The Republicans are Making a Huge Mistake with the Current Tax Plan by Appearing to be Fiscally Irresponsible

 

The House and Senate have now each passed their own similar tax bills and a conference will come up with a single unified plan. Each of the individual bills has been scored to add $1 trillion to the national debt over a ten year period and so the final plan will almost surely have this same feature.
With our public (on which interest is paid) debt now 77% of GDP, the highest since right after WWII, and already growing rapidly, this is an extremely unattractive, and even dangerous, feature of the tax plan.
One of our most cherished principles in the U.S. is “liberty and justice for all.”  But consider the normally perceived philosophical differences between the two political parties:

  • The Republicans are the party of liberty concentrating on providing maximum opportunity for people to succeed in life by realizing their full potential. This means fostering strong economic growth in order to have lots of opportunities for self-betterment. It also means keeping government at all levels as lean and efficient as possible, so as to minimize interference with private initiative. Excessive public debt is a particular anathema by creating a huge public burden, especially on future generations.

  • The Democrats are the party of justice concentrating on helping to provide the less fortunate members of society with the necessities of life by means of public support programs. This also means working to oppose all forms of prejudicial behavior based on race, gender, sexual orientation, etc. In addition it means trying to alleviate the inevitable income inequalities which arise in a free and dynamic society like ours, primarily with redistribution of tax revenues.

Conclusion. Both parties have fundamentally important principles. They gain and keep adherents by fighting for what they believe in. If the national Republican Party becomes lackadaisical about our huge national debt, as it appears to be right now, it risks losing its reputation for fiscal responsibility.  This will do it great damage.

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Responding to Economic Trends

 

In my most recent posts I have been making the case that

  • The American economy is in basically good shape with a low unemployment rate of 4.2% and the likelihood of somewhat faster growth in the near future.
  • Income inequality and poverty are real problems, see here and here, but there are reasonable and effective ways to address them.
  • Rapidly accumulating debt is by far our most critical unsolved problem which is all the more frightening because our polarized political system does not seem capable of addressing it.

The Bureau of Labor Statistics has just released its projections of what the U.S. economy will look like in 2026.


The highlights are:

  • More dominated by the service sector amid the continuing erosion of manufacturing jobs (see two charts below).

  • More polarized in both earnings and geography (see top and bottom charts).

  • More tilted towards jobs which require at least a bachelor’s degree (see bottom chart).

The BLS report has several ramifications for public policy as follows:

  • Improved educational outcomes are needed all along the line: K-12 basic and vocational, training programs for the many skilled jobs going begging and also more low-cost college programs.
  • More low-skill immigrants, not fewer, are needed to take on the expanding number of low-wage jobs, such as caring for the growing numbers of elderly, which Americans are not willing to do.

Conclusion. These economic trends towards more earnings and geographical polarization could easily make our current political polarization even worse than it already is. This means it is all the more important to make sure that we keep speeding up economic growth, better address income inequality and poverty and get our gargantuan debt problem under control.

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Economic Growth and Economic Justice II. What Needs to Happen

 

In today’s fractious political climate, it is at least widely recognized that skilled blue-collar workers are often suffering from stagnant income growth and/or job loss. Unfortunately, the political parties often disagree on how to address this major problem.  There are several different perspectives from which to view the overall situation:

  • Slow economic growth, averaging only 2% per year since the end of the Great Recession in June 2009. From 1950 – 2000 the economy grew at over 3% per year and produced a prosperous American middle class. Now, with strong headwinds from globalization and constantly improving technology, we badly need faster overall economic growth to provide more and better paying middle class jobs.
  • Income inequality. There is increasing income inequality in the U.S. even though the top 25% or so are doing very well. But raising taxes on the wealthy could slow down economic growth by discouraging new investment. In addition, redistribution of tax revenue to lower income Americans will not give them much of a boost.

  • Income insecurity. This is a huge problem for the many blue-collar workers who are struggling to make ends meet. There are a number of specific government actions which could alleviate this enormous societal problem.
  • Economic justice. Poverty in the U.S. is widely distributed geographically, with almost as much in rural and small town areas as in big cities. This could provide an opportunity for Republicans and Democrats to work together to address a very challenging problem.

Conclusion. Our country has very serious economic and fiscal problems which are not being addressed because of severe partisan infighting in Congress. But slow economic growth, income insecurity and poverty affect a wide variety of people with different political outlooks.  It’s inexcusable to allow partisan bickering to get in the way of finding workable solutions.

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The U.S. Middle Class Is Growing, Not Shrinking

 

One of the topics I discuss on this blog is income inequality (here, here, and here).  An interesting article in yesterday’s Wall Street Journal, “Upper Middle Class Sees Big Gains, Research Finds,” is highly pertinent to the inequality issue.
Capture1As can be seen in the above chart, the percentage of people in the middle class or above has greatly expanded between 1979 and 2014.  Furthermore, the basic research on this issue,by Stephen Rose at the Urban Institute, shows very clearly (in the chart below) what is happening: the higher is a family income, the faster it is increasing.
Capture3The best policy response to this phenomenon should be clear.  Rather than trying to decrease inequality with higher taxes on the wealthy, we should be trying to boost the less wealthy into higher income classes. The way to accomplish this is to:

  • Grow the economy faster with broad-based tax reform (lower tax rates paid for by shrinking deductions), immigration (guest worker) reform, (fair) trade expansion, and regulation reform (to help more small businesses get started). This will create more jobs and better paying jobs.
  • Improve education with early childhood education (to get minorities off to a better start in school), boosting high school graduation rates above the current 80% average (with better career and vocational education) and making college more affordable by putting more resources into community colleges and scholarships for low-income students.
  • Combat social inequality. The fraction of children with a single parent is the best predictor of upward economic mobility. The lower-income class marriage rate has dropped from 84% in 1960 to 48% in 2010. Policy should therefore focus on removing the marriage penalty in all government programs.

The basic forces of globalization and growing technology use are driving this societal change. The best way to respond is to enable more people to benefit from these basic trends.

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Can the U.S. Economy Do Better? II. It Won’t Be Easy

 

In my last post, “Can the U.S. Economy Do Better?” I laid out the view of the Hoover Institution economist John Cochrane that a few basic changes such as deep tax reform, a thorough overhaul of social programs, more educational competition and regulatory simplification would go a long way towards perking up the economy.
Capture6The banker and financial analyst, Satyajit Das, presents a contrary point of view in, “The Age of Stagnation: Why Perpetual Growth is Unattainable.”  According to Mr. Das:

  • The Global Financial Crisis (GFC) was not part of the normal boom and bust cycle, but rather the collapse of the postwar economic expansion under the weight of four main factors: high debt levels, large global imbalances, excessive financialization and an unsound build-up of future entitlements.
  • The economy risks becoming trapped in a QE-forever cycle. A weak economy leads to expansionary fiscal measures and Quantitative Easing (QE). If the economy responds then interest rates will go up and lead to a debt crisis. If the economy does not respond, then there is pressure for additional stimuli.
  • The economist Robert Gordon predicts that the future U.S. growth rate, adjusted for six big headwinds (demographics, declining educational attainment, rising inequality, effects of globalization, environmental costs, and debt overhang) may only be .2%, well below the 2.1% growth rate of the past few years.
  • The GFC may signal the zenith of globalization. The U.S. could function successfully as a closed economy, with foreign trade making up only 15% of GDP. The European Union and China could also turn inward. The rise of autarky and nationalism is a dangerous cocktail.
  • Financialization drives inequality. QE and low interest rates encourages high-income households to increase investments and therefore boosts the stock market. The increasing cost of healthcare, higher education and childcare is a big burden on low-income households.
  • Financial repression is increasingly accompanied by political repression which engenders lack of trust which in turn drives political disengagement and social disorder.

Ouch, ouch, ouch! This is a very negative assessment of the U.S. economic and social scene today.  But I report the views of Mr. Das because they are reality based and need to be dealt with.

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Five Ways to Destroy the U.S. Economy

 

For seven years following the end of the Great Recession in June 2009 our economy has been plodding along at an average growth rate of 2.1% per year, much more slowly than after a typical recession. Instead of talking about how to fix the mess we are in, most of the presidential candidates are proposing measures which will make things even worse.
Capture0The economists Glenn Hubbard and Tim Kane, writing in the Weekly Standard, take a novel approach.  Rather than suggesting ways of speeding up economic growth, which may no longer be of interest to voters in primary elections, they list their “Top Five Ways to Destroy the U.S. Economy” which are to:

  • Restrict Trade. Free exchange is the cornerstone of a growing economy. Raising tariffs will restrict imports, cause inflation and harm American consumers. Killing the Trans Pacific Partnership, stopping the Keystone Pipeline, and curtailing legal immigration would just be a start.
  • Make Work Illegal. Raising the minimum wage to $15 per hour will do lasting harm to underprivileged teenagers who are denied a first job. In the U.S. today over 30% of jobs require a government license compared to only 5% in the 1950s. This creeping need for permission keeps untold millions out of the labor force.
  • Tax People More Unequally. Why should the tax code be riddled with exemptions, deductions and credits which primarily benefit the wealthy? Why do we insist on taxing corporations at 35% when all other advanced economies are competing to lower their corporate taxes? This simply drives jobs overseas.
  • Stop Innovation. Why does Washington continue to favor big banks and bail out old established industries? A generation ago 1 in 6 companies were startups: today 1 in 12 are.
  • Increase the Debt. Debt has more than doubled in the past decade, yet interest payments in 2015 were the same as in 2006, because rates are artificially low. How long can this last? A sure path to a slow growth future is this kind of fiscal profligacy. Just call it investment and hope that most people will ignore the problem.

As Mr. Hubbard and Mr. Kane conclude, “The good news about this policy agenda is that it requires no sacrifices. If Washington just stays on course we will reap the whirlwind.”

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Surprise! It Is Progressives Who Drive Income Inequality

 

The economist Lawrence Lindsey has an Op Ed in yesterday’s Wall Street Journal  analyzing Census Bureau data here, and here showing that income inequality rose more under Bill Clinton than under Ronald Reagan.  It also has risen much more under Barack Obama than under George W. Bush.
Capture6Here is the explanation for this:

  • Cheap money is a boon to those who have access to it.
  • Bill Clinton, George W. Bush and Barack Obama all presided over bubble economies fueled by easy monetary policy. But the effects of the Bush housing bubble were more evenly distributed than for the Clinton stock market bubble or the Obama credit bubble.
  • In 1968 government transfer payments totaled $53 billion or roughly 7% of personal income. By 2014, these had climbed to $2.5 trillion or 17% of personal income. Despite the redistribution of a sixth of all income, inequality is far higher today than in 1968.
  • Two earner households have become the backbone of the American middle class.
  • When families with children making between $20,000 and $50,000 attempt to have a second earner go back to work, the effective tax rate on the extra earnings, including lost government benefits, is between 50% and 80%. This “working class trap” is increasing income inequality and keeping the income of these households lower than they would otherwise be.
  • During the first six years of the Obama presidency, the number of two-earner households declined, while the number of single-earner households rose by 2.6 million and the number of no-earner households rose by 5 million. In other words, two-thirds of the increase in the number of households under Obama is accounted for by households with no one working. This is the reason the middle class has shrunk and that inequality is increasing.
  • A recent Brookings Institution study shows that boosting the top tax rate from 39.6% today to 50%, and redistributing the additional $95 billion in tax revenue to the bottom 20% of wage earners would reverse only 20% of the increase in income inequality under Obama.

As Mr. Lindsey concludes, “Attacking the rich and running against inequality may be a sensible political strategy. But in the end the programs to implement this strategy make the problem worse.”

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