Tag Archives: economic growth

The Spending Crunch

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In the March 26, 2013 edition of the Wall Street Journal, the nonpartisan columnist Gerald Seib makes a very astute observation, namely that “Liberals Face Spending Dilemma”.  The Republicans are beating the drums for a balanced budget, the economy is growing at the anemic rate of 2% per year and entitlement spending is growing much more rapidly than this.  So what is going to happen?  Discretionary spending is going to have to shrink!   This means a big hit for both defense and nondefense discretionary spending, meaning most of the traditional programs funded by the federal government.
How do we get out of this predicament?  The best way would be to make the economy grow faster but this is unlikely to happen while the Democrats control the executive branch and are unwilling to implement pro-growth policies such as tax reform, deregulation and stepped-up international trade.
But even with more business friendly pro-growth policies, entitlement spending is growing way too fast and eating up a larger and larger piece of tax revenues.  The Republicans want to control the costs of Social Security, Medicare and Medicaid but simply cannot get this done without Democratic cooperation and support.  Either Democrats help figure out how to make significant cost cutting changes to entitlements or else steep cuts in discretionary social spending will have to be made.
The Republican drive to rapidly shrink deficit spending down to zero is for real and will not be denied.  The sooner the big spending liberals figure this out and adjust their behavior, the better off will be the whole country.

What are the Economic Effects of Immigration Reform?

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Mr Argeo Cellucci and Stephen Kelly have recently (WSJ on March 10, 2013) made a very interesting proposal for immigration reform: “Taking a Nafta Approach to Immigration”.  The North American Free Trade Agreement, starting in 1994, has boosted trade between Canada, Mexico and the United States by over 400%.  Their proposal is to give unrestricted visas to all American, Canadian and Mexican citizens to live and work anywhere within the borders of our three countries.

Enacting such a plan would mostly solve our long simmering immigration problem overnight.  It does not offer citizenship for illegals in the U.S. and therefore is not amnesty.  Our current illegals with Mexican citizenship would attain legal status with visas but would still have to apply for, and wait for, citizenship through ordinary channels.

But the main reason for making such a change in immigration policy is economic, rather than to ease law enforcement or border control problems.  The scholar Raul Hinojosa-Ojeda has recently demonstrated in “The Economic Benefits of Comprehensive Immigration Reform”  the huge benefits that would ensue from such a policy change.  It would boost U.S. GDP by at least .84% annually which means that our slow recovery from the recession of about 2% GDP growth per year would increase by 50%.

Faster economic growth is the elixir our country badly needs to not only provide more jobs but to enable us to rapidly shrink deficit spending at the federal level and restore our national government to sound fiscal health.  Here’s how we can do it!

The Connection between Business Investment and Unemployment, Revisited

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In my previous post I discussed the very close inverse relationship between business investment and unemployment pointed out by John Taylor in his February 4, 2013 blog entry.  Paul Krugman pointed out that that investment can be subdivided into residential and nonresidential components and that residential investment shrunk dramatically during the Great Recession.  According to Krugman, this invalidates Taylor’s conclusion that the best way to boost the economy is to boost business investment.

But Taylor has done further analysis which shows that it is the nonresidential component of total fixed investment which has the very close inverse relationship with unemployment, not the residential component.

In other words, the best way to boost the economy, and thereby increase employment, is to stop giving excuses for our slow recovery because of low housing prices and to motivate businesses in general to increase investment.  There are various ways to do this, as pointed out by many commentators including myself and, the important thing, is to increase movement in this direction.

The Connection between Business Investment and Unemployment

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The Stanford economist, John Taylor, has pointed out in the February 4, 2013 entry of his blog, Economics One, the strikingly close correlation between business investment and the national unemployment rate. His graph shows that since 1990, whenever business investment increases, then the unemployment rate starts to fall with only a short time lag.  And, vice-versa, when business investment starts to fall, then the unemployment rate starts to increase.

It seems like plain common sense, then, that a very good way to boost the economy and thereby create more jobs, is to figure out how to motivate businesses to increase their rates of investment.  One way to accomplish this is to let businesses speed up their tax deductions for capital investment.  Of course, the best way of all would be to completely eliminate the corporate income tax.

Approximately 10% of federal tax revenue comes from the corporate income tax.  This amounts to roughly $250 billion per year.  Such a loss of federal revenue could easily be balanced by closing loopholes and deductions for high income taxpayers.  Such a shift in federal taxation would provide an enormous boost to the economy.

Making our economy grow faster is the key to solving both our very serious economic (putting people back to work) and fiscal (shrinking our federal deficit) problems.  Any and all ways to get this done should be the top priority of our national political leaders.

The Stark Budget Choices Now Before Congress

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The Congressional Budget Office has just released a new report, “Macroeconomic Effects of Alternative Budgetary Paths” concerning several decisions which Congress will have to make in the very near future, pertaining to the sequester budget cuts of $1.1 trillion over ten years, approving a budget for the remainder of the current 2013 fiscal year and raising the federal debt limit.

The first page of the CBO report conveys the basic message with a single graph.  If the sequester is cancelled and there is perhaps even additional deficit spending in the near term, it will give the economy a small boost in 2014 but cause a drop in GDP of close to 1% by the year 2023.

If the deficit is decreased by an additional $2 trillion over 10 years, beyond the spending cuts required by the sequester, the economy will take a small hit in 2014 but will receive a boost of close to 1% by 2023.  An additional deficit reduction of $2 trillion over 10 years, will cause a greater immediate hit to the economy but produce a much more substantial boost of almost 2% by 2023.

An excellent summary of the CBO report, including political implications, is given by the Wall Street Journal on February 6, 2013.  For example, it is the last scenario above, an additional $4 trillion deficit reduction over ten years, which would put the US on a path to achieve a balance budget by 2023.

Under current law, with no additional deficit reduction in the future beyond the sequester which takes effect on March 1, the annual deficit will shrink for the next three years but then resume a steady climb back to $1 trillion by 2023 and the publicly held national debt will climb from its current level of 73% of GDP to 77% of GDP by 2023.

The choice now before Congress is thus very clear:  should we continue kicking the fiscal can down the road, as the Keynesian economists want to do, or should we bite the bullet, take a small immediate hit to the economy, and thereby put the future of our country on a sound financial basis?

To me the answer is clear as clear can be.  But it will require our national leaders to stand up and be counted.  Do enough of them have the political courage to do what needs to be done?

The Great Reset

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The Great Recession ended almost four years ago, in June 2009, and growth in the US economy has been an anemic 2% annually since then.  The unemployment rate, now 7.8% is dropping only very slowly and millions of workers are still unemployed or underemployed.  If this isn’t bad enough already, knowledgeable experts are now predicting (see the Friday January 25 Omaha World Herald)  that many mid-skill, mid-pay jobs will never return largely because of the rapidly accelerating use of technology in all aspects of our lives.
Faster economic growth would not only provide more jobs but would also increase tax revenue and therefore shrink the deficit.  If such traditional measures as lower tax rates, deregulation and aggressively promoting foreign trade won’t fly politically which, of course, is very disappointing, then we need to consider other measures which could gain political support.  A good place to start is to enact The Startup Act of 2011 proposed by the Kauffman Foundation.
The Startup Act proposes: 1) more visas for entrepreneurs and Green cards given out with STEM degrees, 2) tax incentives for startup investments, 3) speeding up the patent process for entrepreneurs and 4) relaxing the regulatory burden on startup businesses.  Such measures as these need not be expensive to undertake and could give our economy a big boost.
Our leadership role in world affairs depends on our economic, military and cultural dominance.  First and foremost is our economic strength.  It is vital to speed up the growth of our economy.  Any and all means to accomplish this should be considered.  The status quo is not acceptable!

Is inequality Holding Back the Recovery?

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The Nobel prize-winning Keynesian economist, Joseph Stiglitz, claims in the January 20, 2013 New York Times, that “Inequality is holding back the recovery”.  He says that the most important reason is because the middle class is too weak to support the consumer spending we need.  And that the weakness of the middle class is holding back tax receipts.  And that we are squandering our young who are increasingly unable to get an education without borrowing huge sums of money.

Many liberals deplore the slow rate of economic growth since the recession ended in June 2009 and all of the problems it creates and exacerbates such as high unemployment and lower tax revenue to support public services.  What these liberals amazingly fail to understand is that there are tried and true methods to promote economic growth.  What we need to do is to lower tax rates (offset by eliminating tax deductions and loopholes), remove or diminish the enormous new regulatory burdens which have recently been placed on the economy, boost domestic energy production and aggressively, rather than halfheartedly, pursue new trade agreements to lower the barriers to free trade.

Powerful trends such as globalization and computer technology are driving economic progress and causing the inequality which Stiglitz and many others deplore.  We need to embrace these trends and use them to our advantage.  The way to boost the middle class is to boost our stagnant economy in the tried and true ways which have worked in the past.  The way to boost postsecondary education is to recognize that there are many high quality and low cost schools all over the country.  And that it is not necessary to borrow lots of money to get a good education. 

In short, the solution to the urgent and critical economic and fiscal problems we are now facing lies entirely under our control.  All we need are national leaders who have the vision, capability and fortitude to lead the way.