Tag Archives: jack heidel

A Scarred U.S. Economy

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Today’s New York Times has an article “U.S. Economic Recovery Looks Distant as Growth Stalls”, summarizing the predominant view of economic experts that annual growth of the U.S. economy in the future is now expected to be only 2.1%, about two-thirds of the historical rate of 3%.
CaptureThis is, of course, disappointing since it means continued stagnation of household incomes as well as high unemployment.  Much of the projected decline in GDP growth is attributed to structural factors such as:

  • The number of Americans receiving disability benefits has increased significantly in recent years. Few of these people will ever return to work.
  • Fewer immigrants are arriving. There are now two million fewer people over the age of 16 than had been projected in 2007.
  • The birth rate has declined each year from 2007.
  • Government spending on public investment has fallen by 8% since the recession started. Corporate investment has been lackluster.
  • Fewer businesses are being created and existing businesses are spending less on research and development.
  • Rising income inequality results in “secular stagnation” whereby there is insufficient consumer spending to stimulate economic growth.

There are lots of head winds slowing down the economy.  As the NYT article says, “for more than a century the pace of growth was reliably resilient, bouncing back after recessions like a car returning to its cruising speed after a roadblock.”  Treasury Secretary Jacob Lew says that the government now expects annual growth to be permanently slower.
Should we resign ourselves to this pessimistic attitude or should we consider whether or not there is any practical and feasible alternative?
There is, in fact, an easy way to speed up growth.  Broad-based tax reform would do it.  By this I mean lowering tax rates across the board paid for by closing loopholes and shrinking the deductions which primarily benefit the wealthy.  This would place more income in the hands of the two-thirds of taxpayers who do not itemize deductions.  These are typically middle and lower income folks with stagnant incomes.  They would spend their tax savings, thereby giving the economy a big boost.
This would also amount to redistribution from the rich to the poor, making us a more equal society in the process.  It’s a win-win for our economy and for social harmony.  What’s holding us back?

Raising America’s Pay II. How Can We Do It?

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My last post “Raising America’s Pay” addresses a new report from the Economic Policy Institute, “Raising America’s Pay: Why It’s Our Central Economic Policy Challenge”.  Its starting point is the now generally accepted view that wages for the typical American worker have been flat ever since the early 1970s even though labor productivity has continued to rise steadily.
The EPI authors recognize that globalization and the growth of technology have contributed to wage stagnation even though they blame malign policy decisions as well.  I do agree with them that the resulting increase in economic inequality is detrimental to America.  I also agree with them that the way to address inequality is for wages to go up. The best way to accomplish this is to lower unemployment by increasing economic growth.  This will happen when large numbers of consumers start spending more money, thereby increasing demand.  Does this sound like a vicious circle?  It need not be!
CaptureThe above chart from the Wall Street Journal shows that the net worth of U.S. households has now more than recovered from the Great Recession.  The problem is that most of this new wealth has gone to the people with the highest incomes who are more likely to save it.  What we need to do is “redistribute” (gasp!) some of this vast sum of new wealth back to middle and lower income people who would be much more likely to spend it.
There is a straightforward way to do this.  Broad based tax reform!  Lower everyone’s tax rates paid for by closing loopholes and shrinking deductions which primarily benefit the wealthy.  This will be a pure gain in income for the two thirds of Americans, about 80 million, who pay income taxes but do not itemize deductions, most of whom are in the lower and middle income brackets.  These people are likely to spend most of their new income, thus giving the economy the big boost that it needs!
Our leaders in Washington should be able to figure this out!

Raising America’s Pay

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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.
CaptureFirst 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!

Why We Need a Carbon Tax III. Natural Gas Is Not a Real Solution

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Most people agree that global warming is for real and that it is caused by a buildup of greenhouse gases in the atmosphere, mostly from carbon dioxide.  We need to respond to this existential threat and the U.S. should lead the way.  The Environmental Protection Agency’s new regulations call for a 30% reduction in carbon emissions, from 2005 levels, by 2030.  Since fracking has led to a natural gas boom in the U.S. and the burning of natural gas only emits half as much carbon as the burning of coal, it is very likely that the new EPA rules will lead to a major replacement of coal by natural gas in U.S. energy production.
CaptureBut there is a downside to this approach as pointed out in yesterday’s New York Times, “The Potential Downside of Natural Gas,” as follows:

  • Natural gas is starting to replace nuclear power which has no carbon footprint. Last year five reactors announced that they would close because of the low cost of natural gas. This will increase CO2 in the atmosphere.
  • Fracking for oil produces natural gas as a side product which may not be easily marketable. This excess natural gas is either burned off or escapes unburned releasing methane which causes even more damage than CO2.
  • The low cost of natural gas is also slowing down the development of renewable energy sources such as wind and solar power.

A far more efficient system of reducing carbon dioxide in the atmosphere would be to tax its emission from any fuel source.  The most commonly mentioned amount is $20 per ton which would raise the price of gasoline by about 10 cents per gallon.   This way the use of all forms of fuel, including coal, oil and gas, would be taxed equally based on how much carbon they emit.  This would create a huge economic incentive for developing carbon capture in fuel combustion, which is the ultimate solution to eliminating CO2 emissions.
In other words, we have a huge problem on our hands which needs an effective solution.  Half measures will not get the job done and will just cause lots of confusion and political controversy in the meantime.  It’s time for some real leadership!

A Strong Country Requires a Strong Economy

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“Ukraine is a wake-up call for what a post-American world would look like” declares the foreign affairs expert Walter Russell Mead in an article “Putin Did Americans a Favor” (http://online.wsj.com/articles/walter-russell-mead-putin-did-americans-a-favor-1401662270) in yesterday’s Wall Street Journal.
“For those willing to see, the signs of what a post-American world would look like are easy to discern.  We can look at Bashar Assad’s murderous campaign in Syria to see how Iran thinks power should be used.  To see what Saudi Arabia thinks about human rights and liberal values, follow events in Egypt and Pakistan.  China would become more aggressive in a post American world, and the chances of Sino-Japanese conflict would increase. … In Europe, only power keeps or can keep Russia from rebuilding its old empire.”
“Those who think American decline is inevitable must face a tragic truth: The eclipse of American power will be a disaster for our economic interests, for the values we cherish and, in the end, for our security at home.  What stability, peace and legality now exist in the international system are there because the U.S., with important help from allies and partners, made great sacrifices to build and secure them.”
Capture2America’s decline is not inevitable but neither is our continued success.  As much as anything else, it depends on the strength of our economic system.  We need to give much more attention to making our economy grow faster.  This will create more jobs and better jobs and thereby boost national morale.  It will bring in more tax revenue for paying our bills.  In addition, projecting national power is very expensive.  We can and should continue to insist that our defense budget be lean and efficient.  But there is a limit as to how far we can go in this direction.  Ultimately defense spending will have to increase as a percentage of GNP.  This can only be accomplished with a robust economy.
As I have repeated many times in my blog posts, the best strategy for making the economy grow faster is to encourage more consumer spending by lowering individual tax rates and to encourage more entrepreneurial activity by reducing tax rates on small business.  Such tax changes can easily be paid for by closing loopholes and shrinking tax deductions for the wealthy.  But there has to be a political will to do this.
Can this be accomplished?  I don’t know but our future as a free and prosperous nation depends on it!

Immigration Reform Will Benefit Nebraska

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Today’s Omaha World Herald has an excellent article, “A Window on Immigration.”  It points out that 2.46% of Nebraska residents as of the 2010 census were illegal immigrants.  This works out to about 45,000 illegal immigrants in Nebraska today compared to just 3,000 as recently as 1980.  This is really a shocking figure.  It is roughly the same as the population of Nebraska’s fourth largest city (Grand Island) or Nebraska’s fifth largest county (Buffalo).  Nebraska’s unemployment rate of 3.9% is really a labor shortage.  It needs these 45,000 illegal immigrant workers!
CaptureWhy is it so difficult for our national leaders to solve this problem?  It’s crazy to think that we are going to round up 11 million illegals throughout the country and dump them into Mexico unless they are willing to “self-deport.”  Amnesty and citizenship are bogus side issues.  Here is the outline of a simple plan which would solve the problem:

  • Give all businesses a limited time period, perhaps six months or a year, to present a list of their current employees who are illegal. Everyone on this list without a criminal record would receive a guest worker visa along with all necessary legal papers. These papers would belong to the individual worker who could use them to change employment from one business to another.
  • Going forward, businesses would be authorized to hire additional foreign workers as needed who would automatically qualify for guest worker visas. Such visas would be granted in the country of origin thereby avoiding the need for illegal entry into the U.S.
  • As of a certain date in the near future, all businesses would be required to periodically demonstrate the legal status of all workers on their payroll. Penalties for non-compliance would be severe.
  • Guest workers would be eligible to apply for citizenship after a relatively lengthy period of time, perhaps five years or ten years.

Once an adequate guest worker visa program has been set up and is operating efficiently, allowing all businesses to hire as many foreign workers as they need, security on our southern border with Mexico would be no more of a problem than is security on our northern border with Canada.
In other words, illegal immigration is an economic problem, not a law enforcement problem.  The way to solve this problem is to address it correctly!

The Anxieties and Worries of Middle America II. What to do?

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Our economy has been stagnant since the end of the Great Recession five years ago.  The median household income has not nearly returned to its pre-recession level.  And now a new report has just appeared, “Room to Grow: conservative reforms for a limited government and a thriving middle class”, suggesting new approaches to address this major problem.
CaptureThe lead author, Peter Wehner, declares that “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.”
How can we raise median household income and put millions of unemployed people back to work, at the same time?  Deficit spending is no longer a viable option because our national debt is way too high already.  Quantitative easing by the Federal Reserve has been tried, hasn’t helped very much, and is now being unwound.
Consumer spending makes up 70% of GDP and so the most direct way to boost the economy is for people to spend more money.  Can this be accomplished effectively and efficiently with government policy?  The answer is yes!
Broad based tax reform is the way to do it.  Lower tax rates across the board for everyone, paid for by closing the loopholes and deductions which primarily benefit the wealthy.  Two thirds of the American people do not itemize deductions on their tax returns.  This means that lower tax rates for all of these middle income people will put more money in their pockets, most of which they will spend, thereby massively boosting the economy.
Of course there will be pushback to this course of action from the millions of affluent Americans who benefit from all of the loopholes and deductions in our tax code.  But our first priority by far is to help the many more millions of middle income Americans who are suffering from stagnant incomes at best or may still even be unemployed as a result of the recession.

“The Anxieties and Worries of Middle America”

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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.”
Capture“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!

Privatize Veteran’s Health Care

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The current Veterans Administration waitlist scandal is an unfortunate symptom of a much bigger problem, namely the very high and rapidly increasing cost of providing healthcare to our nation’s veterans.  Especially at a time of huge budget deficits and exploding national debt, all branches of government, including our VA system, must operate more efficiently.
CaptureAs we celebrate Memorial Day and the 70th anniversary of the Normandy Invasion in WWII, this is a good time to contemplate a major restructuring of the VA.  As pointed out two days ago in the Wall Street Journal, “VA’s Budget, and Rolls, Have Boomed”, not only has the number of VA healthcare patient visits increased dramatically from 3.4 million in 2000 to 5.6 million in 2012, but the average annual expenditure per patient has also risen by 62% over the same time period.
The purpose of having a separate healthcare system for veterans is to give them better care than they would otherwise receive.  But the scarcity of resources means that their healthcare is being effectively rationed with longer waiting times.
The situation for veteran’s healthcare is a harbinger of what awaits us for our big government entitlement problems: Social Security, Medicare and Medicaid.  For the sake of all recipients, present and future, the rapidly growing costs of these programs must be contained.  There are lots of possible ways to do this.  Our national leaders simply need to take the problem seriously and insist on action.
At the same time it makes no sense to maintain a separate health care system for our nation’s 22 million veterans, only 7% of our total population.  The VA has lots of other responsibilities to take care of anyway: providing life-insurance, mortgage, and housing programs, managing cemeteries, and providing job training, for example.  Veteran’s healthcare could and should be privatized with a voucher system administered by the VA.  It will save billions of dollars for taxpayers and provide better, and timelier, healthcare for our nation’s veterans.

Redistribution, Inequality and Growth

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Most people agree that income inequality and wealth inequality are increasing in the U.S. Likewise anyone who’s paying attention is aware of our slow rate of GDP growth, averaging 2.2% per year, since the end of the recession five years ago.  Is there a connection between inequality and slow growth?  Maybe!
CaptureFirst of all, it is important to note that income inequality in the past 30 years has been greatly offset by federal taxes and transfer programs as shown in the October 2011 chart (above) from the Congressional Budget Office.
Capture1Secondly, the Economist discusses this situation in the article “Inequality v growth”.  The economists Jonathan Ostry, Andrew Berg and Charalambos Tasangarides have shown (see above chart) that a large amount of redistribution affects growth more negatively than a smaller amount of redistribution.
Economists generally agree that the recovery has been slowed down by a lack of demand by consumers for more goods.  So the recovery should speed up as less affluent consumers feel secure enough to spend more money.  Two things, to start with, can make this happen.  One is a restoration of the housing market so that homeowners have more equity (which can be borrowed and spent).  Another way to accomplish this is with government redistribution programs, such as food stamps and Medicaid, for low income people.
But there is an even better way to put money in the hands of people who will spend it, and at no cost to the government.  I am talking about broad based tax reform, whereby tax rates are lowered for everyone, offset by closing tax loopholes and shrinking deductions, which primarily benefit the wealthy.  For the two-thirds of taxpayers who do not itemize deductions, and who tend to be the less affluent, such a tax rate cut will put money in their pockets, most of which they will spend.
Such a tax program as this would be a direct shift of resources from the wealthy to everyone else, thereby lessening inequality.  It would stimulate the economy, creating millions of new and higher paying jobs, and thereby increasing tax revenue and lowering the deficit.  Win, win, win, win!