GDP Growth Disappointing. GDP growth was only 1.2% in the second quarter of 2016 and in fact has now averaged only 1.2% for the past year, much lower than the 2.1% average growth since the end of the Great Recession in June 2009.
Consumers Spending Money. Consumer spending was up 4.2% in the second quarter continuing a long term trend. This means that there is plenty of demand for new products in the economy.
Wages Rising More Quickly. Total compensation is not only rising but the wage and salary component, not counting benefits, is up 2.5% over one year ago. This means that consumers have more money to spend.
Investment Shrinking. Investment in new business structures, equipment and intellectual property has now fallen for the third consecutive quarter. Eventually, if not turned around, this decrease in new investment will lead to fewer jobs and less consumer spending.
Poor Productivity Growth. Labor productivity fell .6% in the first quarter of 2016, a continuing slide. Weak productivity growth is a grave threat to long term prosperity in the U.S.
Conclusion. Wages are going up and consumers have money to spend. But worker productivity can only increase when business makes new investment. This is not happening nearly fast enough. The House Republicans have an excellent plan to encourage business investment.
Is either presidential candidate paying attention to this opportunity to speed up economic growth?
I, for one, am waiting to find out!
In my last post I presented the argument that voters are often more reasonable than the populist leaders who are trying to appeal to them. They would rather hear something more optimistic than rage against a dangerous world. But there is a difference of opinion on how to reach these voters:
Leading Democratic presidential candidate Hillary Clinton endorses the Buffett Rule which calls for millionaires to pay a minimum tax of 30% on their income. Says Clinton, “I want to go even further because Warren is right. I want to be the president for the struggling, for the striving and the successful.”
All of the Republican presidential candidates, including Donald Trump, have tax reform plans which will grow the economy but none of which are revenue neutral. In other words, they will all add to annual deficits and therefore make our debt problem much worse than it already is.
The nonpartisan Tax Foundation has issued a new report, “Options for Broadening the U.S. Tax Base,” which proposes capping itemized deductions at $25,000 per individual combined with
i) cutting the corporate tax rate to 27%
ii) cutting the top three ordinary income brackets by 5%, and
iii) implementing a top capital gains tax rate of 20%.
Such a plan would be revenue neutral and would lead to a long term GDP gain of 2.7%, a long term wage gain of 2.2% and a ten year dynamic revenue gain of $759 billion.
The Clinton plan would bring in up to $50 billion per year in new tax revenue but would do little to boost the economy. The Republican presidential tax plans are fiscally irresponsible. The Tax Foundation plan would boost the economy and reduce deficits rather than increase them. Other specific reforms would boost the economy even more.
In other words there are clear cut ways to create more jobs and raise wages. This is a message which should appeal to the angry and disaffected voters who are attracted to Donald Trump.
As we are just getting started on what so far is a confusing presidential election campaign, it would be easy to forget how incredibly lucky we are in America. Our country is very strong and we are isolated from many of the world’s problems. The terrorist attacks in Paris over the weekend are a grim reminder of this fact. But we still have responsibility for much of what is happening around the world.
George W. Bush’s biggest failing is not the Iraq War, draining Medicare funds with a new drug benefit or ramping up deficits with tax cuts that lose revenue. His biggest failing is not foreseeing the financial crisis and at least mitigating it if not heading it off entirely. His financial advisors (Greenspan, Bernanke, Geithner, Paulson) were asleep at the switch. As the Economist makes clear in its latest issue, “First America, then Europe. Now the debt crisis has reached the emerging markets.”
Barack Obama’s biggest failing is not the stagnant economy or massive debt buildup which occurred on his watch, although he could have eased their burden with smarter policies. His biggest failing is his unwillingness to assert sufficient power in the Middle East to head off the chaos we observe today. The enormous European refugee crisis with all of its attendant horrors is largely the result of his inadequate intervention in Iraq, Libya and Syria.
The main concerns of this website are the internal fiscal and economic problems faced by the U.S. We have to figure out amongst ourselves how to address these very serious issues. But, like it or not, what we do affects the whole world. If we fail to meet our responsibilities, the whole world, including us, will suffer with the consequences.
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.” According 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:
It has prompted voters to turn against the incumbent party time and again.
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.
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.
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 U.S. economy has grown at the rate of only 2.2% since the end of the Great Recession in June 2009. This is much slower than the average rate of growth of 3% for the past fifty years. The economists Glenn Hubbard and Kevin Warsh, writing in the Wall Street Journal, “How the U.S. Can Return to 4% Growth,” point out that:
After the severe recession of 1973-1975, the economy grew at a 3.6% annual real rate during the 23 quarters that followed.
After the deep recession of 1981-1982, real GDP growth averaged 4.8% in the next 23 quarters.
Recent research has shown that steep recoveries typically follow financial crises.
The economist John Taylor, also writing in the WSJ, “A Recovery Waiting to Be Liberated,” explains that the growth of the economy, i.e. growth of GDP, equals employment growth plus productivity growth. He then points out that:
Population is growing about 1% per year. However the labor-force participation rate has fallen every year of the recovery, from 66% in 2008 to 62.9% in 2014. Even turning this around slightly would increase employment growth above the 1% figure coming from population growth alone.
Although productivity growth has hovered around 1% for the past five years, this is less than half of the 2.5% average over the past 20 years.
Given the strong headwinds of globalization and ever new technology affecting the U.S. economy, we especially need new policies such as:
Fundamental tax reform directed at increasing the incentives for work and driving investment in productive assets.
Regulatory reform that balances economic benefits and costs (e.g. lightening the burdens of Obamacare and Dodd-Frank).
Trade agreements to break down barriers to open global markets.
Education policies to prepare all young people for productive careers.
In other words, rather than accepting our current situation as “the new normal” or as unalterable “secular stagnation,” we need to “give growth a chance”!
The Bureau of Labor Statistics has just reported very good news in its monthly Job Openings and Labor Turnover Survey. For the first time since 2000, the number of job openings now exceeds the number of new hires, as shown in the chart just below. This means that wages will start to grow faster as employers have to compete harder for new workers. This is an early indication that our economy will likely soon resume a faster rate of growth than its average of 2.3% since the end of the Great Recession in June of 2009. There will be many benefits. The unemployment rate should continue to keep heading downward from its current level of 5.5%. More unemployed and underemployed workers will be able to find satisfactory jobs. The labor participation rate should start to head back up from its historically low current state.
The Federal Reserve is likely to begin raising short term interest rates sooner rather than later in order to keep inflation in check before it has a chance to heat up. In other words we may be breaking out of the ambiguous state of slow-growth secular stagnation in which we have been trapped for six years.
All of this is very good news as long as Congress realizes that it is now even more urgent than ever to put our massive public debt of $13 trillion on a downward path, compared to the total economy, before interest rates begin to rise substantially and eat us alive with interest payments on this huge debt.
In this regard the Budget Plan approved by Congress just this Spring, which will lead to a balanced budget over ten years, looks very attractive indeed. It will be a mammoth job to achieve such a milestone in fiscal restraint, but doing so will lead to a more secure and prosperous future for all Americans.
Several large U.S. companies have recently announced that they are planning to merge with foreign companies and move their corporate headquarters to a low tax country such as Ireland or Great Britain. The Obama Administration proposes to disallow such “tax inversions” by requiring that after such a merger at least 50% of the stock of the new company would have to be foreign owned. Otherwise the firm would still be considered American for tax purposes. Such a technical fix is unlikely to solve a much more fundamental problem.
As the latest issue of the Economist, “How to stop the inversion perversion,” makes clear, “America’s corporate tax has two horrible flaws. The first is the tax rate, which at 35% is the highest among the 34 mostly rich-country members of the OECD. … The second flaw is that America levies tax on a company’s income no matter where in the world it is earned. In contrast, every other large rich country taxes only income earned within its borders (a so-called ‘territorial system’). Here, too, America’s system is absurdly ineffective at collecting money. Firms do not have to pay tax on foreign profits until they bring them back home. Not surprisingly, many do not: American multinationals have some $2 trillion sitting on their foreign units’ balance sheets.” A relatively simple solution to this glaring problem would be to lower the corporate tax rate to 25%, the OECD average, and shift to a territorial system. Revenue losses would be offset by closing loopholes and deductions.
A better, but likely more controversial, solution would be to completely eliminate the corporate income tax and then tax dividends and capital gains at the same rate as earned income. This would avoid the double taxation problem whereby profits are taxed first at the corporate level and then again for individuals as dividends and capital gains.
The overall goal in this entire endeavor should be to boost the economy, thereby creating more jobs, and additionally to raise the tax revenue needed to pay our bills. Fairness is important but growth is even more important!
The Economic Policy Institute has just issued a provocative new report, “Raising America’s Pay: Why It’s Our Central Economic Policy Challenge”. It is based on the now widely accepted view, as summarized in the chart below, that wages for the typical (i.e. median, not average) American worker have been stagnant since the early 1970’s, even though productivity has continued to increase at its historical rate. First of all, the authors make reasonable arguments that:
The slumping of hourly wage growth for the vast majority explains the overall trends in income inequality.
Wage stagnation stalls progress in reducing poverty.
Wages are the root of economic security for the vast majority. This includes the fact that Social Security benefits depend upon wage earnings before retirement.
Then they ask: “Why has wage growth faltered for the vast majority, and what can be done?” Here is where the report becomes controversial!
The authors do agree that globalization of markets and technological change have contributed to the wage growth slowdown but argue that this overlooks the impact of labor market and tax policy and business practices as follows:
Falling top tax rates have increased the income share of the top 1 percent.
The Federal Reserve has prioritized low rates of inflation over low rates of unemployment in recent decades and high unemployment suppresses wage growth.
The erosion of the inflation adjusted minimum wage and the share of the workforce represented by a union explain much of the entire rise of wage inequality over this time period.
The authors are completely correct that stagnant wages for American workers is a critical, even “central,” problem facing the economy at the present time. The question, of course, is how to address this problem most effectively. In my opinion, the authors have completely neglected to take into account how a faster rate of economic growth would contribute to a solution of the problem and how this could be accomplished. I will address this question in my next post in a couple of days.
They conclude by saying that this report is only the first in a multiyear research and public education initiative of the EPI. We have a lot to look forward to!
According to Peter Wehner, a senior fellow at the Ethics and Policy Center, the middle class consists of Americans “who do not consider themselves poor or rich, and can imagine their fortunes turning either way.” “We’ve moved towards an economy that more significantly favors skilled over unskilled labor. In addition, jobs, including even higher skilled jobs, are being outsourced to countries like China and India as the economy grows more globalized.”
“While President Obama has shown that he is able to effectively describe these trends, he has proved singularly unable to improve the economy in light of them. Indeed, a slew of economic indicators have worsened during his presidency.”
“Among the public there is a very deep sense of unease and apprehension. Ground that people once believed was stable is seen as crumbling, and many Americans seem unsure what to make of it. But one thing they do believe: right now politics is out of touch with what they’re experiencing. We’ve witnessed a collapse of trust in the federal government, and when it comes to Republicans and Democrats, the public’s attitude is: a pox on both your parties.”
“Most Americans have lost confidence in President Obama; they are deeply unhappy with both his policies and their consequences. …Yet Americans have not so much turned to the Republicans as they have turned against the Democrats.”
“Americans do not have a sense that conservatives offer them a better shot at success and security than liberals. … Rather than speak about the economy in broad abstractions, conservatives need to explain how to put government on the side of people working to better their conditions.”
I consider these excerpts from Mr. Wehner’s introductory essay in the document “Room to Grow: conservative reforms for a limited government and a thriving middle class” to be an excellent summary of the mood of the American Middle Class. Some of the accompanying policy prescriptions are good ideas and some are not. Stay tuned!