The Atlantic monthly magazine is celebrating its 160th anniversary this year. In 1857 its founders envisioned that the magazine would “honestly endeavor to be the exponent of what its conductors believe to be the American idea.” In the current issue one of its writers asks, “Is the American Idea Doomed?” and claims that it has few supporters on either the left or the right. Well, I happen to be in the middle and I think the American idea is doing very well indeed.
The World Economic Forum ranks the U.S. as the world’s most competitive large economy and, in fact, the U.S. is getting richer faster than anybody else.
Productivity growth in the digital industries has grown at the annual rate of 2.7% over the past 15 years compared with only an anemic .7% annual growth in productivity in the physical industries. The U.S. economy is becoming more digital all the time.
The four U.S. companies, Amazon, Apple, Facebook and Google are in the process of revolutionizing all aspects of life not only in America but all around the world.
According to the Kauffman Foundation entrepreneurship is flourishing in the U.S. (see chart), and not just in Silicon Valley.
According to Freedom House democracy has made much progress around the world in the last 30 years, even if further growth has stalled for the past ten years. Other democratic countries are our best friends and so we want more of them.
Granted Donald Trump is a wild card. So far his record is mixed but he hasn’t made any big mistakes (liking dragging us into war or hurting the economy). It is unlikely that he’ll slow our huge forward momentum whether or not he helps it.
Conclusion. “The democratic experiment is fragile” (perhaps!) but it’s also got a lot going for it right now. We can never afford to be complacent but we need not be pessimistic either.
The American Enterprise Institute’s Nicholas Eberstadt has performed a valuable national service with two recent publications: “Men without Work” and “Our Miserable 21st Century” These works lay out in great detail what has gone wrong in our country in the past 16 years:
Overall household wealth has doubled as a result of a surging stock market fed by the Federal Reserve policy of quantitative easing.
The recovery from the crash of 2008 has been singularly slow and weak compared to the 1947 – 2007 trend line.
The work rate for Americans aged 20 and older has declined by 4% from 66% to 62%.
Half of all prime working age male labor-force dropouts take opioid medication on a daily basis paid for by Medicaid. 57% of this population class is collecting disability benefits.
17 million male ex-prisoners and convicted felons are now in our midst and largely unable to find the employment which would lead to productive lives.
Here is Mr. Eberstadt’s initial prescription for addressing this very serious social problem:
Revitalize American business and its job-generating capacities. According to the Brooking Institution’s Ian Hathaway and Robert Litan, “business deaths now exceed business births for the first time in the thirty-plus-year history of our data.”
Reducing the immense and perverse disincentives against male work embedded in our social welfare programs. For example, U.S. disability programs are subject to widespread abuse and gaming. Social welfare programs should emphasize a “work first” principle emphasizing training and education, job placement, and tax credits, etc.
Drawing men with a criminal record back into productive work life. Note that the huge increase in America’s ex-prisoner and ex-felon population in recent years coincides with a dramatic drop in rates for both violent crime and property crime. This suggests that former criminals do not pose a continuing danger to society.
Conclusion. For the future prosperity and social cohesion of our country addressing this problem should be a very high priority. Let’s hope that President Trump gets the message.
As many commentators, including myself, have pointed out, we need faster economic growth in order to create more and better paying jobs and also to bring in more tax revenue to shrink our huge budget deficits.
The rate of economic growth equals the growth of labor productivity plus the growth of employment. The problem is that both productivity growth and the labor force participation rate have dropped steeply in recent years.
As I have pointed out in previous posts, the U.S. economy has become less entrepreneurial in recent years in the sense that there are now more firms going out of business than new firms going into business.
An article in yesterday’s Wall Street Journal has another way of looking at this. The rate of startup formation has been declining in the U.S. for decades (as shown just below). It is obvious that figuring out how to boost entrepreneurship would do a lot to spur economic growth.
This can be accomplished with:
General growth measures. Tax reform (lower marginal rates paid for by shrinking deductions), regulatory reform and simplification, maximum free trade to open markets, immigration reform to bring in more skilled workers, entitlement reforms to prevent a debt explosion.
Business tax incentives. Immediate write-off (i.e. expensing) of business investment. This encourages more investment by eliminating the need for depreciation over an arbitrary number of years. It is paid for by eliminating the deduction for interest expense to finance such investment.
Conclusion. Lots of voices are saying that technological innovation is slowing down and that only fiscal stimulus by the government can speed up growth. Such pessimistic views will predominate unless the private sector is given the tools it needs to achieve growth in the most productive way.
Our economy is doing a little better recently but not nearly as good as it could be. In my last post, “Men without Work,” I present Nicholas Eberstadt’s data that a significant part of the problem is the very large number (9.5 million) of prime working age (25 – 54) men who are unemployed and not looking for work.
Statistically, such men are likely to be un-workers if 1) they have no more than a high school diploma, 2) are unmarried and without dependent children, 3) are not immigrants and 4) are African American.
Two other relevant factors are 1) the huge increase in employment for prime working age women, from 34% in 1948 to 70% in 2015 and 2) the very high male arrest and incarceration rates for blacks and those without a high school diploma.
Obviously, it is highly detrimental to society to have such a large number of men who are idle during their prime working years.
Here are several ways to address this problem:
Revitalize America’s job-generating capacities. More businesses have closed than opened in each year since the 2008 financial crisis. Furthermore, the growing regulatory burden is not a recipe for encouraging entrepreneurship.
Reverse the perverse disincentives against male work embedded in our social welfare systems. The Earned Income Tax Credits should be extended to single adults without dependents. Eligibility for disability income should be tightened considerably.
Come to terms with the enormous challenge of bringing convicts and felons back into our economy and society. The huge increase in incarceration rates in recent years has coincided with a dramatic drop in rates for both violent crime and property crime.
Conclusion. One good way to speed up economic growth is to put more unemployed prime working age men back to work. There are several very concrete steps which can be taken to do this.
My previous post, two days ago, introduced a new book by two economists, John Dearie and Courtney Geduldig, “Where the Jobs Are, Entrepreneurship and the Soul of the American Economy”. They make a very strong case that net job creation comes primarily from businesses less than one year old, true “start-ups”. But, unfortunately, there has been a huge drop off in the number of new businesses created each year since 2007 and, furthermore, the historical average of seven new jobs created by a firm in its first year has now fallen to less than five.
How do we reverse this alarming trend? Here is what the authors have learned from the many entrepreneurs they have talked to:
“Not enough people with the skills we need”
“Our immigration policies are insane”
“Regulations are killing us”
“Tax payments can be the difference between survival and failure”
“There’s too much uncertainty and it’s Washington’s fault”
Although there are 24 million Americans either unemployed or underemployed, there are also 3 million advertised high skill job openings going begging and many more potential jobs available for qualified individuals. A greater emphasis on STEM (Science, Technology, Engineering and Mathematics) education in the U.S. would help. But also immigration reform is urgently needed. The Senate has passed legislation to raise the annual cap on H1-B visas (for high skilled workers) from 65,000 currently to 110,000. Hopefully the House will concur.
A Preferential Regulatory Framework for New Businesses could be devised to help fragile new businesses in their first five years. A Regulatory Improvement Commission could be created to streamline the entire federal regulatory process. Likewise a Preferential Tax Framework for New Business should be created and could, for example, recommend taxing income for the first five years at a much lower rate than normal.
Regarding policy uncertainty the authors refer to the U.S. Economic Policy Uncertainty Index which is at a very high level since the Great Recession. Economic uncertainty obviously discourages business growth.
Conclusion: A very good way to boost the economy and create more new jobs is to put greater emphasis on supporting entrepreneurs who are trying to start new businesses. There are a number of concrete actions that the federal government can take to do this and doing so should be a very high priority for our national leaders.
Two economists, John Dearie and Courtney Geduldig, have just published a very interesting new book, “Where the Jobs Are, Entrepreneurship and the Soul of the American Economy”. In April 2011, Mr. Dearie and Ms. Geduldig launched an effort to understand the nature and scope of the damage to the U.S. labor markets caused by the Great Recession and, if possible, identify new ways to enhance the economy’s job-creating capacity.
They quickly “learned of research that demonstrates how virtually all net new job creation in the United States over the past 30 years has come from businesses less than a year old – true ‘start-ups.’ Investigating further, they also learned that America’s job creation machine is faltering, with the rate of start-up formation declining precipitously in recent years. To find out why, they launched an ambitious summer road trip – conducting roundtables with entrepreneurs in 12 cities across the nation.” Here is what they learned.
First of all, the U.S. labor market is tremendously dynamic, as existing businesses create new jobs and eliminate others. “In 2011, for example, 47.5 million separations occurred while 49.6 million Americans took new jobs.” But “existing firms, of any age or size, in aggregate, nearly always produce more separations than hires. … Indeed, existing businesses shed on a net basis a combined average of about 1 million jobs each year as some businesses fail, others become more efficient, and as separations simply outpace new hires. By stark contrast, new firms in their first year of existence, create an average of 3 million new jobs.”
Unfortunately, there has been a huge drop off in the number of new businesses created annually since 2007. Furthermore, the historical average of seven new jobs created by a new firm in its first year, has now fallen to less than five new jobs.
The obvious question which this discussion raises is: what policy changes are needed to boost the creation of new businesses? This will be the topic of my next post in a couple of days!
In my previous post I laid out the view of the economist, Tyler Cowen, in his new book “Average is Over”, that the powerful trends of globalization, technology, and ever increasing machine intelligence (such as Google’s search engines), will lead to a super elite 10-15% of American’s who will have the ability and self-discipline to master tomorrow’s technology and profit from it. The average middle class worker will be increasingly replaced or downgraded by intelligent machines. Social and economic inequality will continue to grow and this new trend will be very hard to overcome. This is a bleak prospect for the future of America. What can be done to resist this trend and to try to turn it around? Jim Clifton, the CEO of the Gallup Organization, says in “The Coming Jobs War”, that “what everyone in the world wants is a good job” and he has many ideas about how to boost the economy in order to produce more good jobs. According to Mr. Clifton, there is no shortage in this country of creativity, new inventions and innovation. What is lacking are successful business models to commercialize the good ideas which are already out there and create customers for new products. We need entrepreneurship. “Entrepreneurship has a direct impact on supply and demand, but with a distinction. It doesn’t just provide supply, it builds demand.” Next question: how do we boost entrepreneurship? We get government out of the way as much as possible. This means the lowest possible tax rates (offset by eliminating tax loopholes for the wealthy) and fewer burdensome regulations (such as the employer mandate for health insurance). As a society we have to decide which is more important: creating more and better jobs by growing the economy faster or making everyone more equal with higher taxes and more income redistribution. We can’t have it both ways. To reverse or at least slow down the trends which are now shrinking the middle class, the best policy is to go all out for entrepreneurship and investment!