Tag Archives: economic growth

The Democrats and the Economy II. A Path Forward

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On Monday the Democratic Congressional leadership held a rally in rural Berryville, Virginia. They laid out a program designed to appeal to the middle class and blue-collar workers who voted for Donald Trump.  However many of their proposals involve expensive government programs and therefore would add significantly to the national debt.


What is needed is a greater emphasis on free-market ways of helping middle- and low-income workers such as:

  • Increasing basic economic growth which has stalled to a relatively slow 2% per year of GDP since the end of the Great Recession in June 2009. For example:
  • Revenue neutral tax reform, lowering rates for both individuals and corporations, paid for by closing loopholes and shrinking deductions, would have many benefits. It would stimulate business investment, create new demand by lowering the taxes paid by the approximately 2/3 of taxpayers who do not itemize deductions, and provide an incentive for multinational corporations to bring their foreign profits back to the U.S. for reinvestment.
  • Targeted deregulation of the financial sector by exempting main street banks from the onerous requirements of the Dodd-Frank Act would enable these smaller banks to lend more money to small businesses.
  • Fundamental healthcare reform to lower costs from the current 18% of GDP to the approximate 12% average of other developed countries. This would save the American economy $1 trillion annually which could be spent far more productively. The Democrats are on the right track here by refusing to accept Republican half measures.
  • Improve educational opportunities such as early childhood education for low-income families, expanded career education and job training in high school and community colleges, and more emphasis on income-based repayment for student college debt. There would be some cost involved here.
  • Modest increase in the national minimum wage from the current level of $7.25 per hour to perhaps $10 per hour and then index it to inflation going forward. The Democratic proposal for a national $15 per hour minimum wage would put too many people out of work.

Conclusion. This collection of proposals involves both Democratic and Republican ideas and should be implementable with a bipartisan effort.

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The Democrats and the Economy

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The Democratic Party is starting to wake up. Donald Trump was elected President because he was able to appeal to blue-collar workers who feel left behind in today’s high tech global economy.
Yesterday the Democratic Congressional leadership held a rally in rural Berryville, Virginia to lay out an economic program to try to appeal to these very same Trump voters.


Such a program, would, for example:

  • Increase people’s pay by lifting the national minimum wage to $15 per hour and also creating jobs with a $1 trillion infrastructure plan.
  • Reduce their everyday expenses by providing paid family and sick leave as well as breaking up large monopolies which can raise prices without restraint. Also empowering Medicare to negotiate lower drug prices for older Americans.
  • Provide workers with the tools they need for the 21st century economy by giving employers, especially small businesses, a large tax credit to train workers for unfilled jobs.

Unfortunately, there are problems with most of these ideas. In Seattle even a $13 per hour minimum wage has significantly reduced minimum wage work. The national minimum wage should be raised but to a more modest level.
There is no demonstrated need for a large-scale publicly funded infrastructure program and it would add hugely to the national debt.
A jobs program to maintain the employment rate for prime-age workers without a bachelor’s degree at the 2000 level of 79% and at a living wage of $15 per hour plus benefits would cost $158 billion per year.


Conclusion. Yes, blue-collar workers are hurting.  Yes, some of the ideas suggested above would help them get ahead.  But many would also increase already large deficit spending and therefore add dramatically to the national debt.  What is needed is a combination of free market initiatives and carefully targeted government programs.  Stay tuned!

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The Right Way to Deregulate Wall Street

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The economy has been chugging along at about 2% annual GDP growth ever since the end of the Great Recession in June 2009. Unemployment has been steadily dropping and is now a fairly low 4.4%.  Low wage earners are now even beginning to see bigger gains in pay.
Most people would like to speed up economic growth even more.  Tax reform will help in this regard but so will sensible deregulation.  Barron’s has an excellent article this week about deregulating Wall Street by William D. Cohan.


According to Mr. Cohan:

  • GDP growth is highly correlated with bank lending.
  • The Dodd-Frank Act, passed by Congress in 2010, has disproportionately burdened community banks, despite their having no role in the financial crisis.
  • More than 1700 U.S. banks have disappeared since Dodd-Frank was passed.
  • Senator John Kennedy (R, LA) has introduced a bill which would exempt community banks and credit unions with assets of less than $10 billion from the Dodd-Frank Act.
  • As a result of Dodd-Frank, big banks are now required to have more capital and less leverage. Today a bank’s assets would have to fall about 7% before a bank’s capital would be wiped out, as opposed to only 2% in 2008.  This makes them safer.
  • Prior to 1970 the Wall Street partnership structure ensured that bankers had plenty of skin in the game – essentially their full net worth was on the line every day.
  • Today bankers and traders are rewarded for taking risks with other people’s money. Mr. Cohan recommends that the top 500 traders and executives at every big bank have a significant portion of their net worth on the line.

Conclusion. Mr. Cohan’s program would not only give a big boost to the economy by enabling community banks to lend more freely but would also make our financial system safer by requiring top financiers to have skin in the game.

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Boosting the Middle Class

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My last two posts, here and here, have dealt with the contention by Richard Reeves  that the real inequality gap in the U.S. is not between the top 1% (the wealthy) and the bottom 99% but rather between the top 20% (the upper middle class) and the remaining 80%.
The top 20% are the highly educated doctors, lawyers, business managers, successful entrepreneurs, academics, journalists, etc. who thrive in the global economy, largely shielded from the intense market competition faced in the non-professional occupations. Basically the upper 20%, with incomes of $112,000 and up, have it made.
The question is then, how do we give a boost to the people in the middle- and lower-income brackets so that more of them can enjoy much of the same prosperity as the top 20%?


The answer is to:

  • Make the economy grow faster than the slow 2% annual GDP growth we have had since the end of the Great Recession in June 2009. With sensible tax and regulatory reform, we should be able to achieve a growth rate of 2.5% per year.  This will create more jobs and better paying jobs.
  • Improve educational opportunities by, for example, making early childhood education widely available to low-income families, attracting the best teachers to the poorest schools with targeted bonus pay, and funding college more fairly by requiring that all student debt repayment be income-based.
  • Fundamentally reform the American healthcare system in order to reduce healthcare costs from the current 18% of GDP to about 12% which is the average for other developed countries. This will save the American economy $1 trillion per year in unnecessary and extravagant costs, which could be put to much better use for higher worker pay, expanded social services and shrinking annual deficit spending.

Conclusion. The U.S. is a very prosperous country but clearly we can do an even better job to improve the quality of life for many more Americans.

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Can Economic Prospects for the Middle Class Be Improved?

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Donald Trump was elected President last fall because of his surprising and unexpected strength with blue-collar workers. These folks have had a rough time in the 21st century economy: high unemployment, unstable marriages, opioid addition, lower longevity, etc.

My last post discusses a new book by Richard Reeves which makes the case that the real inequality in the U.S. is between the top 20% (the upper middle class) and the lower 80%.  The upper middle class are mostly the well-educated professionals who benefit from the modern high-tech global economy.  Mr. Reeves believes that this elite group is so entrenched with privileges as to be self-perpetuating. His response to this situation is to try to expand opportunity more widely by, for example:

  • Reducing unintended pregnancies through better contraception by making LARCs (long-acting reversible contraceptives) more widely available to free more young women from the burden of unwanted children.
  • Expanding access to early childhood education including home visitation to give a big preschool boost especially to kids from low-income families.
  • Getting better teachers for unlucky kids by giving teachers a substantial bonus to teach in high poverty schools. This will attract better teachers to the more challenging schools.
  • Funding college more fairly. Free college is a terrible idea. It would just be yet another boondoggle for the upper middle class. All student debt repayment should be income-based. The status of vocational postsecondary learning (at community colleges) should be elevated.

Conclusion. The idea here is not to pull down those who are well off but rather to give more people the opportunity to succeed in the modern economy. Of course, faster economic growth is another way to create more and better paying jobs.  But faster economic growth has its own limitations and, at any rate, is difficult to achieve with a rapidly aging population.  I will return to this topic soon!

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The Growing Skills Gap

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Donald Trump was elected President because of strong blue-collar support. Many blue collar workers feel left out of the American dream because of stagnant incomes and/or job loss.
At the same time there is a huge national focus on the high cost of college and the associated huge student loan debt.  But student loan debt is a fixable problem and is not what is holding our economy back.
Take a look at the two charts below from recent issues of the Wall Street Journal, here  and here.


The first chart shows the last four growth cycles and how wages eventually tick up as unemployment continues to fall.  Missing this time is hardly any growth in wages towards the end of the cycle (Of course, the current cycle won’t be over until we have the next recession).


The second chart shows that there are now more job openings (6 million) than job hires for the first time since 2001.  Furthermore there were only a low of 138,000 jobs added in May with an average of 121,000 per month for the past three months.  This suggests that employers are having a hard time finding qualified workers.
Obviously, what is badly needed is a renewed emphasis on workforce training.  Interestingly enough, the Business Roundtable has just issued an extensive report  detailing what many major corporations are doing to close America’s skills gap.

Conclusion. Lots of people, certainly including President Trump and the Republican Congress, would like to see faster economic growth.  Clearly there are practical and useful ways to achieve this and many people are already trying to make it happen.

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The Cost of Higher Education Is Not What Is Holding Us Back

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It is well known that the cost of higher education is increasing much faster than inflation and even faster than the cost of healthcare. In turn, student debt is also rising rapidly and creating a financial burden for lots of young people.


The New York Times writer, David Leonhardt, has an article in Sunday’s paper showing that most states have reduced their funding of higher education since 2009, some quite dramatically.  This is not surprising since higher ed has to compete with K-12 education, Medicaid, prison operations, public employee pensions, etc. and states have to balance their budgets.  But it means that the cost of tuition will continue to rise even faster than usual.
However, except for a few specific fields such as computer programming, high school STEM teaching and nursing, there is no overall shortage of college graduates to keep our economy going.  In fact there is a surplus of college graduates in many non-technical areas.


But there is a growing labor shortage more generally, first of all for construction and agriculture workers which can be filled by unskilled immigrants.  Furthermore, there are now millions of job openings for middle skill workers which are going unfilled for lack of qualified applicants.  Training for such jobs as emergency medical technician, robot-heavy factory worker, and wind turbine technician is where states and localities should invest more public resources.
The huge demand for middle- and high-skill blue collar workers provides an opportunity to put laid-off middle-aged (Trump voting!) factory workers back to work in high paying middle class jobs.  A little ingenuity at the local and state level should be able to figure out how to do this.
Conclusion. A college education is not the only path to a productive and satisfying middle class life.  In fact U.S. economic growth is being held back by a lack of qualified middle- and high-skill workers.

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Objections to the Trump Budget

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President Trump’s budget for 2018 presents a plan to achieve a balanced federal budget in ten years, by 2027.  This is a highly desirable goal but there is much skepticism about whether or not his budget is realistic, see here and here.


My thoughts on this important matter are:

  • Fiscal restraint is a common sense necessity, and is not austerity. Our public debt (on which we pay interest) now stands at 77% of GDP, the highest since WWII, and will continue to increase without major changes in public policy. Right now the debt is almost “free” money because interest rates are so low. As interest rates inevitably go up in the near future, interest payments on the debt will skyrocket and become a huge drain on our federal budget and make annual deficits even worse than they already are.
  • 3% annual GDP growth, as assumed in the Trump budget, is almost certainly too optimistic. However the Trump Administration is on track to achieve significant deregulation  and averaging 2.5% growth over the next ten years is doable.
  • Insufficient entitlement reform is a big drawback for the budget. It will be very difficult, essentially impossible, to achieve and sustain a balanced budget without modifying Social Security and Medicare to make them self-financing. Turning Medicaid into a block grant program to the states would finally put Medicaid on a sensible budget.
  • Requiring able-bodied welfare recipients to work is a good idea and is the basis for cutbacks in social welfare programs.
  • The Departments of State, Interior, Education and Justice should be able to absorb cutbacks and operate more efficiently.

Conclusion. There are many good initiatives built into the Trump budget. Unfortunately there are also some invalid assumptions and glaring omissions.  It does not represent a bona fide plan to balance the budget in ten years but at least it recognizes the importance of doing so.

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Is Trump Serious about Shrinking the Debt?

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The newly released Trump budget for Fiscal Year 2018 claims that it will lead to a balanced budget in ten years.  This is a highly desirable goal.  However the projected $4.5 trillion in spending cutbacks for many popular programs, as well as the projected 3% GDP growth for the next ten years, are both unrealistically optimistic.  Nevertheless, at least the Trump Administration is moving in the right direction.


Here is a good summary by Donald Marron in National Affairs of why it is so important to keep deficits and debt under control:

  • Prolonged deficits and mounting debt will undermine economic growth by interfering with investment in the private sector.
  • Prolonged deficits risk fueling inflation as the government lowers the value of the dollar by printing more of them.
  • High levels of debt held by foreign lenders put us at the mercy of foreign countries.
  • The growing debt exposes America to greater “rollover” risk with the increasing reliance on short term debt which frequently has to be rolled over.
  • Rising debt limits flexibility for increased spending in times of recession or other emergency. For example, when the Financial Crisis occurred in 2008, the debt level was just half of its current level. This meant the government could risk higher deficit spending in order to stimulate the economy.
  • Deficits have an unfortunate tendency to feed on themselves. Our current deficit level of approximately $500 billion per year is so large that it can only be significantly reduced with great pain. The only possible way to make deficit reduction politically feasible is to spread this pain widely amongst the public as shared sacrifice. This will be very hard to do.
  • Deficits and debt are grossly unfair to future generations who are stuck with servicing the debt and/or struggling to pay it down.

Conclusion. The Trump Administration recognizes the strong need to get deficits and debt under control. Unfortunately its current budget just submitted is not a realistic plan to get this done.

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How Fast Can the Economy Realistically Be Expected to Grow?

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Both President Trump and the Republican Congress want the economy to grow faster than the slow 2% growth which we have experienced since the Great Recession ended in June 2009. The Congressional Budget Office predicts (see chart below) that growth will average just 1.8% over the next ten years under current policy.


The Committee for a Responsible Federal Budget, using CBO data, believes that several policy changes can help boost growth on an annual basis as follows:

  • Immigration reform, .3%, by increasing the number of workers.
  • Tax reform, .18%, if well designed. However, deficit-financed tax reform would ultimately harm growth.
  • Increase the Social Security retirement age by two years, .15%, by keeping people in the workforce longer.
  • Reduce deficits by $4 trillion over ten years, .1%. This is enough deficit reduction to put our debt on a sustainable, downward path.
  • Continue expanding energy production at the shale boom level, .09%.
  • Repeal of the Affordable Care Act, .08%, will keep more people in the workforce.
  • Ratifying the Trans Pacific Partnership, .01%, by increasing foreign trade.
  • Increasing public investment in infrastructure, education and research by $40 billion per year, .1%.

Note that all of these changes would increase growth by an estimated .83% of GDP per year. Added to the 1.8% base this yields a growth rate of 2.63%. Unfortunately, many of these reforms are unlikely to occur.  On the other hand, various deregulatory actions being taken by the Trump administration are likely to increase growth by an unknown amount.

Conclusion. It is reasonable to anticipate that growth can and will be speeded up to about 2.5% of GDP per year under the Trump administration.  Along with the tight labor market now developing (current unemployment rate of 4.4%), blue-collar and other middle class workers should continue to receive decent pay increases for the foreseeable future.

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