Trash Talk from the New York Times

Posted on March 6, 2014 by jackheidel

The Budget Committee of the House of Representatives has just issued a report “The War on Poverty: 50 Years Later”, providing an excellent summary of federal antipoverty programs and their cost at the present time (budget year 2012). Highlights are:

The federal government spent $799 billion on 92 different programs to combat poverty
Over $100 billion was spent for 15 different food aid programs
Over $200 billion was spent on cash aid
Over $90 billion spent on education and job training (over 20 programs)
Nearly $300 billion spent on healthcare
Almost $50 billion spent on housing assistance

The report also points out that many low-income households face very high effective marginal tax rates, approaching 100%, if any members are employed, because making more money means losing welfare benefits. This discourages low-income individuals from working at a time when the labor-force participation rate has fallen to a 36-year low of 62.8%.
Here’s the situation: we have a rapidly growing federal budget with huge deficit spending (see above chart), a stalled economy with low labor-force participation, and an inefficient welfare system which encourages people not to work. Surely our goal should be to motivate welfare recipients to become productive citizens by returning to the workforce. So doesn’t it make sense to revamp our welfare system to be more efficient as well as to create more incentives for recipients to get and hold a job?
Apparently this does not make sense to the New York Times. Two days ago they ran an editorial “Mr. Ryan’s Small Ideas on Poverty”, castigating Paul Ryan for “providing polished intellectual cover for his party to mow down as many antipoverty programs as it can see.” The editorial goes on to say that “it’s easy to find flaws or waste in any government program, but the proper response is to fix those flaws, not throw entire programs away as Mr. Ryan and his Party have repeatedly proposed. . . . For all their glossy reports, Republicans have shown no interest in making these or any other social programs work better.”
Putting it as charitably as possible, the NYT is being unhelpful. It is a beacon of progressive thought for millions of Americans. But it is apparently unwilling to give any credence to a sincere effort by fiscal conservatives to reform a major government program to make it operate more efficiently and effectively.

Where Have All the Raises Gone?

Posted on March 4, 2014 by jackheidel

In yesterday’s New York Times an editorial asks the question “Where Have All the Raises Gone?”, pointing out that wages for college graduates have been stagnant since 2001 (see the chart below.) A report referred to in the NYT editorial suggests that as the information technology revolution has matured, employer demand for cognitive skills has waned and so some college graduates have had to take lower paying jobs, displacing less educated lower skilled workers in the process. This makes sense and, of course, new hiring has slowed down even more as a result of the recession.
The question then becomes, what, if anything can government do to counteract and overcome this trend? According to the NYT, “what’s needed to raise pay are policies like a higher minimum wage, trade pacts that foster high labor and regulatory standards, and more support for union organizing.”
Of course there is another point of view and it is expressed very well in yesterday’s Wall Street Journal by Mortimer Zuckerman, the Chairman and Editor-in-chief of U.S. News and World Report, “Fight Inequality With Better Paying Jobs”. Mr. Zuckerman declares that “income inequality isn’t so much the problem as income inadequacy. A more robust economy, stoked by growth-oriented policies from Washington, would help produce the jobs and opportunities that millions of Americans need to climb the economic ladder.” He suggests that what is needed is:

Lower corporate tax rates so that American multinational companies will bring their foreign earnings back home.
Get healthcare costs under control (Obama Care doesn’t do this).
Cut back on unnecessary regulations to encourage more business investment.
Train more skilled workers. The National Federation of Independent Businesses reports that 38% of its members have job openings they can’t fill.
Restore H1-B visa levels to the higher levels of earlier years – 195,000 per year compared to only 65,000 today. Skilled immigrants start many new businesses and this is the biggest source of new job creation.

In other words there are lots of things the federal government can do to boost the economy. As Mr. Zuckerman says, “The political system is failing us. Washington doesn’t seem to be listening as our political parties are focused more on ideological conflict than the good of the country.”

Should We Be Optimistic or Pessimistic about Our Country’s Future?

Posted on March 2, 2014 by jackheidel

Last month the Congressional Budget Office issued the report “The Budget and Economic Outlook: 2014 to 2024”, giving an updated prediction on economic performance. It predicts continued slow growth of GDP leveling off in the next few years at a rate of about 2.2% per year. The public debt (on which we pay interest) will be 74% of GDP this year and increase to 79% of GDP by 2024. Federal revenues will grow this year to 17.5% of GDP while federal spending will be 20.5% of GDP. The problem is that the gap between revenue and spending will get worse as indicated by the chart below.
CBO estimates that interest rates on three month Treasury bills will rise from 0.1% today to 3.7% in 2018, and higher in subsequent years, which means that interest payments on our public debt will increase dramatically as shown in the chart below. Inflation is predicted to average about 2% over this time period. Unemployment will slowly drop to 5.8% in 2017 and not reach 5.5% until 2024.
In an article two days ago, an economics reporter for the New York Times, Floyd Norris, writes that this is “A Dire Economic Forecast Based on New Assumptions”. Mr. Floyd argues that it is unlikely that we will continue to have both anemic growth and high interest rates at the same time. Of course, if the economy does grow more quickly, then government revenues will also grow faster which will slow down the growth of the debt. But CBO predicts that our recovery from the Great Recession will continue to be tortuously slow.
The problem is that when interest rates do go up, as they will sooner or later, interest payment on the national debt will rise quickly, as shown in the CBO chart. This is going to happen and will be unpleasant to deal with. Are we going to have slow growth in the meantime, with high unemployment along with it, and then also have expensive debt payment later? This is indeed a pessimistic prospect!
We have a continuum of choices:

Do nothing until the big crunch hits in a few years (like Greece)
Cut spending dramatically, including for entitlements (politically infeasible)
Raise taxes dramatically (also politically infeasible)
Both cut spending and raise taxes (perhaps doable as we get closer to the big crunch)
Grow the economy faster which would both lower unemployment and raise revenue

I know what my choice is, how about you?

A Breath of Fresh Air

Posted on February 27, 2014 by jackheidel

U.S. Representative David Camp (R, Michigan), Chair of the House Committee on Ways and Means, has just introduced the “Tax Reform Act of 2014” and describes it in a column in yesterday’s Wall Street Journal, “How to Fix Our Appalling Tax Code”. This legislation, developed over the past three years by the committee he chairs, has lots of attractive features. Mainly, however, it would give the economy a substantial boost. Congress’s Joint Committee on Taxation estimates that it would increase GDP by $3.4 trillion over the next ten years and create 1.8 million new jobs.
It will accomplish this goal by trimming or eliminating tax breaks and loopholes for the wealthy in order to reduce tax rates for almost everyone. For example, the home mortgage deduction will be cut, for new homeowners, from the current value of $1,000,000 to $500,000. The deduction for state and local taxes will be eliminated. The charitable deduction will only apply for contributions in excess of 2% of income. The middle class is protected by raising the standard deduction to $11,000 per individual or $22,000 per couple. This means that 95% of taxpayers will be able to avoid itemizing.
The two basic tax rates would be 10% up to $75,000 in income, then 25% up to $400,000. Over $400,000 there would be a 10% surcharge on salaried or “non-production” income. The corporate tax rate would be cut from 35% to 25%, again by eliminating special exemptions and loopholes.
All of these features add up to a dramatic simplification of our tax code which will save an estimated $168 billion annually in preparation fees.
But always keep in mind the larger purpose of broad based tax reform like this. In the words of the economist Glenn Hubbard, it is “a policy shift in favor of mass prosperity – dynamism and inclusion.” It will do more for the poor than raising the minimum wage because it will actually create new jobs and better paying jobs.
This legislation represents a fantastic starting point for a national discussion on pro-growth tax reform. Let’s get on with it!

Truth and Myth about Inequality

Posted on February 25, 2014 by jackheidel

Two of my favorite columnists are the Brooking Institution’s William Galston, a social economist who has a weekly column in the Wall Street Journal and the economics journalist Robert Samuelson who writes for the Washington Post.
Most people agree that income inequality in the U.S. is steadily getting worse. Mr. Galston make a good case (see my last post) that it is primarily caused by the large gap between the rising productivity of American workers and the stagnant level of their pay which has developed since 1973. He thinks that we need a fundamentally new social contract which links worker compensation to productivity. This, of course, is a tall order and it is not at all clear how such a new order would be achieved.
Mr. Samuelson has a different perspective: “Myth-making about Economic Inequality”. For example:

The poor are not poor because the rich are rich
Most of the poor will not benefit from an increase in the minimum wage because only 6% of the 46 million poor people have full time jobs
All income groups have gained in the past three decades, even though the top 1% has gained the most (see the above chart from the CBO, December 2013)
Widening economic inequality did not cause the Great Recession

These two perspectives on inequality are quite different but not contradictory. Basically what Mr. Samuelson is saying is that we have to be careful in how we address this problem or we’ll just make it worse. Raising taxes on the rich is unlikely to help and might hurt if it slows down the economy. Raising the minimum wage will only raise a fairly small number of people out of poverty and may cause a lot of unemployment along the way.
My solution: focus on boosting the economy to create more jobs in the short run (tax reform, immigration reform, trade expansion) and improved educational outcomes for the long run (early childhood education, increasing high school graduation rates, better career education).
But I agree with Mr. Galston that it is imperative to lessen income inequality, one way or another. Otherwise as a society we’ll have big trouble on our hands.

Closing the Productivity and Pay Gap

Posted on February 23, 2014 by jackheidel

The social economist William Galston has a column, in last week’s Wall Street Journal, “Closing the Productivity and Pay Gap”, discussing the large gap between the rising productivity of American workers and the stagnant pay level which has developed since 1973 (see below). He points out that “the erosion of the compensation/productivity link has made it harder to sustain robust domestic demand for goods and services, which constitutes more than two-thirds of our entire economy. As the gap widened, U.S. households responded by sending more women into the workforce, expanding the numbers of hours worked, and taking on a greater burden of debt. These strategies have hit a wall. Unless compensation rises more rapidly, stagnant domestic demand will depress economic growth as far as the eye can see.” In other words, workers are no longer receiving their fair share of the productivity gains. And this retards the increased economic growth which we all desire. Without detracting from the seriousness of Mr. Galston’s argument, I would like to make several observations which are pertinent to the discussion.
First of all, as pointed out by the Heritage Foundation (in the second chart), wage stagnation since 1973 does not take into account the growth of total compensation including healthcare and other benefits. And since healthcare costs are twice what they are in any other country, this is a huge drag on the growth of worker’s pay. In other words, if the U.S. were able to cut healthcare costs nearly in half, as should be possible with a more efficient system, then the hundreds of billions of dollars saved would give a huge boost to paychecks.
Secondly (as shown in the last chart), there is a direct correlation between wages and education level for U.S. workers. Of course, boosting educational outcomes is much easier said than done and, in any event, is a long term process. Nevertheless, any highly motivated and ambitious person can increase their earnings prospects by succeeding in school.
Finally, a combination of minimum wage increases and perhaps an expansion of the Earned Income Tax Credit can help those people at the lowest levels of the income scale earn a living wage as long as they are willing to work.
As Mr. Galston said in an earlier piece, “We need nothing less than a new norm – a revised social contract – that links compensation to productivity. And because we cannot return to the conditions that once sustained that link, we need new policies to bring it about.”

Poverty, Inequality and the Minimum Wage II. Cities Are Expensive!

Posted on February 20, 2014 by jackheidel

Poverty and inequality are getting worse in the United States. The question is what to do about it. One proposal is to raise the minimum wage from its current value of $7.25 per hour to $10.10 per hour. The Congressional Budget Office has studied the tradeoffs in doing this. Approximately 16 million people, at the bottom end of the wage scale, would see their incomes go up. But 500,000 people would see their incomes go down because they’d lose their jobs! Does the positive outweigh the negative? It’s not clear!
But here is another aspect of the problem. The Brookings Institution has just published a new study “All Cities Are Not Created Unequal”, pointing out that the 50 largest cities in the U.S. have higher rates of inequality than does the country as a whole. Brookings looks at the so-called 95/20 ratio between the 95^th percentile of wage earners compared to the 20^thpercentile. The national average for this ratio is 9.1 with the 95^th percentile earning (in 2012) $191,770 and the 20^th percentile earning $20,968. But many large cities such as San Francisco (16.6), Boston (15.3) and New York City (13.2) have much higher ratios. The midsized city of Omaha has a ratio of 8.2 which is below the national average.
In other words the problems of poverty and inequality are much worse in some parts of the country than in others. This suggests that at least part of the solution to addressing this problem should come at the state and local level. It makes sense for California, Massachusetts and New York, for example, or at least San Francisco, Boston and New York City, to establish their own higher minimum wages.
This is not to say that a higher minimum wage at the national level is not also needed (more coming). But the whole country cannot be expected to bail out a few major cities where the problem is much worse than elsewhere.

Poverty, Inequality and the Minimum Wage

Posted on February 18, 2014 by jackheidel

Poverty and income inequality are getting increasingly worse in the United States and need to be seriously addressed by our political system. In my last post on February 16, I presented data from the Heritage Foundation which shows that the War on Poverty has been quite successful in eliminating destitute poverty in the U.S. What this means is that most low-income families have the basic necessities of enough food to eat (96%), a refrigerator (99%), a telephone (96%), air conditioning (81%), a car (74%), etc. Of course, these “amenities” are provided at a great cost to society of about $1 trillion per year in social transfer payments.
Can we do a better job in helping the poor in the near term? The conservative writer and political activist, Ron Unz, thinks we can. He has just written a perceptive blog post “The Conservative Case for a Higher Minimum Wage”, proposing a national minimum wage of $12 per hour. His reasoning is as follows. Low wage jobs are primarily in the non-tradable service sector and so these jobs are hard to outsource and also hard to automate. Therefore the unemployment effects of such a minimum wage increase would be minimal. Mr. Unz estimates that, Walmart could accommodate a $12 per hour minimum wage with a one-time price hike of just 1.1%. The grocery prices of home-grown agricultural products would rise by less than 2%.
A $12 per hour wage for a full time 40 hour per week worker would mean an annual salary of $25,000 per year or $50,000 per year for a couple. At this income level, the family would be paying more in taxes and receiving fewer government benefits. This would turn many net tax recipients into net taxpayers and thereby raise their stakes in the American way of life as well as lowering the deficit.
I emphasize that this is a program to alleviate poverty in the U.S. It will not do anything to help the middle class worker whose wages have been stagnant ever since the recession started six years ago. This is a much harder problem which will require politically charged changes in U.S. economic policy.
Stay tuned!

Poverty, Inequality and Mobility in a Free Society: Can We Do Better?

Posted on February 16, 2014 by jackheidel

There has been a lot of public attention given to these topics recently. Our stagnant economy since the end of the recession almost five years ago has meant high levels of unemployment and underemployment which naturally causes widespread discontent. The 50^th anniversary of President Johnson declaring War on Poverty provides an opportunity to look back and evaluate its success.
A very good summary of where we stand on poverty was given two years ago by Robert Rector and Rachel Sheffield of the Heritage Foundation: “Understanding Poverty in the United States: Surprising Facts about America’s Poor”. The authors used 2010 census data for their study. Poverty was defined to be a cash income of $22,314 or less for a family of four in 2010 (which increased to $23,550 in 2013). They pointed out, for example, that “96% of poor parents stated that their children were never hungry at any time during the year because they could not afford food.” The chart below shows that poor households, in general, have many of the common amenities.
In other words, the close to $1 trillion spent per year ($871 billion in 2010) by federal and state governments on means tested assistance for the poor has largely eliminated destitute poverty in the U.S. Further progress will require successfully addressing both the collapse of marriage and the lack of parental work in low-income communities. These very difficult problems can only be addressed with a long term educational effort to turn poor children into productive citizens.
Conclusion: the War on Poverty has had reasonable success at huge cost and further gains will be more expensive and more drawn out over time. We’ve already started on this second phase by emphasizing early childhood education and so the focus now should be to implement this new direction.
Next step: it’s now time to direct our serious attention to the issues of inequality and mobility. That will be the subject of my next post!

Inequality, Productivity and Compensation

Posted on February 13, 2014 by jackheidel

The Brookings Institution social economist, William Galston, has an interesting column in yesterday’s Wall Street Journal, “The U.S. Needs a New Social Contract”, deploring the fact that worker compensation (i.e. wages + benefits) has not kept up with gains in worker productivity since the 1970s. Here is a chart published by the Economic Policy Institute showing the divergence between productivity and compensation for a “typical” ( i.e. in the middle) worker beginning in the 1970s:
The Heritage Foundation’s James Sherk has addressed this same question in a recent report “Productivity and Compensation: Growing Together” and shows that the “average” compensation of an American worker does track productivity very closely as shown in the chart below:
What is the explanation for this apparent discrepancy? In fact, it is the difference between the average earnings of U.S. workers and the earnings of the median or middle worker. The very high earnings of the top 10% and the even higher earnings of the top 1% raise average worker compensation way above the income level of the median worker. In other words it is the result of the skewed and unequal distribution of incomes which is heavily weighted toward those at the top of the scale. The typical or median worker is falling behind and is not benefitting from the steady rise in the overall productivity of the American economy. This is what income inequality is all about.
The question is what to do about it. Faster economic growth will create more opportunity by creating more jobs and better paying jobs. Raising high school graduation rates as well as creating high quality technical training programs will also help.
Mr. Galston insists that this is not enough. Too many workers will continue to lag farther and farther behind. We could raise the Earned Income Tax Credit for low income workers but this would be very expensive in our currently tight fiscal situation which is likely to continue indefinitely.
Do we need a new social contract? If so, what form will it take? How will we pay for it? These are indeed very difficult questions to answer!

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility

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