Tag Archives: economic growth

Is Economic Growth Environmentally Sustainable?

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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.

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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

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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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The Connection between Taxes and Growth

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One of my favorite economic journalists is Eduardo Porter of the New York Times who writes the weekly column Economic Scene. In his latest column.  He points out that taxes (federal, state and local) for the U.S. and the O.E.C.D. average were about the same 27% of GDP in 1969.  But now, almost 50 years later, the U.S. tax level has stayed the same while the O.E.C.D. average has grown by 7% (see chart below).


Mr. Porter says that according to Wagner’s Law “government spending as a share of the economy will increase as nations get richer and their citizens demand more and better public services.”
Americans may be receiving fewer public services than citizens of the OECD countries but we are also enjoying faster economic growth as pointed out by the AEI scholar James Pethokoukis using data from the International Monetary Fund (see chart below).


According to the Pew Research Center our median family wage is also one of the highest in the world (see chart below).


As pointed out by Mr. Pethokoulis, lower taxes are a fundamental reason for the superior performance of the U.S. economy.  Other (tax-related) reasons are:

  • The most competitive large economy as ranked by the World Economic Forum.
  • An entrepreneurial culture fueled by a willingness to take risks.
  • Labor markets which generally link workers and jobs unimpeded by excessively restrictive labor regulations.
  • A growing population fueled by immigration based on economic opportunity.
  • A culture and tax-transfer system that encourages hard work and long hours.
  • A favorable regulatory environment, relatively speaking.
  • A decentralized political system in which states compete both tax-wise and by other means.

Conclusion. Americans pay lower taxes than other developed countries and also enjoy faster economic growth and higher median wages than most. There appears to be a strong connection between these three fundamental measures of economic wellbeing.

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Improving the Republican Tax Plan

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The Republican tax plan has many good features and is now moving along in Congress. The best feature of all is reducing the top corporate rate from 35% to 20%.  This will make the U.S. internationally competitive and create a strong incentive for all multinational companies to conduct more business in the U.S. and for U.S. multinationals to bring their profits back home for reinvestment.
The Tax Foundation estimates that the Senate version of the Plan will lead to the creation of 925,000 new jobs and an after tax income gain of $2,598 for a middle-income family over a ten year period.
But there are several parts of the plan which could be significantly improved.  For example:

  • Revenue neutrality, at least on a dynamic basis (taking growth into account) is essential. Our national debt is way too large to ignore.

  • Shrinking more deductions, to achieve revenue neutrality. The mortgage interest deduction should be eliminated completely, not just limited to $500,000 mortgages. Same for the state and local tax deduction.
  • More progressivity. Keep the estate tax to bring in more tax revenue. Scrap the lower 25% rate for a pass-through business tax because it will be too easy to abuse.  The Congressional Budget Office has estimated that eliminating the individual mandate for the ACA will save $338 billion over ten years.  It will also save millions of Americans from having to pay a tax penalty of $695 or more for not having health insurance.
  • Emphasis on growth. Make expensing (i.e. immediate write-off) for new investment a permanent feature rather than limited to five years only.

Conclusion. There are lots of good features in the Tax Reform Plan. Several changes would make it even better.  As soon as it achieves stability in the legislative process, the CBO will analyze its fiscal and economic effects.  At this point revenue neutrality will be essential for achieving broad support.

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Donald Trump and Isolationism, Protectionism and Nativism

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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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How to Make America Stronger

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Americans are very fortunate indeed to live in such a strong, prosperous and free society.  But not all of us share in this good fortune.  How can we help the less fortunate among us have a better chance to succeed in life?

Here are several things we can do, in rough order of importance:

  • Grow the economy faster than the 2.1% growth rate which has prevailed since the end of the Great Recession in June 2009. Faster growth means more new jobs are created and higher wages are paid for existing jobs. Success in life for most people includes earning an adequate income to live comfortably without major wants. Appropriate deregulation and tax reform are the best ways to speed up growth.
  • Improve basic education so that more people can qualify for rewarding jobs. Right now too many kids from minority and other low-income families are not graduating from high school with the skills they need to succeed in life. Two promising solutions to this problem are more charter schools and expanded early childhood education, both targeted at kids from low-income families.
  • Alleviate poverty in a productive manner by emphasizing work requirements for most, if not all, welfare programs. Higher work force participation and lower poverty rates are strongly correlated. Work not only provides income but also provides dignity and purpose in life.
  • Promote two parent families. Two parent families are much less likely to be poor than single parent families and also more likely to be supportive of their children’s education. Federal tax policy should always encourage child raising by two parent families for this reason.

Conclusion. America will become an even stronger country than it already is if more people, especially from low-income and minority families, have the education, work training and personal qualities to make a positive contribution to society.

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Understanding Economic Growth

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One of the major topics I discuss on this blog is:

  • Economic growth, in particular the fact that the U.S. economy has grown at the relatively slow rate of 2.1% per year since the end of the Great Recession in June 2009. It appears, however, that the economy may now be starting to pick up speed.

There are plenty of “experts” who say that it is unrealistic to expect economic growth to continue indefinitely at the same level (3% on average) which has prevailed since the end of WWII because:

  • Resources are limited. The earth is finite but it is also vast. It is unlikely that any mineral or even energy source such as fossil fuels will be depleted for hundreds, if not thousands, of years. If and when any particular resource becomes scarce, human ingenuity will be able to find a replacement.
  • Population growth is slowing down. It is likely that human population worldwide will level off this century somewhere between 9 and 10 billion. This is highly desirable but is unlikely to slow down economic growth. As income and education levels rise, productivity and GDP per person will also increase.
  • Growth tends to be debt financed which is unsustainable.  I agree with this reservation. This is the one problem, if not solved, which has the potential to derail continued steady progress.

The remarkable human progress of the last 200 years is likely to continue indefinitely.  In particular:

Conclusion. The world has enjoyed remarkable human progress in the last two hundred years, in the form of steady economic growth, and this progress is likely to continue indefinitely into the future.

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Responding to Economic Trends

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In my most recent posts I have been making the case that

  • The American economy is in basically good shape with a low unemployment rate of 4.2% and the likelihood of somewhat faster growth in the near future.
  • Income inequality and poverty are real problems, see here and here, but there are reasonable and effective ways to address them.
  • Rapidly accumulating debt is by far our most critical unsolved problem which is all the more frightening because our polarized political system does not seem capable of addressing it.

The Bureau of Labor Statistics has just released its projections of what the U.S. economy will look like in 2026.


The highlights are:

  • More dominated by the service sector amid the continuing erosion of manufacturing jobs (see two charts below).

  • More polarized in both earnings and geography (see top and bottom charts).

  • More tilted towards jobs which require at least a bachelor’s degree (see bottom chart).

The BLS report has several ramifications for public policy as follows:

  • Improved educational outcomes are needed all along the line: K-12 basic and vocational, training programs for the many skilled jobs going begging and also more low-cost college programs.
  • More low-skill immigrants, not fewer, are needed to take on the expanding number of low-wage jobs, such as caring for the growing numbers of elderly, which Americans are not willing to do.

Conclusion. These economic trends towards more earnings and geographical polarization could easily make our current political polarization even worse than it already is. This means it is all the more important to make sure that we keep speeding up economic growth, better address income inequality and poverty and get our gargantuan debt problem under control.

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Which Is Worse: Republican Hypocrisy about Debt or Democratic Complacency about It?

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My recent posts about the American Idea have argued that our country has a great future before it.  We have a strong and prosperous economy and are the world’s leading innovator.  Furthermore there are clear cut and effective ways to address the income inequality and poverty which hold back many Americans from fully sharing the benefits of our remarkably successful society.
But there is one huge problem our political system is ignoring which will lead to a major crisis if left unattended much longer.


I am referring, of course, to our gargantuan:

  • National Debt, now sitting at 77% of GDP (for the public part on which we pay interest), the largest it has been since the end of WWII. It is predicted by the Congressional Budget Office to keep steadily getting worse without major changes in current policy. Right now all of this debt is essentially “free money” because interest rates are so low.

Republicans are very good at deploring the debt but quick to forget about it, when it gets in the way of cutting taxes.  Note that:

  • Economic growth is created by tax cuts but only 10-20% of the lost revenue from tax cuts is offset by new growth.

Democrats, on the other hand, don’t take the debt seriously, except when arguing against Republican tax cuts. Debt deniers claim that the risk of government overspending is inflation, not bankruptcy. What they don’t understand is that

  • Interest rates will return to more normal (and much higher) historical levels eventually and, when this happens, interest payments on the debt will skyrocket by hundreds of billions of dollars every year. This will crowd out all sorts of spending on popular domestic programs. It is likely to lead to a new fiscal crisis, much worse than the Financial Crisis of 2008.

Conclusion. For all of our nation’s great strengths, we are in a very serious fiscal pickle, with no clear cut path of orderly resolution. Realistically our debt problem cannot be wound down without committed Presidential leadership and this is unlikely to happen anytime soon.

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