Tag Archives: Economic inequality

I Am One of Paul Krugman’s “Very Serious People”

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There is a stark contrast between the fiscal and economic policies being proposed by the presidential candidates from the two different parties. The Democrats want to tax the rich to reduce income inequality while the Republicans want major tax reform in order to speed up economic growth.
CaptureI favor the latter approach as long as it does not increase deficit spending.  The Keynesian economist Paul Krugman mocks deficit hawks like me as “Very Serious People.”  But in my “serious” view we have a choice between two very different paths for our economic future:

  • Slow Growth. Continue on our present path of slow 2% annual growth. The official unemployment rate has dropped to 5% but slack in the economy caused by the low labor participation rate keeps raises low and millions still unemployed or under-employed. The slow economy also keeps inflation and interest rates low. This permits Congress and the President to shrug off deficit spending and debt accumulation because it’s virtually “free money,” being borrowed at very low interest rates.   Our present course not only prolongs income inequality but also allows the debt to keep ramping up indefinitely. The longer this continues, the greater will be the disruption when inflation and interest rates do eventually return to normal historical levels.
  • Faster Economic Growth.   There are many things we can do to speed up economic growth. Tax reform is first and foremost but deregulation (relax Obamacare and Dodd-Frank), trade expansion (pass TPP) and immigration reform (with an adequate guest worker program) would also help. But, contrary to what the Republican presidential candidates say, tax reform must be revenue neutral to be sustainable. That way the economic growth it produces will lower deficit spending rather than increasing it.  This is critical because economic growth will create new jobs and raise pay for existing jobs, thereby creating inflationary pressure. Inflation will lead to higher interest rates which in turn will make our debt much more expensive than it is now.

Conclusion. We can make our economy grow faster if we simply put our mind to it. But then inflation and interest rates will go up and interest payments on the debt will become an increasing burden on society.  This is why it is so important to put our debt on a downward path as a percentage of GDP.  We can make it happen if we want to.

Austerity’s Grim Legacy?

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There is a very important debate going on in the country right now as I have discussed in my last three posts:

  • The Republican presidential candidates are proposing big tax cuts to stimulate the economy but at the cost of huge increases in annual deficits and the accumulated debt.
  • The Democratic candidates want to raise taxes on the wealthy but even raising the top tax rate from 39.6% to 50% would have only a modest effect in lowering income inequality.
  • The Tax Foundation has an excellent plan to lower tax rates for all in a revenue neutral manner by closing loopholes and limiting deductions. Their plan would give the economy a big boost and actually lower deficits by bringing in more tax revenue.

Now comes Paul Krugman in Friday’s New York Times, “Austerity’s Grim Legacy”  saying that “Some of us tried in vain to point out that deficit fetishism was both wrong-headed and destructive, that there was no good evidence that government debt was a problem for major economies, … And we were vindicated by events.  More than four and a half years have passed since Alan Simpson and Erskine Bowles warned of a fiscal crisis within two years; U.S. borrowing costs remain at historic lows.”
Capture12How can such an obviously intelligent and articulate economist miss what is so very, very clear to so many lesser mortals?  Interest rates will not stay low forever!  And when they do go up, interest payments on our rapidly expanding debt will skyrocket! The Congressional Budget Office estimates that the interest payment on our debt will increase from 1.7% of GDP today to 3.6% of GDP in 2025, or $827 billion in 2025 compared with $227 billion in 2015.  Where will the money to pay this new $600 billion expense come from?
It is absolutely crazy not to take our enormous debt seriously.  We simply must put this huge debt on a downward path as a percentage of GDP.  It can be done but it will take a concerted effort by our national leaders to do it.

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A Much Better Way to do Tax Reform

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My last two posts, here and here, have pointed out the folly of the tax plans of the presidential candidates from both parties:

  • The Republican plans would stimulate the economy but at a cost of huge increases in the national debt, even using dynamic scoring to take into account the growth effects of these plans.
  • Raising the top tax rate to 50%, a Democratic idea, would bring in $100 billion per year, but this is not enough to either make a big dent on budget deficits or lower income inequality appreciably.
    CaptureThe Tax Foundation has just published an excellent guide to income tax policy which makes several good suggestions for using tax reform to boost the economy:
  • Eliminating the deduction for state and local taxes would raise $81 billion per year. Using this revenue to reduce individual income tax rates would grow the economy by 1.77% of GDP over 10 years.
    Capture11
  • Eliminating the mortgage interest deduction would raise $75 billion per year. Reducing individual tax rates by the same amount would grow the economy by 1.61% of GDP over 10 years.
    Capture12
  • Capping itemized deductions at $25,000 would bring in $188 billion per year. Reducing individual tax rates by the same amount would grow the economy by 1.99% over ten years.
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Sensible, i.e. revenue neural, tax reform will do wonders for the economy as this study from the Tax Foundation shows. It will bring in more tax revenue to help pay the bills.  It will raise salaries for the already employed.  It will create new jobs for the millions of unemployed and underemployed people who want them.  It will thus reduce income inequality by increasing the wages of people on the bottom. Why is this so hard for so many people to understand?

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Combating the Politics of Distrust

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My last post, “The Politics of Distrust” presents the view that the main reason for the divisiveness of today’s politics is “the stubborn torpor of the American economy.” If this is true then the solution is obvious: speed up economic growth!
CaptureA couple of weeks ago the economist Alan Blinder, a Hillary Clinton advisor, had an Op Ed in the Wall Street Journal, “A Fairness Agenda for Winning Over Angry Voters” with which I largely agree. Here are the highlights of Mr. Blinder’s fairness agenda:

  • A labor market tight enough to leave employers scouring the land for workers, the best tonic for workers the world has ever known. Mr. Blinder does say that looser purse strings by Congress would help create more demand but it is simply too risky to keep running up our already enormous national debt. Eventually interest rates will return to normal and interest payments on the debt will skyrocket.
  • Raising the federal minimum wage would be an enormous help for wage earners at the bottom. Many states and cities are doing this on their own which is a better way to go because of huge regional differences.
  • Increase the Earned Income Tax Credit, especially for childless workers. A very good way to incentivize work.
  • More Vocational Training and Apprenticeships. Strengthening community colleges and career education in high schools would go a long way to accomplish this.
  • Provide quality pre-K education for families who can’t afford it. Early childhood education for children from low-income families is another very good idea.
  • The tax code is a national disgrace. The corporate tax may be even more complex, inefficient and unfair than the personal tax. The mantra of tax reformers has always been: broaden the base, lower the rates. Amen!

What Mr. Blinder is calling a fairness agenda turns out to be a growth agenda in disguise. I would add a few more items like deregulation to encourage entrepreneurship and business expansion but basically Mr. Blinder has suggested an attractive program for economic growth which should appeal to a broad collection of political interests.

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The Politics of Distrust

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I define myself as a fiscal conservative with a social conscience, because I want to address budget deficits and income inequality at the same time.  There is so much divisiveness in politics these days that liberals accuse me of favoring austerity while, at the same time, conservatives accuse me of being soft on welfare.
The author Jay Cost has an article, “The Politics of Distrust” on this topic in yesterday’s Wall Street Journal.  He says that the principal cause of this distrust is “the stubborn torpor of the American economy.”
Capture0According to Mr. Cost:

  • For roughly half a century after WWII economic growth averaged 3.6% a year.
  • Over the past 14 years, real growth has averaged only 1.7%.
  • Persistently weak economic growth has contributed to our sour civic mood in three important ways:
  1. It has prompted voters to turn against the incumbent party time and again.
  2. Underwhelming growth has heightened anxieties about economic anxiety – liberals blame the unfairness of market-based capitalism and conservatives blame the corrupting hand of government – in taxation, regulation and monetary policy.
  3. Finally, weak economic growth has damaged the credibility of the experts – the experts failed to foresee the slowdown of the early 2000s, failed to anticipate the housing bubble, failed to predict that economic growth would remain weak after it burst, and failed to implement policies to return it to our postwar norm.
  • These trends amount to a comprehensive assault on the political equilibrium of the past half century. During the postwar era public policy could evolve because broad agreement existed. Now the consensus has vanished and we are left with gridlock, indecision and drift.
  • The tonic to this stalemate is as obvious as it is elusive: economic growth that approximates the levels of the late 20th century.

Perhaps surprisingly there is a fair amount of agreement between liberals and conservatives on how to speed up economic growth. This will be the subject of my next post.

A Fiscal Conservative with a Social Conscience

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My last two blogs were “Why racism exists in America” and “Educare and the Academic Achievement Gap.”  I often describe myself as a fiscal conservative but it would be more accurate to say that I am a fiscal conservative with a social conscience.
Capture0By this I mean:

  • First and foremost I want to shrink our annual federal budget deficits enough so that our national debt begins to decline as a percentage of GDP. Right now the public debt (on which we pay interest) is at 74% of GDP which is the highest it has been since the end of WWII. This high level of debt is unsustainable and will inevitably lead to a new and much worse financial crisis if it is not put on a downward path.
  • Closely related to the first goal is the need to get our economy growing faster than the 2% average rate of growth since the end of the Great Recession in June 2009. This will have the twin benefits of producing more tax revenue which will make it easier to shrink our annual budget deficits as well as creating more and better paying jobs for everyone.
  • A third goal is to reduce income inequality. The best way to do this is not with more income redistribution from those with higher incomes to those with lower incomes but rather by achieving faster economic growth which will raise incomes for all. Yet another critical way of making American society more equal is to focus on:
  • Reducing social inequality. There are many different forms of social inequality  in our society but let’s focus on one of the most severe aspects: black-white racism.  America will be a more peaceful and prosperous country if we can reduce the glaring inequalities between the two races.

I am sufficiently optimistic to think it is possible to make progress on all of these fronts at the same time. It won’t be easy but momentum is slowly but surely building in this direction.

Social Inequality vs Income Inequality

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There is today in the U.S. much concern about income inequality and I have devoted many posts to this topic recently such as “Are economics and Social Progress Related to Each Other?”, “How to Expand Economic Mobility”, and “Richer and Poorer.”
CaptureThe above CBO chart shows that income inequality has not changed much in the last 30 years once government transfers and federal taxes are taken into account. Along the same line, the Manhattan Institute’s Oren Cass makes a strong case in, “The Inequality Cycle,” that Americans should be paying at least as much attention to the social aspects of inequality as to the economic aspects.
For example:

  • As Charles Murray shows in “Coming Apart,” (http://www.amazon.com/Coming-Apart-State-America-1960-2010/dp/030745343X) the upper class has remained stable with respect to marriage rates (94% in 1960, 84% in 2010), civic involvement, and trust in society while for the lower class marriage rates (84% in 1960, 48% in 2010 and dropping), civic involvement and public trust have all declined significantly.
  • Children in the lower classes are five times more likely to face abuse, violence, addiction and the death or imprisonment of a parent.
  • By the time they reach kindergarten, 72% of middle class children know the alphabet compared with only 19% of poor children.
  • The fraction of children with a single parent is the best predictor of upward economic mobility in a particular region, whereas the level of income inequality is not a significant predictor.

Mr. Cass suggests that public policy should focus on these social problems at least as much as on income inequality. For example:

  • Education reform should be focused on both ends of the K-12 spectrum: early childhood education to ensure that all children are ready to learn when they get to school and better vocational education in high school so that graduates can find a good job if they’re not going to college.
  • Remove onerous regulations on the workplace so that employers are not pushed unnecessarily into independent contractor arrangements.
  • The federal government should be more supportive of marriage (e.g. with tax policy), and the participation of religious organizations in the delivery of public social services (to improve their quality).

Conclusion: Being poorly raised does more to cut off opportunity than being raised poor.

The Pope, the United Nations and Global Poverty

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This is a big week in the U.S. Pope Francis is coming here and the UN will convene a conference in NYC to endorse international development goals for the next 15 years. As I explained in a recent post, “The Dung of the Devil,” the Pope should pay more attention to the recent accomplishments of free enterprise in decreasing the amount of poverty and economic inequality around the world.
In an article just a few days ago in the Wall Street Journal, Bjorn Lomborg, the Director of the Copenhagen Consensus Center, explains that the U.N. is likely to endorse 169 targets for global investment for the next 15 years. Mr. Lomborg demonstrates with cost-benefit analysis that focusing on just 19 of these goals would accomplish far more than adopting everything on the U.N.’s much longer list.
Capture1Here are a few of Mr. Lomborg’s items:

  • Completing the World Trade Organization’s Doha agreement would return $2000 for every dollar spent to retrain and compensate displaced workers.
  • The elimination of fossil fuel subsidies would be worth $15 for every dollar spent in direct support of the very poor who are unable to afford higher fuel prices. By contrast, trying to drastically increase the production of renewable energy would return less than a dollar for every dollar spent because renewable forms of energy remain so expensive.
  • Tripling access to preschool in sub-Saharan Africa would have benefits worth more than $30 for every dollar spent because of improved future earnings. On the other hand, efforts to improve exams and teacher accountability are much harder to achieve and the benefits would only amount to $5 for every dollar spent.
  • Other actions: boosting agricultural yields, cutting indoor air pollution with clean cook stoves, increasing access to family planning, fighting malaria and combatting malnutrition are other examples where investment would lead to big dollar returns.

Conclusion: Free enterprise economics has done much in recent years to eliminate poverty and inequality around the world. Additional public and private investment, focusing on just a relatively few major goals, can accomplish even more.

Should the National Minimum Wage Be Raised?

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A recent column by David Brooks in the New York Times, “Minimum Wage Muddle,” is a good summary of the pros and cons of raising the minimum wage for the whole country. Mr. Brooks refers to a recent Congressional Budget Office report that a hike in the minimum wage to $10.10 per hour might lift 900,000 out of poverty but would also likely mean a loss of 500,000 jobs.
Capture5As suggested in a recent post, one of the things we could do to get beyond our political dysfunction at the national level is to:

  • Put a greater emphasis on state-centered federalism both to encourage experimentation and innovation in the American system and to remove issues from the national agenda which contribute to division, stalemate and endless controversy.
    Capture4Considering that income inequality varies so greatly from one part of the country to another, (see above), it makes a lot of sense to federalize the minimum wage issue. In other words, let cities and states set their own minimum wage levels based on their own local circumstances.
    For example, the state of Nebraska, with very little inequality and where I live, has just raised its minimum wage to $8/hour ($9/hour beginning January 2016). Nebraska’s lowest in the country unemployment rate of 2.6% means that hardly anyone will lose their job.
    As Mr. Brooks says, “Raising the minimum wage will produce winners among job holders from all backgrounds, but it will disproportionately punish those with the lowest skills, who are least likely to be able to justify higher employment costs.”
    Conclusion: raising the national minimum wage is not the best way to address the inequality and fairness issue. A better way is to create more jobs by boosting the economy overall. Then help low wage workers take home more money with a (perhaps expanded) Earned Income Tax Credit. Cities and states can establish their own individual minimum wages however they wish.

Richer and Poorer

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As I often remind readers, this blog is primarily concerned with three basic fiscal and economic problems facing the U.S. They are: 1) our stagnant economy, 2) our massive debt, and 3) income inequality. Today I discuss inequality. The March 16 2015 issue of the New Yorker contains an extensive article on this topic by Jill Lapore, “Richer and Poorer.” However it suffers a common defect of only presenting one side of a complex issue.
There are facts about inequality which more people need to be aware of. For example:

  • The scope of income inequality is greatly reduced once incomes are adjusted for government transfers and federal taxes as shown in the following chart from the Congressional Budget Office.
    Capture
  • There is a strong correlation between inequality and growth as shown by the second chart just below from the World Bank.
    Capture2
  • Globalization has had a dramatic effect on incomes world-wide as low skill work has shifted from the developed world to the developing world as shown in the chart below from the Wall Street Journal. Hundreds of millions of people in the developing world have been lifted out of poverty at the cost of lost jobs to low skill workers in the U.S. and other developed countries.
    Capture3Any effective strategy for decreasing income inequality needs to be reality based. Yes, it exists but its severity is exagerated. The Americans who need help the most are the ones unlikely to either attend or graduate from college. What they need most is vocational training to prepare them for the millions of high skill jobs going begging in the U.S.
    The best thing we can do to decrease income inequality in the U.S. is to get our economy growing faster. Since the end of the Great Recession in June 2009, it has grown at the historically slow rate of 2.2% of GDP and this slow rate of growth is predicted (by the CBO) to continue indefinitely under current government policies. A return to the historical 3% growth rate would create jobs and better jobs for millions of the unemployed and under-employed as well as providing bigger raises for the middle class as employers have to compete for qualified workers.
    How can we make the economy grow faster? I have addressed this critical issue many times and will return to it soon.