Inequality and Growth

Posted on July 16, 2015 by jackheidel

In my opinion the two most serious problems facing the U.S. at the present time are 1) stagnant growth and 2) massive debt. As discussed by William Galston in yesterday’s Wall Street Journal, the U.S. presidential campaign is now beginning to address the first of these issues. For example:

Bernie Sanders rejects “growth for the sake of growth” and says that “our economic goals have to be redistributing a significant amount back from the top 1%.”
Hillary Clinton says that we have to build a “growth and fairness” economy. “We can’t create enough jobs and new businesses without more growth, and we can’t build strong families and support our consumer economy without more fairness.”
Jeb Bush argues that there is nothing wrong with household incomes that 4% growth wouldn’t solve.

The readers of this blog will have little difficulty figuring out where I stand on this continuum of economic values. My view is illustrated by the chart just below from the World Bank which shows that countries with the fastest growing economies also have the least amount of inequality.
Let’s be more specific. Mrs. Clinton would achieve more fairness by:

Raising the minimum wage.
Guaranteeing child care and other family friendly policies.
Encouraging profit sharing.
Encouraging more innovation by increasing public investment in infrastructure, broadband, energy and scientific research.

These are attractive goals but how do we achieve them? The best way to raise wages is to get the economy growing so much faster that it creates a labor shortage. Then businesses will be competing for labor and wages will go up. This is exactly what is happening in Omaha NE where I live and the unemployment rate is down to 2.9% (2.6% in Nebraska as a whole).
Furthermore, in a tight labor market, businesses will automatically try harder to keep good employees by providing extra benefits such as childcare and profit sharing.
Public investment in infrastructure, etc. will be more easily affordable with the higher tax revenue generated by a faster growing economy.
Conclusion: faster growth is the best way to create a more fair and equal society!

“The Dung of the Devil”

Posted on July 14, 2015 by jackheidel

My last post, “The Moral Case for Free Enterprise,” was motivated in part by a recent speech of Pope Francis comparing the excesses of global capitalism to the “dung of the devil.”
The scholar Mark Perry of the American Enterprise Institute has just published an interesting chart (just below) demonstrating an 80% reduction in world poverty in the 36 year period from 1970 to 2006. He quotes AEI President Arthur Brooks that “if you love the poor, if you are a good Samaritan, you must stand for the free enterprise system, and you must defend it, not just for ourselves but for people around the world. It is the best anti-poverty measure ever invented.”
In a previous post, a year and a half ago, “A Global Perspective on Income Inequality,” I referred to another chart (just below) to demonstrate the massive growth of income in the developing world. To a large extent this is the result of economic globalization shifting low-skill employment from the developed world to the developing world where the cost of labor is less expensive. As Arthur Brooks says, “It was globalization, free trade, the boom in international entrepreneurship. In short, it was the free enterprise system, American style, which is our gift to the world.”
So, yes, the world as a whole is now much better off but American workers have paid a price for the global shift in low-skill work. The answer is not to impede globalization but rather to:

Speed up the growth of our own economy in order to raise wages and provide more jobs for the unemployed and underemployed.
Improve K-12 educational effectiveness and expand career educational opportunities to better prepare present and future workers for the many new high-skill jobs being created all the time.

The world is changing rapidly but there are effective ways for the U.S. to adapt if only we have the good sense to move forward!

The Land of the Free and the Home of the Brave

Posted on July 5, 2015 by jackheidel

As we celebrate the 239^th anniversary of the signing of the Declaration of Independence in 1776, Americans have much to be thankful for. It is often said that the United States is the strongest, wealthiest and freest country the world has ever known. Although this may be somewhat of an exaggeration (see below), it is still indicative of how fortunate we are compared to the rest of the world.
As we celebrate our good fortune, we need to be acutely aware that our continued success as a great nation is not automatically assured. In fact we face a number of troubling and persistent problems which are not likely to disappear unless we take strong action to address them. For example we have:

A stagnant economy with only 2.2% annual growth since the end of the Great Recession. And the Congressional Budget Office predicts no speed up over at least the next ten years, based on current policy. Such slow growth condemns 20 million unemployed and underemployed citizens to unfulfilling lives, as well as lackluster pay raises for many more tens of millions.

Massive debt. Our public debt (on which we pay interest) is now at 74% of GDP, highest since the end of WWII, and predicted by the CBO to grow rapidly under current policies. When interest rates return to the normal 5% level, interest payments on the debt will skyrocket, making it much more difficult to fund all of the federal programs we depend on for our quality of life.

Increasing Income Inequality is real even if overhyped in the media. America is still a land of great opportunity but basic fairness demands that all citizens be able to share in our national abundance.

Threats from abroad. ISIS now controls much of Iraq, Syria and northern Africa and must be defeated. NATO needs our very strong support, all the more so with the Eurozone and European Common Market under increasing pressure from within.

As the strongest nation in the world we have much responsibility for continued world peace and prosperity. We can’t fulfill this role adequately unless our own internal fiscal and economic policies are in fundamentally sound shape.
Let’s be thankful for what we have and bear down hard to insure that we keep it!

Letting Young People Drift and the Liberal Disconnect

Posted on June 23, 2015 by jackheidel

The New York Times had an excellent lead editorial on Sunday, “The Cost of Letting Young People Drift,” describing how 5.5 million young Americans, ages 16 – 24, are neither working nor in school. “At a time when the economy is requiring workers to have higher levels of skills, one in seven of America’s young adults can’t even get started.”
The NYT editorial is based on new research, “Zeroing In on Place and Race: youth disconnection in America’s cities” performed by Measure of America. The report points out that the problem has gotten much worse since the Great Recession in 2008, as shown in the chart below.
It also breaks down the youth disconnection rate by state. For example, Nebraska (7.6%), North Dakota (7.9%) and Iowa (8.8%) have the lowest percentages, while Mississippi (18.5%), West Virginia (19.6%) and Louisiana (19.8%) have the highest percentages (as shown below).
But also look at the latest “Unemployment Rates for States” published by the Bureau of Labor Statistics. There is a very close connection between a state’s unemployment rate and its youth disconnection rate, as shown below. In other words, one of the best ways to keep young people connected is to give them a better chance of finding a job.
But it requires faster economic growth to provide more jobs. Just yesterday the NYT had an editorial, “Obstacles to Economic Growth,” lamenting our very slow rate of economic growth of about 2.2% for the past six years. According to the NYT, “What’s needed most is public and private investment in the economy sufficient to support strong growth and rising productivity.” The editorial then goes on to berate Congress for being more interested in budget cuts than in new spending programs to stimulate the economy. According to the NYT, “the pathway to prosperity is clear for leaders who will dare to take it.”
The NYT thus recognizes the need for more private investment to stimulate the economy but has no apparent interest in policy measures to encourage it. How can a news organization as sophisticated as the NYT be so passionate about wanting to improve society and so clueless about the best way to do it?

How to Expand Economic Mobility

Posted on June 11, 2015 by jackheidel

My blog addresses the three main economic and fiscal issues facing the U.S. today: slow growth, economic inequality and massive debt. Today I focus on inequality by referring to a recent article by the Manhattan Institute’s Scott Winship, “Up: Expanding Opportunity in America.” Mr. Winship observes that there has been little change in upward mobility over the past three generations. Furthermore the U.S. has upward earnings mobility rates quite comparable to Canada and the Scandinavian countries, which are generally regarded as having strong economies.
Nevertheless he makes several suggestions for attempting to boost upward mobility in the U.S. as follows:

Proposal 1: Wage War on Immobility through an Opportunity, Evidence and Innovation Office and an Opportunity Advisory Commission. OEIO would fund and evaluate an array of demonstration projects at the state and local levels. It would consolidate many already existing programs and have a budget of $20 billion per year.
Proposal 2: Experiment with Promising and Innovative Approaches to Mobility Promotion. Examples are: text-messaging strategies such as READY4K, Language ENvironment Analysis, and Converting Large Schools with High Drop-out Rates into Small Personalized Schools.
Proposal 3. Block-Grant Means Tested Programs and Send Them Out to the States. Such a proposal has recently been made by the House Budget Committee.
Proposal 4. Encourage Employment through Work Subsidies. This is already being done with the Earned Income Tax Credit.
Proposal 5. Encourage Delayed and Planned Childbearing through Tax Incentives. The idea is to promote marriage by expanding the current Child Tax Credit of $1000 per child for single parents to perhaps $4000 per child for married parents, but for low-income families only.
Proposal 6. Reform the Social Security Disability Insurance Program. The share of adults age 25 to 64 receiving SSDI benefits has tripled from 1.6% in 1970 to 5% in 2010. Reform of this program would put many able-bodied men and women back to work and save lots of money, some of which could be used to fund the above programs.

Conclusion: Increasing upward mobility is one very good way to combat economic inequality. Mr Winship provides an excellent discussion of several new as well as already established ways of accomplishing this goal.

Growth vs Equitable Growth

Posted on May 29, 2015 by jackheidel

There is a huge debate going on in political and policy circles between the advocates of increasing economic growth and the advocates of increasing income equality. I generally argue that the best way to increase income equality is to increase economic growth overall.
I have just come across a series of articles from the Nov/Dec 2014 issue of the American Monthly, “American Life: an investor’s guide ,” which are sponsored by the Washington Center for Equitable Growth, a progressive Think Tank. The fact that this group is focused on equitable growth, rather than the narrower goal of income equality, is of great interest to me.
They advocate a number of things that I agree with such as:

The incredible importance of early childhood healthcare and education.
Improving K-12 education, especially in low-income areas.
Providing much more vocational education and apprenticeship programs.
Running a “high pressure” economy in order to tighten the labor market. They recognize that lower unemployment leads to higher wages (see above).
Expand the Earned Income Tax Credit especially for workers without children.

The authors want to “pressurize” the economy with a more stimulative fiscal policy which means increased deficit spending, a very bad idea in my opinion. Much better ways to boost the economy are with policies such as tax reform, trade expansion, immigration reform and regulatory relaxation.
Yes, there is a high degree of income inequality and yes, it’s getting worse over time. But, as Warren Buffett says, the poor are not poor because the rich are rich. The best way to help the poor is to make them more productive. That is exactly the purpose of the policies enumerated above.

Learning By Doing II. The negative influence of lobbyists

Posted on May 12, 2015 by jackheidel

My last post reported on a new book by James Bessen, “Learning by Doing: the real connection between innovation, wages and wealth.” It makes several recommendations for how the U.S. can better meet the challenges posed by the hollowing out of the middle class, as illustrated in the chart just below from the Dallas Federal Reserve.
Mr. Bessen blames one primary culprit for this problem: the growing role of money in politics. For example:

The dramatic growth in occupational licensure from 70 occupations covering 5% of the workforce in the 1950s to over 800 occupations covering over 29% of the workforce in 2008. Such a major change can only be understood as the outcome of massive lobbying.
Defense procurement. For example, in 2012 the defense industry spent $132 million on over 900 lobbyists. It is hardly surprising that defense procurement rules have favored established defense contractors at the expense of start-up technology firms.
The best patent law money can buy. Patent trolls have continued to file more lawsuits, despite the America Invents Act of 2011. A new legislative effort for patent reform in 2013 passed the House by a margin by a margin of 325 to 91 but then was killed by the Senate in May 2014.
Changes in trade secret law. The problem is that more uniform trade law, which sounds desirable, also broadens its scope which then limits employee mobility and the creation of spin-offs.
Strong enforcement of non-compete agreements in Massachusetts protects established firms but hurts startups. This has given Silicon Valley companies a big advantage over the companies on Route 128 outside of Boston.

Mr. Bessen makes a very strong case for the harmful effects of lobbyists and their money in retarding economic growth. But how can we possibly curtail the influence of lobbyists without limiting their freedom of speech? Stay tuned for the next post!

Learning By Doing

Posted on May 10, 2015 by jackheidel

The two biggest problems facing our country today are a stagnant economy and an exploding national debt. Faster economic growth would help pay our bills by bringing in more tax revenue. It would also create more jobs and give a boost to stagnant wages. One of the causes of this stagnation is that our economy has become less entrepreneurial over time as shown by this often cited chart from the Brookings Institution.
A very interesting new book by James Bessen, “Learning by Doing: the real connection between innovation, wages and wealth.” looks at both our economic history and our current economy to understand how society can best meet the challenges posed by new technology. Mr. Bessen identifies the basic problems as follows:

Funds have been shifted away from vocational education and community colleges at a time when large numbers of workers could acquire valuable skills at these institutions.
The rapid growth of occupational licensing restricts training and jobs open to mid-skill workers and, in many cases, limits their use of technology.
Military procurement favors large defense contractors over start-up firms, while heightened secrecy requirements limit the development of open standards and the broad sharing of knowledge.
Job mobility has declined, limiting knowledge sharing and weakening labor markets.
Abusive patent litigation has exploded, making it harder for startups and small firms to develop new technology.

Mr. Bessen concludes:“The practical skills of ordinary people have been a wellspring of widely shared wealth for 200 years, and the economic power of mighty nations rests on the technical knowledge of the humble. Provide the means for ordinary workers to acquire the skills and knowledge to implement new technology today and the economic bounty will not only grow, it will be widely shared.”
What are the roadblocks to implementing Mr. Bessen’s recommendations? I will return to this question later.

Why Inequality Is Harmful and What to Do About It

Posted on May 7, 2015 by jackheidel

I describe this blog as addressing our fiscal and economic problems, meaning deficits and debt on the one hand and slow economic growth on the other. But these topics, while being of critical importance to our national welfare, are also somewhat on the dry side. The subject of economic inequality stirs up lots more interest and response. In the Fall of 2012 The Economist declared that “a new form of radical centrist politics is needed to tackle inequality without hurting economic growth.”
Says The Economist:

There’s too much cronyism in the rich world. Banks which are “too big to fail” have an implicit subsidy. From doctors to lawyers, many high paying professions are full of unnecessarily restrictive practices. Social spending often helps the rich more than the poor. For example housing subsidies for the top 20% (mortgage-interest deductions) are four times the amount spent on public housing for the poorest 20%.
If income gaps become too wide, they can lead to less equality of opportunity, especially in education. The gap in test scores between rich and poor American children is 30 – 40% wider than it was 25 years ago.
If those on the top of the heap resist equalizing changes, it could lead to political pressure which serves nobody’s best interests.

Here are The Economist’s proposals for a True Progressive Agenda to attack inequality:

Compete. A Rooseveltian attack on monopolies and vested interests is needed. School reform is crucial: no Wall Street financier has done as much damage to social mobility as the teacher’s unions have.
Target. Government spending need to be focused on the poor and the young. Governments can’t hope to spend less on the elderly but they can reduce the pace of increase.
Reform. Eliminate tax deductions which primarily benefit the wealthy such as for mortgage-interest; narrow the gap between tax rates on wages and capital income.

“The right is still not convinced that inequality matters. The left’s default position is to raise income tax rates for the wealthy and to increase spending still further – unwise when sluggish economies need to attract entrepreneurs and when governments are overburdened with promises of future spending.”
Surely there is a better way!

Globalization Is a Messy Process

Posted on April 28, 2015 by jackheidel

Globalization is having a dramatic effect on income distribution around the world as I discussed in a previous post. Middle incomes in the developed world are stagnating while at the same time they are growing rapidly throughout much of the rest of the world.
At the same time as western world economies are stagnating, turmoil and instability are breaking out elsewhere, especially in eastern Europe, the Middle East and northern Africa. Fortunately the U.S. and its allies are stepping in with military force to help maintain local order in many parts of the world where it is breaking down.
In short, at the same time, whether connected or not, the postwar geopolitical system is breaking down and the economic stability of the Great Moderation has given way to the Great Recession and its aftermath of macroeconomic volatility.
An interesting article by Chrystia Freeland in the latest issue of The Atlantic, “Globalization Bites Back” addresses both of these issues together. She says “I believe that capitalist democracy has proved itself to be the only compelling, universalist vision of how to live the good life. But the stable world order many of us assumed this thesis foretold has not come to pass.”
As the above chart shows, one very positive result of this messy process is likely to occur. The middle class worldwide is predicted to grow from 1.8 billion in 2009 to 4.9 billion in 2030. All of this enormous growth in the size of the middle class will occur outside of North America and Europe.
The implications for the continued prosperity and world leadership of the U.S. are clear. We need to get our own economy back on track, growing at a faster rate. We also need to get our fiscal house in order so that the dollar will continue to be the international currency of choice.
Our dominant role in world affairs is beneficial to all but it is by no means assured without much effort on our part.

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility

Tag Archives: Economic inequality