Tag Archives: economic growth

Where Are the Jobs? III. The Real Inequality Gap

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Today’s Wall Street Journal has a story “Job Gap Widens in Uneven Recovery”, which shows how unbalanced the economic recovery is.  For workers aged 25 and older, unemployment is only 6%, compared to the overall unemployment rate of 7.3%.  But for the young, ages 16 – 24, unemployment is 15%.  Since the end of the recession in June 2009, wages have risen by 12% for the highest paid 25% of all workers.  For the lowest paid 25%, wages have only risen by 6% over this time period.
“Households earning $50,000 or more have become steadily more confident over the past year and a half.  Among lower income households, confidence has stagnated.  The gap in confidence between the two groups is near its widest ever.  That isn’t only bad for those being left behind.  It’s also hurting the broader recovery, because it means families are able to spend only on essential items.  Consumer spending rose just .1% in September 2013, after adjusting for inflation.”
Unfortunately, this data is entirely consistent with other gloomy economic trends which I have been reporting on recently such as the threat of technology to the middle class, the increased competition from globalization, and the shrinking size of the labor pool because of baby boomer retirements.
The New York Times has a running series of articles on “The Great Divide” and how to address it.   Here is a clear cut example of this divide: how older, better trained and more affluent Americans are recovering from the recent recession more quickly than the less well off.  This evident unfairness is damaging to the health of our society.  The question is how do we address it in an effective manner?
The basic problem is the overall slow growth of the economy, about 2% of GDP per year, since the recession ended in June 2009.  There are many things that policy makers can do to speed up this growth if they were only able to set aside ideological differences.  The best single action by far is tax reform, for both individuals and corporations, lowering overall rates in exchange for reducing deductions and loopholes which primarily benefit the wealthy.
Here is yet another reason why it is so important to speed up the growth of our economy.  How exasperating that our national leaders cannot figure out a way to come to together and get this done!

Does Our Economy Need More Inflation?

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The lead story in this week’s Economist, “The Perils of Falling Inflation” and a recent article in the New York Times, “In Fed and Out, Many Now Think Inflation Helps“, both make the case that the U.S. core inflation rate of 1.2%, excluding food and energy prices, is dangerously low, risking deflation.  “Rising prices help companies increase profits; rising wages help borrowers repay debts.  Inflation also encourages people and businesses to borrow money and spend it more quickly.”
But there is another distinctly different point of view.  In a Barron’s column last week “Deflating the Inflation Myth”, Gene Epstein points out that “business activity is motivated by profit, not prices.”  He shows with a chart that profits decreased during the highly inflationary 1970’s and 1980’s but they have been increasing since the end of the recession in 2009, even with very low inflation.  The key to boosting the economy is more business investment and risk taking but a higher rate of inflation is not the way to accomplish this.
In a speech at the Economic Club of New York in June of this year, former Fed Chair Paul Volcker said that “the implicit assumption behind that siren call (to let inflation increase) must be that the inflation rate can be manipulated to reach economic objectives – up today, maybe a little bit more tomorrow, and then pulled back on command.  All experience amply demonstrates that inflation, when fairly and deliberately started, is hard to control and reverse.”
As soon as interest rates go up as they surely will in the not too distant future, interest payments on our now enormous national debt will skyrocket and become a huge drag on the economy.  If and when inflation goes up, it will pull interest rates up along with it.  Let’s not push inflation, and therefore interest rates, up any faster or higher than necessary!

Labor’s Share of National Income Is Falling

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The latest issue of the Economist shows quite dramatically in the article “Labour Pains” that labor’s share of national income is dropping.  In the U.S. workers’ wages have historically been about 70% of GDP.  In the early 1980s this figure started falling and is now 64%.  Similar declines are occurring in many other countries.
This phenomenon is closely related to what others are observing as I have reported recently.  Tyler Cowen’s new book “Average is Over” discusses the threat of technology to the middle class.  Daniel Alpert in “The Age of Oversupply” talks about the increase of competition from various global forces.  Stephen King’s “When the Money Runs Out” makes the case that “a half-century of one-off developments in the industrialized world will not be repeated.”
Historically the stability of the wage to GDP ratio “provides the link between productivity and prosperity.  If workers always get the same slice of the economic pie, then an improvement in their average productivity – which boosts growth – should translate into higher average earnings. … A falling labour share implies that productivity gains no longer translate into broad rises in pay.  Instead, an ever larger share of the benefits of growth accrues to the owners of capital.”
A shrinking share of a GDP which itself is slowing down is a double whammy.  The only way to address the problem effectively is to deal with the root causes.
First of all, we need to boost overall economic growth by the proven methods of broad based tax reform, especially including much lower corporate tax rates, making regulations less onerous, carrying out immigration reform, and giving special attention to helping entrepreneurs create new businesses.
How can we, additionally, help low skilled and low waged workers move up the ladder?  Long term the most worthwhile action is to change K-12 education by putting more emphasis on career education to produce more highly skilled workers.  Short term, we should provide crash job training for the estimated three million current job openings in the U.S. which require skilled workers.
Economic inequality in the U.S. is becoming progressively worse all the time.  There are fiscally sound ways to address this alarming problem and it is important that they be clearly and forcefully advocated.

Many Skilled Jobs Are Going Begging in the U.S.

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A few days ago the Omaha World Herald ran a story, ”Manufacturers Want More Young People to Consider a Job on the Factory Floor”, pointing out that there are almost 100,000 manufacturing jobs in Nebraska paying an average salary of $55,000 per year, many of which are unfilled because of a lack of qualified applicants.  Says Dwayne Probyn, Executive Director of the Nebraska Advanced Manufacturing Coalition, “Science, technology, engineering and math, that’s what we need.”
This is in fact a nationwide problem.  A few weeks ago the New York Times had an article, “Stubborn Skills Gap In America’s Work Force” reporting on a recent study by the Organization for Economic Cooperation and Development assessing literacy, math skills and problem solving using information technology, for people aged 16 – 65, in the 22 advanced nations of the O.E.C.D..  Eduardo Porter reports that while the U.S. is about average in literacy skills, it lags way behind in both math and problem solving skills.
One question addressed by Mr. Porter is the much larger wage premium for highly skilled U.S. workers over unskilled workers, than in most other O.E.C.D. countries.  Another question is “how can the U.S. remain such an innovative, comparatively agile economy if the supply of skilled workers is so poor?”  The suggested answer is troubling.  “The American economy rewards skill very well but the supply hasn’t responded.”
This situation is first of all an indictment of K-12 education in the U.S. which has a high school graduation rate of only 80% and also focuses too much on college preparation rather than career education.  These two problems are likely interrelated and at least partially explain the skills gap.
Another factor is immigration.  Right now the U.S. is still attracting more talented foreigners than other countries.  But it is risky to our economy to depend on foreign talent which can stay home as well as choosing to go elsewhere.  Immigration reform will help with this problem but improved K-12 education will help even more.

Are Deficit Fears Overblown?

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In yesterday’s Wall Street Journal columnist David Wessel responds too mildly in “Why It’s Wrong to Dismiss the Deficit” to Larry Summers’ view that we should not worry about the deficit.  Mr. Summers says, “Let me be clear.  I am not saying that fiscal discipline and economic growth are twin priorities.  I am saying that our priority must be on increasing demand.”  According to Mr. Wessel, here is the essence of Mr. Summers’ argument:

  • The deficit isn’t an immediate problem; growth is.
  • We’ve done enough (about the deficit) already.
  • The future is so uncertain that acting now is unwise.

Granted that the deficit for fiscal year 2013 is “only” $680 billion after four years in a row of deficits over a trillion dollars each and that interest rates are at an historically low level at the present time.  The problem is that the public debt is now at the very high level of 73% of GDP and is projected by the Congressional Budget Office to continue climbing indefinitely.  Interest on the debt was $415 billion for fiscal year 2013 which represents 2.5% of GDP of $16.8 trillion.  With GDP growth increasing at about 2% per year since the end of the recession in June 2009, this means that interest on the debt is already slowing down the economy and it’s just going to keep getting worse as interest rates inevitably return to higher historical levels.
Growth is very definitely an immediate problem.  But increased government spending is the wrong way to address it.  The right way to address it is with broad based tax reform (lowering tax rates in return for closing loopholes) to stimulate investment and risk taking by businesses and entrepreneurs.  Significant relaxing of the regulatory burden would also help, especially for the small businesses which are responsible for much of the growth of new jobs.  So would immigration reform to boost the number of legal workers.
As uncertain as the future is, we can be quite sure that entitlement spending (Social Security, Medicare and Medicaid) will be going up fast in the very near future as more and more baby boomers retire and the ratio of workers to retirees continues to decline.  It would be very risky indeed to assume that economic growth will increase fast enough to pay for increased entitlement spending.
Conclusion:  large deficits are a very urgent and immediate problem which we ignore at our peril!   Furthermore the best ways of boosting the economy don’t require increased government spending.

Must America Resign Itself to Much Slower Economic Growth?

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The cover story in this week’s Barron’s, by Jonathan Laing, “The Snail Economy, Slowing to a Crawl”, makes a well-documented argument that “over the next 20 years, the U.S. economy is likely to grow only 2% a year.  That’s down from 3% or better since World War II.  Blame it on an aging population and sluggish productivity growth.  Bad news for stocks and social harmony.”
Here’s an example of the argument he makes.  “Mean incomes of minorities in the U.S. population have remained at about 60% of white incomes in recent decades.  Unless that pattern changes, and minorities earn bigger incomes, that augers slower income growth for the overall population as the baby boomers, predominately white, retire over the next 20 years. …At the same time the minority population, particularly Hispanic, will expand. …If income relationships remain the same, U.S. median income growth will drop by an estimated 0.43% a year through 2020 and 0.52% a year over the succeeding decade.”
This demographic trend can be offset to some extent by boosting the ages at which Social Security benefits are received in order to lighten the burden on those who are working.  Immigration policy could be reformed to attract more highly skilled (and therefore more highly paid as well) workers to further offset the growing number of retirees.  “And most of all, the U.S. should engage in a crash educational program to close the gap in skills and income levels among different parts of the American population.”
In addition to the demographic challenge well described by Mr. Laing, there is the problem that growing economic efficiency (caused by advances in technology and ever more globalization) will continue to replace American workers by both machines and lower cost foreign workers.
It is imperative for us to set aside partisan ideology and dramatically confront all of these economic challenges to continued American supremacy on the world stage.  First and foremost we need fundamental tax reform, significantly lowering tax rates for all productive aspects of our economy, especially for investors, risk takers, entrepreneurs and corporations.  (Lower tax rates can be made revenue neutral by eliminating deductions and closing loopholes.)  We should simplify and streamline regulatory processes, again, to give all possible support to the businesses which can make the economy grow faster.
Our status in the world and therefore the future of our country depend on our success in this urgent endeavor!

Where Are the Jobs? II. How to Create More of Them

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My previous post, two days ago, introduced a new book by two economists, John Dearie and Courtney Geduldig, “Where the Jobs Are, Entrepreneurship and the Soul of the American Economy”.  They make a very strong case that net job creation comes primarily from businesses less than one year old, true “start-ups”.  But, unfortunately, there has been a huge drop off in the number of new businesses created each year since 2007 and, furthermore, the historical average of seven new jobs created by a firm in its first year has now fallen to less than five.
How do we reverse this alarming trend?  Here is what the authors have learned from the many entrepreneurs they have talked to:

  • “Not enough people with the skills we need”
  • “Our immigration policies are insane”
  • “Regulations are killing us”
  • “Tax payments can be the difference between survival and failure”
  • “There’s too much uncertainty and it’s Washington’s fault”

Although there are 24 million Americans either unemployed or underemployed, there are also 3 million advertised high skill job openings going begging and many more potential jobs available for qualified individuals.  A greater emphasis on STEM (Science, Technology, Engineering and Mathematics) education in the U.S. would help.  But also immigration reform is urgently needed.  The Senate has passed legislation to raise the annual cap on H1-B visas (for high skilled workers) from 65,000 currently to 110,000.  Hopefully the House will concur.
A Preferential Regulatory Framework for New Businesses could be devised to help fragile new businesses in their first five years.  A Regulatory Improvement Commission could be created to streamline the entire federal regulatory process.  Likewise a Preferential Tax Framework for New Business should be created and could, for example, recommend taxing income for the first five years at a much lower rate than normal.
Regarding policy uncertainty the authors refer to the U.S. Economic Policy Uncertainty Index which is at a very high level since the Great Recession.  Economic uncertainty obviously discourages business growth.
Conclusion:  A very good way to boost the economy and create more new jobs is to put greater emphasis on supporting entrepreneurs who are trying to start new businesses.  There are a number of concrete actions that the federal government can take to do this and doing so should be a very high priority for our national leaders.

Where Are The Jobs? I. The Basics

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Two economists, John Dearie and Courtney Geduldig, have just published a very interesting new book, “Where the Jobs Are, Entrepreneurship and the Soul of the American Economy”.   In April 2011, Mr. Dearie and Ms. Geduldig launched an effort to understand the nature and scope of the damage to the U.S. labor markets caused by the Great Recession and, if possible, identify new ways to enhance the economy’s job-creating capacity.
They quickly “learned of research that demonstrates how virtually all net new job creation in the United States over the past 30 years has come from businesses less than a year old – true ‘start-ups.’  Investigating further, they also learned that America’s job creation machine is faltering, with the rate of start-up formation declining precipitously in recent years.  To find out why, they launched an ambitious summer road trip – conducting roundtables with entrepreneurs in 12 cities across the nation.”  Here is what they learned.
First of all, the U.S. labor market is tremendously dynamic, as existing businesses create new jobs and eliminate others.  “In 2011, for example, 47.5 million separations occurred while 49.6 million Americans took new jobs.”  But “existing firms, of any age or size, in aggregate, nearly always produce more separations than hires.  … Indeed, existing businesses shed on a net basis a combined average of about 1 million jobs each year as some businesses fail, others become more efficient, and as separations simply outpace new hires.  By stark contrast, new firms in their first year of existence, create an average of 3 million new jobs.”
Unfortunately, there has been a huge drop off in the number of new businesses created annually since 2007.  Furthermore, the historical average of seven new jobs created by a new firm in its first year, has now fallen to less than five new jobs.
The obvious question which this discussion raises is: what policy changes are needed to boost the creation of new businesses?  This will be the topic of my next post in a couple of days!

When Will Young Obama Supporters Wake Up and See the Light?

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Yesterday’s weekend interview in the Wall Street Journal with money manager Stanley Druckenmiller, “How Washington Really Redistributes Income”, vividly illustrates how disastrous Obama economic policy has been for the young people who form the core of his coalition.  “High unemployment is paired with exploding debt that they will have to finance whenever they eventually find jobs.”
“I thought that tying Obama Care to the debt ceiling was nutty”, says Mr. Druckenmiller. “I did not think it would be nutty to tie entitlements to the debt ceiling because there’s a massive long term problem.  And this president, despite what he says, has shown time and time again that he needs a gun at his head to negotiate in good faith.”
How about the “rat through the python” theory which holds that the fiscal disaster will only be temporary while the baby-boom generation moves through the benefit pipeline and then entitlement costs will become bearable.  Unfortunately for taxpayers, “the debt accumulates while the rat’s going through the python,” so that by the 2030’s the debt and its enormous interest payments become bigger problems than entitlements.  “That’s where Greece was when it hit the skids”, he says.
What is Mr. Druckenmiller’s solution?  Raise taxes on dividends and capital gains up to ordinary income rates and eliminate corporate taxes all together.  This is justified because it ends double taxation of corporate profits.  But, in addition, the people who run the corporations would be more incentivized to invest the profits in growth and expansion.  Ending corporate taxation also ends crony capitalism and corporate welfare.  All of this would be “very, very good for growth which is a good part of the solution to the debt problem long-term.  You can’t do it without growth.”
Bottom line:  we urgently need to rein in entitlement spending but we also need smarter policies to grow the economy faster.  Young people ought to be totally on board with all of this.  When will they wake up and see the light?

Why Growth Is Getting Harder

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The Cato economist, Brink Lindsey, has just issued a new report, “Why Growth Is Getting Harder”.  See also Robert Samuelson’s Op Ed in yesterday’s Omaha World Herald, “Economic growth potion slowing to anemic trickle”.  Annual GDP growth has averaged over 3% since 1950.  But for the past four years, since the end of the Great Recession in June 2009, it has averaged barely 2% annually and, as Mr. Lindsey notes, this low growth rate is widely predicted to continue.
Historically the rate of GDP growth is attributed to four factors:

  • greater labor force participation, mainly by women
  • better educated workers, as reflected in high school and college graduation rates
  • more invested capital per worker
  • technological and organizational innovation

For example, women’s labor force participation went from 30.9% in 1950 to 59.9% in 2000.  Since then it has started to lag.  The national high school graduation rate is stuck at about 70% and realistically can’t go much higher.  Mr. Lindsey shows that both the national savings rate and domestic investment rate have been falling steadily since 1950.  Productivity growth was high from 1950 – 1979, high again from 1996 – 2004 and has fallen off again since.
Mr. Lindsey concludes “In the quest for new sources of growth to support the American economy’s flagging dynamism, policy reform now looms as the most promising “low-hanging fruit” available.”
What policy changes and improvements will counteract these negative trends?  Here are several more or less obvious suggestions:  Immigration reform can bring our 11,000,000 illegals into the main stream economy.  Education reform, especially including an early childhood emphasis, will improve the quality of education for low-income kids, and maybe even boost graduation rates.  Tax reform, with lower tax rates (offset by closing loopholes) has much potential for boosting investment and risk taking, as well as for boosting innovation and entrepreneurship.
Faster economic growth is so beneficial for so many reasons, that we should insist that our national leaders make it a top priority.  Ideological objections, such as providing “tax breaks for the rich” are not acceptable and must be constantly batted down!