Tag Archives: GDP

Inequality III: Is the Game Rigged?

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The economist Joseph Stiglitz has an Op Ed column in today’s New York Times, “In No One We Trust”, blaming the financial crisis on the banking industry.  “In the years leading up to the crisis our traditional bankers changed drastically, aggressively branching out into other activities, including those historically associated with investment banking.  Trust went out the window. … When 1 percent of the population takes home more than 22 percent of the country’s income – and 95 percent of the increase in income in the post-crisis recovery – some pretty basic things are at stake. … Reasonable people can look at this absurd distribution and be pretty certain that the game is rigged. … I suspect that there is only one way to really get trust back.  We need to pass strong regulations, embodying norms of good behavior, and appoint bold regulators to enforce them.”  
CaptureMr. Stiglitz is partially correct.  Although the housing bubble, caused by poor government policy – loose money, subprime mortgages, and lax regulation – was the primary cause of the financial crisis, nevertheless, poorly regulated banking practices made the crisis much worse.  But this is all being fixed with Dodd-Frank, a just recently implemented Volker Rule, and a soon coming wind-down of Fannie Mae and Freddie Mac. 
Mr. Stiglitz concludes, “Without trust, there can be no harmony, nor can there be a strong economy.  Inequality is degrading our trust.  For our own sake, and for the sake of future generations, it is time to start rebuilding it. 
But how do we reduce the inequality in order to restore the trust which is necessary for a strong economy?  Mr. Stiglitz doesn’t say!
What we need is faster economic growth in order to create more new jobs.  The last four years have demonstrated that the Federal Reserve can’t accomplish this with quantitative easing.  It needs to be done by private business and entrepreneurship.  Tax reform and the easing of regulations on new businesses is what we need.  It’s too bad that ideological blinders prevent so many people from understanding this basic truth!    
    

How Do We Fight Economic Inequality? By Restoring Growth!

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The liberal economist Paul Krugman returns to one of his favorite topics in yesterday’s New York Times, “Why Inequality Matters”.  “On average, Americans remain a lot poorer today than they were before the economic crisis.  For the bottom 90 percent of families, this impoverishment reflects both a shrinking economic pie and a declining share of that pie.”  The problem with Mr. Krugman’s analysis is that he offers no solution beyond more fiscal stimulus: “the premature return to fiscal austerity has done more than anything to hobble the recovery.”
CaptureBut there is another route to recovery and it is propounded in today’s Wall Street Journal by George Osborne, the United Kingdom’s Chancellor of the Exchequer, “How Britain Returned to Growth”. “We cut spending and top tax rates, and now deficits are down and jobs are being created at a healthy clip … at the rate of 60,000 per month, roughly equivalent to 300,000 in the U.S. … The corporate tax rate is being cut to 20% from 28%. … As a result, more international firms are moving their headquarters to Britain and investment is flowing into our country.”
Yes, as Mr. Krugman says, economic inequality in the U.S. is bad and getting worse.  The question is what to do about it.  Shall we try to improve the situation with artificial stimulation, increasing government debt, already very high, for future generations?  Or shall we address this inequality by encouraging businesses to grow and expand and thereby raise wages and hire more people.
The good news is that America is the success story of the 20th century.  The bad news is that everyone else in the world has figured this out and is now copying our own best methods.  Either we can compete, innovate, stay on top and thrive, or else we can get lazy, stagnate and sink down in the pack.
Will it be more inequality or more growth?  The choice is up to us!

Where Are the Jobs? III. The Real Inequality Gap

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Today’s Wall Street Journal has a story “Job Gap Widens in Uneven Recovery”, which shows how unbalanced the economic recovery is.  For workers aged 25 and older, unemployment is only 6%, compared to the overall unemployment rate of 7.3%.  But for the young, ages 16 – 24, unemployment is 15%.  Since the end of the recession in June 2009, wages have risen by 12% for the highest paid 25% of all workers.  For the lowest paid 25%, wages have only risen by 6% over this time period.
“Households earning $50,000 or more have become steadily more confident over the past year and a half.  Among lower income households, confidence has stagnated.  The gap in confidence between the two groups is near its widest ever.  That isn’t only bad for those being left behind.  It’s also hurting the broader recovery, because it means families are able to spend only on essential items.  Consumer spending rose just .1% in September 2013, after adjusting for inflation.”
Unfortunately, this data is entirely consistent with other gloomy economic trends which I have been reporting on recently such as the threat of technology to the middle class, the increased competition from globalization, and the shrinking size of the labor pool because of baby boomer retirements.
The New York Times has a running series of articles on “The Great Divide” and how to address it.   Here is a clear cut example of this divide: how older, better trained and more affluent Americans are recovering from the recent recession more quickly than the less well off.  This evident unfairness is damaging to the health of our society.  The question is how do we address it in an effective manner?
The basic problem is the overall slow growth of the economy, about 2% of GDP per year, since the recession ended in June 2009.  There are many things that policy makers can do to speed up this growth if they were only able to set aside ideological differences.  The best single action by far is tax reform, for both individuals and corporations, lowering overall rates in exchange for reducing deductions and loopholes which primarily benefit the wealthy.
Here is yet another reason why it is so important to speed up the growth of our economy.  How exasperating that our national leaders cannot figure out a way to come to together and get this done!

Labor’s Share of National Income Is Falling

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The latest issue of the Economist shows quite dramatically in the article “Labour Pains” that labor’s share of national income is dropping.  In the U.S. workers’ wages have historically been about 70% of GDP.  In the early 1980s this figure started falling and is now 64%.  Similar declines are occurring in many other countries.
This phenomenon is closely related to what others are observing as I have reported recently.  Tyler Cowen’s new book “Average is Over” discusses the threat of technology to the middle class.  Daniel Alpert in “The Age of Oversupply” talks about the increase of competition from various global forces.  Stephen King’s “When the Money Runs Out” makes the case that “a half-century of one-off developments in the industrialized world will not be repeated.”
Historically the stability of the wage to GDP ratio “provides the link between productivity and prosperity.  If workers always get the same slice of the economic pie, then an improvement in their average productivity – which boosts growth – should translate into higher average earnings. … A falling labour share implies that productivity gains no longer translate into broad rises in pay.  Instead, an ever larger share of the benefits of growth accrues to the owners of capital.”
A shrinking share of a GDP which itself is slowing down is a double whammy.  The only way to address the problem effectively is to deal with the root causes.
First of all, we need to boost overall economic growth by the proven methods of broad based tax reform, especially including much lower corporate tax rates, making regulations less onerous, carrying out immigration reform, and giving special attention to helping entrepreneurs create new businesses.
How can we, additionally, help low skilled and low waged workers move up the ladder?  Long term the most worthwhile action is to change K-12 education by putting more emphasis on career education to produce more highly skilled workers.  Short term, we should provide crash job training for the estimated three million current job openings in the U.S. which require skilled workers.
Economic inequality in the U.S. is becoming progressively worse all the time.  There are fiscally sound ways to address this alarming problem and it is important that they be clearly and forcefully advocated.

Are Deficit Fears Overblown?

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In yesterday’s Wall Street Journal columnist David Wessel responds too mildly in “Why It’s Wrong to Dismiss the Deficit” to Larry Summers’ view that we should not worry about the deficit.  Mr. Summers says, “Let me be clear.  I am not saying that fiscal discipline and economic growth are twin priorities.  I am saying that our priority must be on increasing demand.”  According to Mr. Wessel, here is the essence of Mr. Summers’ argument:

  • The deficit isn’t an immediate problem; growth is.
  • We’ve done enough (about the deficit) already.
  • The future is so uncertain that acting now is unwise.

Granted that the deficit for fiscal year 2013 is “only” $680 billion after four years in a row of deficits over a trillion dollars each and that interest rates are at an historically low level at the present time.  The problem is that the public debt is now at the very high level of 73% of GDP and is projected by the Congressional Budget Office to continue climbing indefinitely.  Interest on the debt was $415 billion for fiscal year 2013 which represents 2.5% of GDP of $16.8 trillion.  With GDP growth increasing at about 2% per year since the end of the recession in June 2009, this means that interest on the debt is already slowing down the economy and it’s just going to keep getting worse as interest rates inevitably return to higher historical levels.
Growth is very definitely an immediate problem.  But increased government spending is the wrong way to address it.  The right way to address it is with broad based tax reform (lowering tax rates in return for closing loopholes) to stimulate investment and risk taking by businesses and entrepreneurs.  Significant relaxing of the regulatory burden would also help, especially for the small businesses which are responsible for much of the growth of new jobs.  So would immigration reform to boost the number of legal workers.
As uncertain as the future is, we can be quite sure that entitlement spending (Social Security, Medicare and Medicaid) will be going up fast in the very near future as more and more baby boomers retire and the ratio of workers to retirees continues to decline.  It would be very risky indeed to assume that economic growth will increase fast enough to pay for increased entitlement spending.
Conclusion:  large deficits are a very urgent and immediate problem which we ignore at our peril!   Furthermore the best ways of boosting the economy don’t require increased government spending.

Our Dire Fiscal Situation I. The Facts

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Take a look at the front page of a new report from the Congressional Budget Office, “The 2013 Long-Term Budget Outlook”.  It shows very clearly the huge fiscal mess confronting our country in the near future.
First of all, our national debt has almost doubled as a percentage of GDP in the last five years, from about 38% of GDP at the end of 2008 to 73% today.  Although the debt is actually projected to dip to 68% of GDP in 2018, it then begins a steady climb because of increasing interest costs as well as increasing spending on Social Security and government healthcare programs (Medicare, Medicaid and the Affordable Care Act).  The debt will be back to 71% of GDP by 2023 and then climb rapidly to about 100% of GDP by 2038.
Notice from the graph that federal tax revenues have just about recovered from the recession and will soon level off at their historical level of about 19.5% of GDP.  But federal spending will resume a steady climb, reaching 26% of GDP by 2038.  As the gap between revenue and spending gets wider and wider, the national debt grows faster and faster.  This is the enormous fiscal problem we are faced with in the next 25 years.   The worse it gets the harder it becomes to turn around.  It is imperative to address this problem without delay.
In order to reduce the debt from its current level of 73% of GDP down to the historical average of 38% by 2023, Congress would have to pass an additional $4 trillion in spending cuts or tax increases over the next decade.  The only way such enormous savings can be achieved is by reining in entitlement spending: Social Security, Medicare, Medicaid and ACA.  I will outline one way to do this in my next post!

Can We Solve Our Fiscal Problems Without Raising Taxes?

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Scott Lilly, a Senior Fellow at the Center for American Progress, has an Op Ed column in yesterday’s Fiscal Times, “The Choice Congress Won’t Face Up To”.  Mr. Lilly admits that we have at least a long-term deficit problem, namely exploding entitlement spending driven by the aging of the U.S. population.  The Congressional Budget Office predicts that federal outlays, including entitlements, will be 22.8% of GDP in 2023 while revenues will equal only about 19.3% of GDP, a huge gap.  And outlays will continue to rise,  because of entitlement spending, reaching 25% of GDP by 2040.  This means that the public debt, on which we pay interest, would rise from 73% of GDP today, to 99% of GDP by 2040.  As interest rates inevitably return to their historical average of 5%, interest payments on this massive debt will become an increasing burden on the economy.
Mr. Lilly asks the question:  How are we going to cut back on entitlement spending when the average Social Security monthly check is $1268 out of which about $350 goes to out-of-pocket medical expenses not covered by Medicare?  Congressman Ryan has proposed limiting the growth of Medicare to the increase of inflation + 1%.  But the cost of healthcare is increasing much faster than this.  And many seniors are living close to the edge.
Thus we reach “the choice which Congress won’t face up to.”  According to Mr. Lilly, either we have to make big cuts in entitlement spending or else raise taxes dramatically so that federal revenue increases to about 24% of GDP by 2040.  Mr. Lilly makes the far-fetched claim, based on flimsy evidence, that such a large tax increase will not retard economic growth.  But let’s set this issue aside for now.
Is there any alternative to increasing taxes so dramatically in order to avoid making big cuts in entitlements?  The answer is yes.  The above discussion assumes that the cost of healthcare in general will keep on increasing at the current rapid rate, much faster than the increase in inflation.  This is the main driver of entitlement costs.  The U.S. currently spends 18% of GDP on healthcare which is double the amount spent by any other country.  This is what must change.  We should abolish, not just postpone, the employer mandate in Obama Care.  But even more fundamentally, the tax exemption for employer provided healthcare should be removed (and offset with a rate reduction).  This would make consumers far more aware of the cost of healthcare and therefore drive down these costs.
Only after serious attempts are made, such as above, to control costs should any consideration be given to raising taxes.