Tag Archives: economic growth

Why Is Political Progress So Difficult in the United States?

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With Donald Trump expanding the culture wars and the Democrats lining up with the progressive policies of Bernie Sanders, the national political scene seems to be getting more confusing all the time.


And yet there is remarkable consensus on many levels about what the country really needs:

  • Faster economic growth would help provide more jobs and better paying jobs for the blue-collar workers which both parties are trying to appeal to.
  • Tax reform meaning to reduce tax rates, shrink deductions and generally simplify the tax code has widespread bipartisan support, as one way to provide the growth which everyone wants.
  • Shrinking the debt as a percentage of GDP is widely recognized as critical to the future well-being of our country and especially for the poor who are most dependent on social welfare programs.  How to curtail spending sufficiently to get this done is inevitably a highly contentious issue.
  • Healthcare for (almost) all is now the law of the land, given that the GOP has failed to repeal the Affordable Care Act. The emphasis going forward should be to control healthcare costs for both individuals and families as well as for the federal government (the taxpayers).
  • Immigration and DACA. There appears to be strong bipartisan support in Congress for giving the Dreamers legal status in the U.S. With a very low (4.4%), and still dropping, unemployment rate, a huge labor shortage is developing in many states, including Nebraska. What the U.S. needs is an expanded guest worker visa program so that all employers are able to find the (legal) employees they need to conduct business. Perhaps DACA reform will lead to broader immigration reform as well.

Conclusion. The above issues should be largely amenable to bipartisan consensus. Both parties would benefit from putting aside petty differences and working together to solve them.

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Achieving Permanent, Revenue Neutral, Pro-Growth Tax Reform

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As Congress turns its attention to tax reform, there is a clear bipartisan consensus on the fundamental principles to employ, see here, here, here, and here.


For example:

  • Promote growth and increase wages for working families
  • Modernize our outdated business and international tax system.
  • Rely on reasonable economic assumptions
  • Make sure that any rewrite of the tax code is revenue neutral

The Tax Foundation has outlined several different approaches to tax reform which meet the above guidelines.  Their Option A is especially attractive:

  • The corporate tax is reduced to 22.5% and full expensing for business investment is allowed.
  • GDP increases by 7.1% long term which translates to a .7% increase per year for ten years, which is substantial economic growth.
  • All income groups, except for the top 1%, will see an after-tax increase in income.
  • Individual Tax brackets are consolidated into the three rates of 12%, 20.5% and 37% and the standard deduction is nearly doubled (from $6350 to $12,000).
  • All itemized deductions are eliminated except for home mortgage interest (limited to $500,000) and charitable contributions.
  • Capital gains and dividends are taxed as ordinary income with individuals being allowed to deduct 40% of qualified dividends and long-term capital gains.
  • The estate tax is eliminated.
  • This tax plan is revenue neutral on a static basis.

Conclusion. There are many attractive features in this plan. Being revenue neutral, with strong economic growth, means that the increase in tax revenue will shrink our huge current annual deficits.  Only the very wealthy top 1% of taxpayers will see their income (slightly) decreased.  The substantial decrease in the corporate tax rate will incentivize multinational corporations to bring their overseas profits back home for reinvestment.

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Why Can’t Democrats and Republicans Work Together?

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I am a non-ideological fiscal conservative and social moderate. I agree with Republicans on some issues and Democrats on others.  It seems to me that there is a lot of common ground between the two national parties and plenty of opportunity for working together.


For example:

  • The economy. Donald Trump was elected President with the support of blue-collar workers. He wants to help them out by speeding up economic growth.  But the Democrats also want to give a boost to the working class.  Why not lower the corporate tax rate to encourage multi-national companies to bring their profits back to the U.S.? Why not exempt small community banks from Dodd-Frank so they can lend more money to main street businesses?
  • Sustainable healthcare. After failing to repeal and replace the ACA, Republicans now have to accept that universal health insurance is here to stay even though it needs much better cost control. The popularity of employer provided health insurance makes single payer healthcare unacceptable to many. Two major changes are needed to lower healthcare costs.  The ACA Cadillac tax should be replaced by an upper limit on the tax exemption for employer provided insurance. The Medicare Part B premium covers only 25% of the cost of that program and should be increased on a means adjusted basis.
  • Immigration policy. With the unemployment rate now 4.4% and dropping, a huge labor shortage is beginning to develop which will retard economic growth. We now need more skilled and unskilled immigrants alike.  An expanded guest-worker program to meet the needs of employers should be created. Enhanced border security can be part of the mix.
  • Military spending. In a dangerous world we need a strong military defense. But there is a lot of waste in the Pentagon budget. Do we really need 800 foreign bases in over 70 different countries?  Nebraska’s own Chuck Hagel identified $25 billion a year in military waste while he was Secretary of Defense.

Conclusion. Here are just a few ways that the two parties can work together to address some of our biggest national problems. Faster economic growth and fiscal restraint just make common sense.

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Getting Started on Fiscal Responsibility

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This blog is devoted to fiscal and economic issues facing the U.S. Both the Trump Administration and the Democrats are working to speed up economic growth and I believe there is a good chance that this will happen.
However there is not nearly enough interest in addressing an even bigger problem:  our national debt, is now larger, in relative terms, than at any time since the end of WWII.


This is a very difficult political problem because elected representatives would much rather say yes than say no to new programs and more spending.  It is even more difficult to try to restrain the growth of, let alone cut, existing programs.
The Congressional Budget Office has recently published a long list of possible ways to decrease federal spending (or increase federal revenues) over the next ten years. It is interesting to pull out several of these suggestions to see what can be accomplished:

Program                                                                                              10 year savings

  • Eliminate concurrent receipt of retirement pay and disability              $139 billion for veterans.
  • Use an alternative measure of inflation to index mandatory               $182 billion
    programs.
  • Reduce funding for International Affairs Programs.                            $117 billion
  • Limit highway funding to expected highway revenues.                          $40 billion
  • Reduce the size of the federal workforce through attrition                     $50 billion
  • Reduce funding for grants to state and local governments                    $56 billion
  • Impose caps on federal spending for Medicaid                                    $680 billion
  • Increase premiums for Medicare Parts B and D from 25% to              $331 billion 35% of cost.
    Total     $1595 billion

Conclusion. This brief list of budget restraints would reduce deficit spending by about $160 billion per year.   This is significant but not nearly enough compared to the projected deficit of $685 billion for just the 2017 fiscal year alone.  About 2/3 of the savings come from the two entitlement programs of Medicare and Medicaid. The idea here is to give specific examples of the sort of changes which will be necessary to seriously confront our debt problem.

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Constraints on Economic Growth

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Many workers feel left out in today’s slow growth economy. Faster growth will improve their prospects by creating more and better paying jobs.
The private sector economist, Ruchir Sharma, warns however that faster growth will be hard to achieve.  He says that our relatively slow GDP growth of 2% per year since the end of the Great Recession has been caused by the Three Ds: depopulation, deleveraging and deglobalization.


In particular:

  • Depopulation. The baby boom caused explosive population growth after WWII. Even in the early 2000s the working age population in the U.S. was growing by 1.2% per year but is now predicted by the CBO to grow by only .5% per year in the coming years. More immigration, not less, would help in this respect.
  • Deleveraging. Since the Financial Crisis consumers have cut back on borrowing. Also the Dodd-Frank Act has restricted bank lending for business investment. Exempting small community banks from Dodd-Frank would help in this respect.
  • Deglobalization. Cross-border trade expanded from 30% of GDP in 1980 to 60% of GDP in 2008 but has since fallen back to 55% of GDP. Upon taking office President Trump immediately killed the Trans Pacific Partnership and is now renegotiating NAFTA. Any falloff in American export business will hurt economic growth.

In fact, there are countervailing trends. I have previously discussed evidence for the likelihood of faster growth based on the infusion of information technology into physical industries over the next 15 years.

Conclusion. The best way to improve employment prospects for the broad middle class, including blue-collar workers, is by making the economy grow faster. The constraints on faster growth are real but can be alleviated with sensible policies.

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Donald Trump and American Progress

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I am a non-ideological (registered independent) fiscal conservative and social moderate. I was not very excited about either presidential candidate last fall but finally decided to vote for Clinton because of Trump’s sleaziness.
As it turned out Mr.Trump was elected because of his strong support from the white working class, especially in the upper Midwestern states of Wisconsin, Michigan and Pennsylvania.  Interestingly, the Democrats are responding by proposing legislation to try to appeal more strongly to blue-collar workers.
Of course I disapprove of Donald Trump’s poor handling of the Charlottesville tragedy but I try to avoid being distracted by all of the drama and rather stay focused on his policies and actions.  In this respect there are both plusses and minuses.


On the positive side:

  • North Korea. He is handling this crisis well simply by working through the UN to condemn North Korea’s provocative testing of ballistic missiles. Also his Administration has clearly stated that the goal of U.S. policy is to denuclearize the Korean peninsula, not to achieve regime change in North Korea.
  • The economy is still chugging along at 2% annual growth. On the deregulation front, the annualized pace of new regulations for 2017 is 61,000 pages, down from 97,000 in 2016. This is the lowest level since the 1970s and has the potential to speed up growth.

On the negative side:

  • NAFTA renegotiation is just getting started. Any shrinkage of U.S. exports will badly hurt the economy, especially in states like Nebraska which depend so much on agricultural exports.
  • Immigration. Mr. Trump proposes to dramatically decrease annual legal immigration quotas, especially for low-skilled workers. This is a very poor idea  which will hurt the economy, especially in states like Nebraska which have low unemployment rates.

Conclusion. President Trump’s record at this point is mixed, all the more so since the two very important issues of the 2018 budget and tax reform have yet to be resolved in Congress. Mr. Trump’s election may or may not be good for progress in America.  We simply don’t know yet.

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The Major Challenges Facing the United States

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As I frequently remind my readers I am a fiscal conservative and a social moderate. I usually write about particular economic and fiscal problems facing our country.  But every now and then I like to step back and view our overall situation at one time.  The last time I did this was here.
Let’s take another look:

  • The economy is puttering along at 2% annual growth with a relatively low unemployment rate of 4.3% and a good indication that faster growth, up to 2.5% annually, is right around the corner, see here and here.  The economy, at least, is headed in the right direction.
  • Foreign policy. Long term our biggest problem is China, which has four times as many people as we do and is growing economically three times as fast. China will soon surpass us in both economic and military strength. Our best insurance for this inevitable day is to have lots of democratic friends around the world.
  • Global warming is real and getting worse. Our best strategy for dealing with it is a revenue neutral carbon tax, rather than depending on ad hoc regulations like the Clean Power Plan and ever increasing auto emission standards. If the U.S. demonstrates its seriousness with a carbon tax, it is likely that the U.S. and China (which is highly polluted) could work together to establish world-wide carbon emission standards.
  • National debt, currently 77% of GDP (for the public debt on which we pay interest), is predicted by the CBO to keep getting steadily worse (see chart)  without major changes in current policy. Right now our approximately $14.3 trillion public debt is almost “free” money because interest rates are so low. But sooner or later interest rates will return to more normal levels and, when this happens, interest payments on the debt will rise by hundreds of billions of dollars per year. This will inevitably lead to a severe fiscal crisis, far worse than the Financial Crisis of 2008.

Conclusion. I am relatively optimistic that we can maintain good relations with China and will have the good sense to better control carbon emissions. But our debt problem is politically very difficult to address because it will require spending curtailments.  How do we successfully address such a huge problem?

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We Need More Low-Skilled Immigrant Labor, Not Less

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Our economy is chugging along at 2% annual growth of GDP, not spectacular but not awful either. The unemployment rate has dropped to 4.3%, and low-wage earners are beginning to see decent pay raises. Furthermore there are good indications that GDP growth may rise in the near future to at least 2.5%, see here and here.
As growth increases, unemployment continues to drop, and wages increase more quickly, severe labor shortages in certain job categories are likely to develop.  As the New York Times economics reporter, Eduardo Porter, points out, “The Danger from Low-Skilled Immigrants: Not Having Them.”


Consider:

  • Eight of the fifteen occupations expected to experience the fastest growth – personal care and home health aides, food preparation workers, janitors and the like – require no schooling at all.
  • Low-skilled immigration does not just knock less-educated Americans out of their jobs, it often leads to the creation of new jobs – at better wages.
  • The strawberry crop in California owes its existence to cheap immigrant pickers. They are sustaining better paid American workers in the strawberry patch to market chain who would have to find other employment if the U.S. imported the strawberries directly from Mexico.

  • The benefits of immigration come from occupational specialization. Immigrants concentrated in more manual jobs free up natives to specialize in more communication-intensive (English speaking) jobs.
  • The average American worker is more likely to lose than to gain from immigration restrictions. Halting immigration completely would reduce annual economic growth by .3%.
  • The Pew Research Center estimates that about 30,000 unauthorized immigrants work in Nebraska, 3.2% of Nebraska’s total labor force. They are heavily represented in a handful of industries, making up 18% of Nebraska’s construction workers, 9% of production workers, and 5% of farm laborers.  With an unemployment rate hovering around 3%, the Nebraska economy would be severely stressed without these immigrant workers.

Conclusion. Both in Nebraska and nationwide, the U.S. economy has a strong need for immigrant workers. An adequate guest worker visa program is badly needed to provide legal status to these workers who are so critical to the success of the U.S. economy.

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An Optimistic View of the U.S. Economy

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The current economic expansion, beginning in June 2009, is now one of the longest in recent years.  Furthermore, low-wage workers are beginning to see bigger gains in pay.  Since the rate of inflation is still remarkably low, under 2% annually, the expansion may well continue for some time.


The primary negative factor is the relatively slow rate of growth averaging just 2% since June 2009.  But two economists, Michael Mandel and Bret Swanson, have just issued a remarkable report, “The Coming Productivity Boom,” on behalf of the Technology CEO Council, predicting that the diffusion of information technology into physical industries is likely to boost economic growth to 2.7% over the coming 15 years.
Consider:

  • The next waves of the information revolution – interconnecting the physical world and infusing it with intelligence – are beginning to emerge. Increased use of mobile technologies, cloud services, artificial intelligence, big data, inexpensive and ubiquitous sensors, computer vision, virtual reality, robotics, 3D additive manufacturing and 5G wireless technology are on the verge of transforming the traditional physical industries – healthcare, transportation, energy, education, manufacturing, agriculture, retail and urban travel services.
  • At 2.7%, productivity growth in the digital industries over the past 15 years has been strong, compared with only an anemic .7% annual growth in productivity in the physical industries.

  • The digital industries, which account for 25% of U.S. private sector employment and 30% of private sector GDP, make 70% of all private sector investments in information technology.
  • This “information gap” means that the physical economy is operating well below its potential, dragging down growth and capping living standards.
  • The coming transformation could boost annual economic growth by .7% over the next 15 years. This would add $2.7 trillion to annual economic output by 2031.
  • Policy changes will be needed to achieve maximum growth. Better tax policy can encourage more domestic investment. Regulators will have to embrace innovation and technological change.

Conclusion. “The information age is not over. It has barely begun. … But launching this new productivity boom demands a new, pro-innovation focus of public policy.”  In turn it will lead to an increase of wages and salaries to workers of $8.6 trillion over the next 15 years.

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How to Achieve Sensible Tax Reform

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Experts across the political spectrum agree that the U.S. tax code is a huge mess and needs to be reformed as well as simplified.  It is also generally accepted that lower tax rates will lead to faster economic growth.
As Congress turns its attention to tax reform, Senate Democrats have stated the basic principles which they would like to see included in any changes which are made:

  • Increase the wages of working families. This could be accomplished by lowering tax rates for all individuals across the board, paid for by eliminating (or at least shrinking) many of the personal deductions in the tax code. The approximately two thirds of all taxpayers who do not itemize deductions would then receive a tax cut, equivalent to a wage increase.
  • Promote domestic investment and improve middle class job growth. Lower tax rates will give businesses and entrepreneurs a bigger incentive to invest in business expansion and therefore grow the economy faster and create more new jobs.

  • Modernize our outdated business and international tax system. Our corporate tax rate at 35% is the highest in the developed world and, at the same time, produces below average revenue (see chart). Another reform would be to adopt business expensing (immediate tax write-off for new investment). Again, all such changes should be paid for by eliminating loopholes and shrinking deductions.
  • Any rewrite of the tax code must be deficit neutral. As important and valuable as tax reform is, it has to take into account our country’s most fundamental problem: our huge and rapidly growing national debt and therefore end up being deficit neutral overall.

Conclusion. The above principles, stated by the Senate Democrats, represent a sound approach to reforming the U.S. tax system. I hope that the Republicans are willing to recognize the validity of these proposals and include the Democrats in developing a bipartisan tax reform plan.

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