What Is the State of the U.S. Economy?

Posted on January 28, 2014 by jackheidel

On the eve of the President’s State of the Union address, the New York Times gives an answer to this question in today’s paper, “Obama’s Puzzle: Economy Rarely Better, Approval Rarely Worse”. The charts below do show the basic trends all moving in the right direction. But is this good enough?
The unemployment rate is moving steadily downward but it is still a high 6.7% almost five years after the recession ended in June 2009. And this is with a labor participation rate of only 58.6%, which is historically very low.
The budget deficit is dropping but is still unsustainably high. In the five years, 2009 – 2013, deficits have totaled $6 trillion dollars. As soon as interest rates return to their historical average of 5%, interest on this $6 trillion in new debt alone will total $300 billion per year, forever! Furthermore, the Congressional Budget Office, the most credible source of budget information, predicts that the deficit is likely to resume an inexorable climb within a few years as baby boomers retire in ever greater numbers, rapidly driving up entitlement costs.
Economic growth was stronger than expected in the last quarter of 2013 and this is a good sign. But it has averaged only about 2% since the recession ended which is very low by historical standards, in a post recessionary period.
The point is, do we really need to settle for such mediocre performance: a stagnant economy, high unemployment and massively accumulating debt? Should we just declare that in a highly competitive global economy with an ever higher premium on information and technology, that we just can’t do any better than we already are? Isn’t there some way to make our economy grow faster in order to provide more and higher paying jobs?
I think that the answer to this last question is an emphatic yes! In fact, this is what my blog is all about. Just read some of the other recent posts and let me know if you disagree with what I am saying!

A Global Perspective on Income Inequality II. Where Are the Jobs?

Posted on January 26, 2014 by jackheidel

My last post on January 23 shows vividly what the challenges are in restoring the American middle class to the prosperity which existed up until the Great Recession hit in late 2007. The problem, of course, is the gale strength force of globalization which is lifting up low wage workers all over the developing world and creating huge competition for the many low-skilled workers in the United States.
In today’s New York Times, the former Obama Administration car czar, Steven Rattner, writes about “The Myth of Industrial Rebound” in the United States, explaining why manufacturing jobs are coming back much more slowly than other jobs. “Manufacturing would benefit from the same reforms that would help the broader economy: restructuring of our loophole-ridden corporate tax code, new policies to bring in skilled immigrants, added spending on infrastructure and, yes, more trade agreements to encourage foreign direct investment.”
The above chart shows the huge decline in manufacturing jobs relative to other parts of the economy such as the education and health sector as well as the professional and business sector. Of course, these more rapidly growing service sectors are the ones benefitting from the information technology revolution. In manufacturing, on the other hand, the low skill jobs are going overseas while the high skill jobs, using technology such as robots, are much fewer in number.
Conclusion: in order to increase manufacturing jobs in the U.S., we better government policies, as outlined above by Mr. Rattner. But we also need to recognize that there aren’t going to be as many high skilled manufacturing jobs in the future. We are going to need much better K-12 and post-secondary educational outcomes to prepare the middle class for the high skilled service jobs which will predominate in the future.

A Global Perspective on Income Inequality

Posted on January 23, 2014 by jackheidel

In connection with the annual World Economic Forum in Davos Switzerland, the World Bank has published a breakdown of income growth around the world, as reported yesterday by the Wall Street Journal in the article “Two-Track Future Imperils Global Growth”. The key finding, as shown in the chart below, is that it is precisely the middle class in the developed nations which saw the slowest income growth in the years from 1998-2008.
It is clear from this chart what is going on around the world. The top 1% makes its money from capital investments and historically the return on capital exceeds economic growth. The next 9% are both the skilled workers and the educated professionals who are benefitting from the growth of knowledge industry. The medium skilled middle class in the developed world, from the 75^th percentile through the 90^th percentiles, are the ones who are seeing the smallest income gains. Their jobs are being eliminated by the force of globalization which is shifting lower skilled work to lower paid workers in the developing world.
The article points out, consistent with the above chart, that the income, including benefits, of the poorest 50% in the U.S. grew 23% in this same time period. So it really is the middle class which is hurting the most in the U.S. There are three basic ways of addressing this problem:

The federal government can help by taking much stronger measures to boost the economy thereby creating more jobs as well as higher paying jobs. Tax reform, trade expansion, immigration reform and fiscal stability are what is needed to get this job done.
The states can help by improving our K-12 education system to make sure that everyone acquires the basic academic skills, such as reading and math, which they will need to achieve their highest potential in life.
All concerned and aware individuals (such as ourselves!) must constantly beat the drums to encourage young people to stay in school and take learning seriously.

America is “exceptional” because it is the strongest, freest, and wealthiest country the world has ever known. But our future success is by no means guaranteed. We have to constantly work for it and earn it!

Harnessing Market Forces versus Offsetting Market Forces

Posted on January 21, 2014 by jackheidel

The economist Matthew Slaughter writes in today’s Wall Street Journal that ’High Trade’ Jobs Pay Higher Wages. He points out that the 22.9 million Americans who work for U.S. headquartered multinational companies made an average of $73,338 in 2011 compared with the overall average wage of about $55,000 that year. “Workers in multinational firms earn more, as global engagement fosters innovation and productivity growth.”
“There is a growing concern about stagnant or falling incomes, yet most of the measures proposed to deal with the issue – raising the minimum wage and reinstating unemployment benefits – purport to help workers by offsetting market forces. Less attention is given to harnessing market forces.”
This can be done by “liberalizing U.S. trade, investment, immigration and tax policies.” In other words, we need more trade agreements like NAFTA, which has been so successful in increasing trade in North America. We need more high skilled workers, both domestic and foreign. We need lower corporate tax rates to encourage multinational corporations to bring their trillions of dollars in overseas profits back home.
We should always strive for a more equal society with less income inequality. But the best single way to do this is to create more opportunity by growing the economy, i.e. by harnessing market forces.

How To Address Inequality: A Summary

Posted on January 19, 2014 by jackheidel

I have had many recent posts addressing the problem of income inequality in the United States and what can and should be done about it. Below is a chart, from the Congressional Budget office, which also appeared in my December 24, 2013 post. It shows that all income groups have made gains since 1980 but that higher income groups have gained the most.
This means that income inequality is increasing. The question is what to do about it. My own attitude is to try to provide more economic opportunity for low income people. How do we do this in the most effective way?

First and foremost by stimulating the private economy to grow faster and therefore to create more and higher paying jobs. This can be done with broad based tax reform (lowering tax rates offset by closing loopholes), fiscal stability achieved by eliminating deficit spending, expanded foreign trade for a more efficient global economy, and finally, immigration reform to give legal status to undocumented workers and allow more high skilled foreigners to immigrate to the U.S. Such measures as these require action by Congress and the President.
Secondly, by improving human capital, meaning fixing underperforming schools, improving rundown neighborhoods, combatting inner city crime more effectively, providing at least part-time jobs to young people and combatting teenage pregnancy. Problems such as these are best addressed at the state and local level.
Finally, providing more motivation for the unemployed and underemployed to find jobs and hold onto them. A very effective way to do this is with the federal Earned Income Tax Credit. It supplements the salary of working adults with children. New York City is conducting an experiment to see if a similar program will also motivate childless adults to try harder to find work and stay employed.

Conclusion: the best way to address inequality is to give people the best possible opportunity to obtain full time employment. This means 1) creating more jobs, 2) providing better qualified workers for all jobs and 3) motivating the unemployed more strongly to find jobs and hold on to them.
Government at all levels can help people find jobs, in one way or another, and therefore become more productive citizens. This will lead to a happier, healthier, and therefore a stronger society. All of us will benefit from this happening!

Who Are the Enemies of the Poor?

Posted on January 14, 2014 by jackheidel

In his usual provocative fashion, New York Times columnist Paul Krugman says that Republicans are “Enemies of the Poor” because “they’re deeply committed to the view that efforts to aid the poor are actually perpetuating poverty, by reducing incentives to work.”
But the Heritage Foundation’s Robert Rector has recently pointed out in the Wall Street Journal, “How the War on Poverty Was Lost”, that “the typical American living below the poverty line in 2013 lives in a house or apartment that is in good repair, equipped with air conditioning and cable TV. He has a car, multiple color TVs and a DVD player. The overwhelming majority of poor Americans are not undernourished and did not suffer from hunger for even one day of the previous year.” In fact we are now spending $600 billion a year of our $3.4 trillion federal budget and another $230 billion by the states to fight poverty. The poverty rate was 19% in 1964 and is 16% today (when government benefits are included).
Mr. Rector reminds us that “LBJ’s original aim (in initiating his antipoverty program) was to give poor Americans ‘opportunities, not doles’. It would attack not just the symptoms of poverty but, more important, remove the causes. By that standard, the war on poverty has been a catastrophe. The root ‘causes’ of poverty have not shrunk but expanded as family structure disintegrated and labor force participation among men dropped.”
So what should our poverty agenda look like going forward? We are already providing the basic necessities of life. Our future efforts should therefore be focused on improving the quality of life for the poor. This means more effective education and job training. It means more effort to keep families together by reducing marriage penalties. But most of all it means providing more opportunities for employment and job advancement. This requires faster economic growth. There are many ways to accomplish this. Back to square one!
The true enemies of the poor are those who refuse to accept the progress which has been made in the War on Poverty and the need to change our approach in order to make further progress.

How Do We Increase Economic Mobility?

Posted on January 12, 2014 by jackheidel

As the Wall Street Journal reported several days ago, “Economic Mobility Is the New Flashpoint”. “Both parties agree the opportunity gap is widening, but the proposed solutions are starkly different.” The Democrats want to increase the minimum wage, extend unemployment benefits, and expand access to college. The Republicans suggest a whole potpourri of approaches such as reforming welfare (including food stamps), extending school choice, cutting taxes, and relaxing regulations on new businesses.
A look at the latest jobs report from the Labor Department should provide the focus which Congress needs to figure out how to increase economic opportunity. Although the unemployment rate dropped substantially to 6.7% from 7.0% at the beginning of December, only 74,000 new jobs were created in December. The explanation is that 347,000 left the labor force last month. The labor force participation rate, the share of the U.S. working-age population employed, age 16 and over, has dropped from 64.5% in 2000, to just under 63% at the beginning of 2008 to near a post-recession low of 58.6% last month (see chart below).
In other words, Congress should be totally focused on speeding up economic growth in order to create more jobs. Since new businesses create the most new jobs, we should indeed relax as many regulations as possible which impede entrepreneurship. We should lower the corporate tax rate from its very high current value of 35% to get American multinational companies to bring their trillions of overseas profits back home for reinvestment in the U.S. Moving to a national consumption tax (see the Graetz Plan discussion in my January 7 post), could mean dropping the corporate tax rate to as low as 15%.
Isn’t is obvious that the best thing we can do to give low income people an opportunity to rise up the economic ladder is to just give them a job in the first place? If they’re ambitious they’ll take any opportunity they can get and run with it!

Why a High Corporate Income Tax Is So Damaging to Our Economy

Posted on January 9, 2014 by jackheidel

My previous post, “Fundamental Tax Reform Is the Key to Solving Our Economic and Fiscal Problems II. The Graetz Plan”, describes a tax reform plan which establishes a 14% national consumption (VAT) tax, exempts families earning under $100,000 from paying any income tax and also reduces the Corporate Income Tax to 15%. All of this is done in a revenue neutral manner while also preserving all of the progressivity of our current income tax system.
A recent Op Ed column in the New York Times, by the economist Lawrence Kotlikoff, “Abolish the Corporate Income Tax”, makes the case that such a proposal “might sound like a gift to the rich, but it would actually help workers. … Apple’s tax return says it all: The company, according to one calculation, paid only 8% of its worldwide profits in United States corporate income taxes, thanks to piling up most of its profits and locating far too many of its operations overseas.”
Our corporate income tax rate, at 35%, is one of the highest in the world and this is what encourages American multinational companies to move their business to other countries. Whether we abolish the corporate income tax entirely, or just reduce it to 15%, is less important than recognizing the need to overcome popular prejudice about big business and make fundamental changes in our tax structure.
Solving our country’s many problems, from rising inequality at home to projecting adequate strength around the world, requires that the U.S. have a strong economy. An annual growth rate of 2% of GDP is not nearly good enough to end our current economic stagnation. To accomplish this will require overcoming the strong headwinds of increasing global competition and the replacement of people with machines. We will need innovative thinking and initiative to break out of the old ways of doing things which are holding us back.
Are the American people “exceptional” enough to accomplish this challenging task?

Fundamental Tax Reform Is the Key to Solving Our Economic and Fiscal Problems II. The Graetz Plan

Posted on January 7, 2014 by jackheidel

The Yale Tax Law Professor, Michael Graetz, has proposed a new tax system “100 Million Unnecessary Returns: A Simple, Fair, and Competitive Tax Plan for the United States” which would do wonders towards straightening out the huge fiscal and economic problems now facing our country.
How do we rev up the national economy in order to put more people back to work and, at the same time, raise the revenue needed to operate the government in the 21^st century without mountains of debt? Mr. Graetz’s basic idea is to tax consumption rather than relying totally on an income tax. Under his plan both savings and investments will be taxed at a lower rate which will encourage more of both. The Plan has these features:

A broad based Value Added Tax of about 14% is enacted on goods and services. The U.S. is the only advanced economy without a VAT.
Families earning less than $100,000 are exempted from the income tax. For incomes between $100,000 and $250,000, the tax rate would be 15%. For income over $250,000, the rate would be 25%.
The corporate income tax rate is lowered to 15%.
The Earned Income Tax Credit (EITC) is used to provide relief from the VAT burden to low-income families by using payroll tax offsets.
The plan is designed to be revenue neutral as verified by the Tax Policy Center.

This plan has many advantages including:

Taxing consumption and lowering the corporate tax rate to 15% from its current level of 35% would dramatically encourage investment in the U.S. thereby stimulating the economy and creating both new jobs and higher wages for American workers.
It would eliminate more than 100 million of the 140 million U.S. tax returns.
With many fewer Americans paying income taxes there would be far less temptation for Congress to use income tax exclusions, deductions and credits to try to address social and economic problems.
The plan retains all of the progressive features of our current tax system whereby higher income earners pay higher tax rates.

The point of describing the Graetz Plan in some detail is not to suggest that it is the best way to implement tax reform but rather that here, at least, is one attractive way to do it. The purpose is to move the discussion forward. We badly need to make changes along these lines!

Fundamental Tax Reform Is the Key to Solving Our Economic and Fiscal Problems I. Why Change Is Needed

Posted on January 5, 2014 by jackheidel

I have been writing this blog for just over a year. It addresses what I consider to be the two biggest problems faced by our country at the present time. First is our enormous national debt, now over $17 trillion, and the huge annual budget deficits which are continuing to make it worse. The second problem, of equal magnitude, is our slow rate of economic growth, about 2% of GDP annually, ever since the Great Recession ended in June 2009.
These two problems are closely related. If the economy grew faster, federal tax revenue would grow faster and the annual deficit would shrink faster. Not to mention that a faster growing economy would create more jobs and lower the unemployment rate, which is still a high 7%.
The impediments to solving these problems are huge. Our public debt, on which we pay interest, is now over $12 trillion or 73% of GDP. Although it may stabilize at this level for a few years, it will soon begin climbing much higher, without major changes in current policy. This is primarily because of exploding entitlement spending for retirees (Social Security and Medicare) who will increase in number from about 50 million today to over 70 million in just 20 years. As interest rates return to normal higher levels, just paying interest on the national debt will become, all by itself, a larger and larger drain on the economy.
The impediments to faster economic growth are increasing global competition, such as inexpensive foreign labor, as well as rapid advances in technology, such as electronics and robotics. Both of these trends reduce the need for unskilled workers in America which in turn holds down wages and slows down economic growth.
At the same time we have an antiquated tax code to raise the huge sums of money necessary to pay for a large and complex national government. It worked fine through the post-World War II period, as long as the U.S. had the dominant world economy with little significant competition from others. But this situation no longer exists. We now have a tax system which doesn’t raise enough money to pay our bills and at the same time is so progressive that the highest rates (39.6% on individuals and 35% for corporations) are not sufficiently competitive with other countries. This discourages the entrepreneurship and business investment we need to grow the economy faster and create more jobs.
We have an enormous problem on our hands! Is it possible to fundamentally change our tax system to turn things around? My next post will answer this question in the affirmative!

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility

Tag Archives: economic growth