June 2, 2015 by jackheidel

As I have mentioned before, I am a volunteer for the nonpartisan Washington D.C. think tank “Fix the Debt.” As such I give presentations to civic organizations in the Omaha area about our debt problem and what we can and should do about it. I have now given four such talks and have another one coming up next week.

What is most difficult for me is to try to convey a sense of urgency about addressing this problem. Most people deplore deficit spending in a general sense but not nearly enough people think that dealing with it should take priority over current presumably pressing spending needs such as, for example, depletion of the highway trust fund, expanding military spending, or improving early childhood education, just to be specific.
So here is how I am going to try to create a greater sense of urgency. Several months ago I had a post entitled, “The Slow Growth Fiscal Trap We’re Now In” in which I said (in brief summary) that our current economic condition of

slow growth means
low inflation which leads to
low interest rates which in turn leads to
massive debt which eventually leads to a new and much more severe
fiscal crisis.

This is the predicament we’re now in. Do we consciously maintain a slow growth economy, with all the unemployment pain and stagnant wages which this entails, or do we speed things up, enabling more people to go back to work, and also deal with the higher inflation and interest rates which this will entail?
Faster growth may well eventually come on its own anyway and then we’ll be forced to fix our fiscal problems at a time when they’ll be much worse than they are now.
Isn’t it clear that it is much better to act now in a responsible manner rather than to wait and have to react hurridly later on when the problem is much worse?

Growth vs Equitable Growth

Posted on May 29, 2015 by jackheidel

There is a huge debate going on in political and policy circles between the advocates of increasing economic growth and the advocates of increasing income equality. I generally argue that the best way to increase income equality is to increase economic growth overall.
I have just come across a series of articles from the Nov/Dec 2014 issue of the American Monthly, “American Life: an investor’s guide ,” which are sponsored by the Washington Center for Equitable Growth, a progressive Think Tank. The fact that this group is focused on equitable growth, rather than the narrower goal of income equality, is of great interest to me.
They advocate a number of things that I agree with such as:

The incredible importance of early childhood healthcare and education.
Improving K-12 education, especially in low-income areas.
Providing much more vocational education and apprenticeship programs.
Running a “high pressure” economy in order to tighten the labor market. They recognize that lower unemployment leads to higher wages (see above).
Expand the Earned Income Tax Credit especially for workers without children.

The authors want to “pressurize” the economy with a more stimulative fiscal policy which means increased deficit spending, a very bad idea in my opinion. Much better ways to boost the economy are with policies such as tax reform, trade expansion, immigration reform and regulatory relaxation.
Yes, there is a high degree of income inequality and yes, it’s getting worse over time. But, as Warren Buffett says, the poor are not poor because the rich are rich. The best way to help the poor is to make them more productive. That is exactly the purpose of the policies enumerated above.

Are Economics and Social Progress Related to Each Other?

Posted on May 25, 2015 by jackheidel

“Your (last post) is one of the most active and positive that I have read of yours. You do put your time to where your values are. Those of us who see you as too economically focused and ourselves as more humanely concerned need to act as well. Thanks for your focus and attention.”
from a reader of my blog

I am a fiscal conservative and a social moderate. The primary reason I write this blog is because I am so concerned about the fiscal recklessness of our national leaders. Our national debt is much too large and still growing too fast. We need to either cut spending or raise taxes (or do both).
But I am also a social progressive. I voted in favor of Nebraska raising its minimum wage last fall. I support gay marriage as a civil right. I support having Nebraska expand Medicaid in order to cover more low-income people (where Medicaid needs to be fixed is at the federal level).
There is in fact a very close connection between having a sound economy and social progress. As the above chart shows, the U.S. ranks very high in both GDP per person and social progress. All of the countries which are most socially progressive also have sound economies. This is not a coincidence.
My last post talks about what society can do to help blacks improve their socio-economic status. This includes improving educational opportunity in the inner city. But improved educational opportunity needs to be closely directed toward improved economic opportunity. This means, for example, having good jobs available for new high school and community college graduates. But this, in turn, means having strong economic growth with intelligent tax and regulatory policies to encourage entrepreneurship and business expansion.
In short, a sound economy is essential for social progress.

Why Is U.S. Productivity Growth Declining?

Posted on May 17, 2015 by jackheidel

The economist Alan Blinder has just reported, “The Mystery of Declining Productivity Growth” that U.S. productivity growth has fallen dramatically in the last few years. “The healthy 2.6% a year from 1995-2010 has since been an anemic 0.4%. What’s scary is that we don’t know why.”
The economists Edward Prescott and Lee Ohanian believe the productivity slowdown is caused by a corresponding slowdown in new startups (as illustrated by the above chart). They point out, for example, that:

The creation rate of new businesses in 2011 was 30% lower than the average rate of the 1980s.
New startups are critical for growth since many of today’s heavyweights will decline as new businesses take their place. For example, only half of the Fortune 500 firms in 1995 remained on that list in 2010.
Startups in high technology have also declined since 2000 even though there is no slowdown in the development of new technology.

Consistent with the recommendations of James Bessen in a recent post of mine, “Learning by Doing,” Messrs. Prescott and Ohanian recommend policy changes such as:

Better training, plus immigration reform, to produce more skilled workers.
Streamlining regulations that raise cost, especially for small businesses.
Tax reform to reduce marginal tax rates.
Reforming Dodd-Frank to make it easier for small businesses to obtain loans from main street banks.

In today’s New York Times, the economist Tyler Cowen wonders whether our economy is in the midst of a “Great Reset.” “Perhaps the most crucial issue is whether economies will return to normal conditions of steady growth, or whether we are witnessing a fundamental transformation” to a less productive economy.
Here’s another way to put it: shall we attempt to adopt better pro-growth policies or shall we just give in to the status quo and accept that we can’t do any better? Are we optimists or are we pessimists?

Learning By Doing III. Limiting the Influence of Lobbyists

Posted on May 14, 2015 by jackheidel

The eclectic entrepreneur/economist/law professor, James Bessen, suggests how to boost our stagnant economy in a new book, “Learning by Doing: the real connection between innovation, wages and wealth.” The idea is to make fuller use of new technology by putting more emphasis on practical vocational training, ending government favoritism for established businesses, and by removing regulatory roadblocks to job mobility and entrepreneurship. He also thinks that the greatest hindrance to progress on these fronts is the influence of lobbyists and, more generally, “the growing role of money in politics.”
How do we limit the ability of lobbyists, with their huge financial resources, to slow down the opening up of new technology to the broadest possible group of participants? Some people would say this can only be done by curtailing the use of money in politics. But this is virtually impossible. Spending money to get your message out is really just a form of speech and the First Amendment to the Constitution says that “Congress shall make no law abridging the freedom of speech.”
Rather than trying to restrict the ways in which lobbyists can spend their money, we could alternatively try to immunize our elected representatives from its effect, in one or both of these two different ways:

Pass a Balanced Budget Amendment to the Constitution. Such an amendment would likely create the discipline needed for Congress to be able to set priorities and decide what is more or less important with regard to the overall economy. Spending programs, tax revenue, and the effects of regulation would all have to be considered together to maximize economic efficiency. Lobbyists would have far less power to push one particular program independently of how it relates to everything else.
Term Limits for national office. Knowing that one’s time in office is limited would help provide the strength to make the difficult tradeoffs necessary for good legislation and make officeholders more immune to special interest influence.

Conclusion: Rather than making a likely futile attempt to reduce the amount of money in the political process, change the process sufficiently so that money doesn’t have as much influence!

Learning By Doing II. The negative influence of lobbyists

Posted on May 12, 2015 by jackheidel

My last post reported on a new book by James Bessen, “Learning by Doing: the real connection between innovation, wages and wealth.” It makes several recommendations for how the U.S. can better meet the challenges posed by the hollowing out of the middle class, as illustrated in the chart just below from the Dallas Federal Reserve.
Mr. Bessen blames one primary culprit for this problem: the growing role of money in politics. For example:

The dramatic growth in occupational licensure from 70 occupations covering 5% of the workforce in the 1950s to over 800 occupations covering over 29% of the workforce in 2008. Such a major change can only be understood as the outcome of massive lobbying.
Defense procurement. For example, in 2012 the defense industry spent $132 million on over 900 lobbyists. It is hardly surprising that defense procurement rules have favored established defense contractors at the expense of start-up technology firms.
The best patent law money can buy. Patent trolls have continued to file more lawsuits, despite the America Invents Act of 2011. A new legislative effort for patent reform in 2013 passed the House by a margin by a margin of 325 to 91 but then was killed by the Senate in May 2014.
Changes in trade secret law. The problem is that more uniform trade law, which sounds desirable, also broadens its scope which then limits employee mobility and the creation of spin-offs.
Strong enforcement of non-compete agreements in Massachusetts protects established firms but hurts startups. This has given Silicon Valley companies a big advantage over the companies on Route 128 outside of Boston.

Mr. Bessen makes a very strong case for the harmful effects of lobbyists and their money in retarding economic growth. But how can we possibly curtail the influence of lobbyists without limiting their freedom of speech? Stay tuned for the next post!

Learning By Doing

Posted on May 10, 2015 by jackheidel

The two biggest problems facing our country today are a stagnant economy and an exploding national debt. Faster economic growth would help pay our bills by bringing in more tax revenue. It would also create more jobs and give a boost to stagnant wages. One of the causes of this stagnation is that our economy has become less entrepreneurial over time as shown by this often cited chart from the Brookings Institution.
A very interesting new book by James Bessen, “Learning by Doing: the real connection between innovation, wages and wealth.” looks at both our economic history and our current economy to understand how society can best meet the challenges posed by new technology. Mr. Bessen identifies the basic problems as follows:

Funds have been shifted away from vocational education and community colleges at a time when large numbers of workers could acquire valuable skills at these institutions.
The rapid growth of occupational licensing restricts training and jobs open to mid-skill workers and, in many cases, limits their use of technology.
Military procurement favors large defense contractors over start-up firms, while heightened secrecy requirements limit the development of open standards and the broad sharing of knowledge.
Job mobility has declined, limiting knowledge sharing and weakening labor markets.
Abusive patent litigation has exploded, making it harder for startups and small firms to develop new technology.

Mr. Bessen concludes:“The practical skills of ordinary people have been a wellspring of widely shared wealth for 200 years, and the economic power of mighty nations rests on the technical knowledge of the humble. Provide the means for ordinary workers to acquire the skills and knowledge to implement new technology today and the economic bounty will not only grow, it will be widely shared.”
What are the roadblocks to implementing Mr. Bessen’s recommendations? I will return to this question later.

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility

Tag Archives: economic growth