Tag Archives: New York Times

A Pessimistic View of America’s Future IV. The Age of Oversupply

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Today’s New York Times has an interesting Op Ed column by Daniel Alpert, a partner at the investment bank, Westwood Capital, LLC, “The Rut We Can’t Get Out Of” .  It is based on Mr. Alpert’s new book, “The Age of Oversupply: Overcoming the Greatest Challenge to the Global Economy”.
“Hundreds of millions of people who once lived in sleepy or sclerotic statist and socialist economies now compete directly or indirectly with workers in the United States, Europe and Japan, in a world bound by lightning-fast communications and transportation,” says Mr. Alpert.
During the “Great Moderation,” beginning in the early 1980’s, with the tech bubble of the 1990’s and the housing bubble of the 2000’s, we could ignore this threat from the developing world.  But now, after the financial crisis and the Great Recession which followed, this huge new source of global competition for jobs and cheap goods is a drag on our recovery.
Mr. Alpert’s main prescription for recovery is to put the unemployed back to work “by any means, including big public sector investments to improve infrastructure and competitiveness.”  He would do this with massive new deficit spending, arguing that U.S. debt is not a serious problem in the short term.
I agree with his argument that the global oversupply of workers, money and goods is a huge threat to future prosperity.  Where I disagree is when he says that faster economic growth is more important than controlling deficit spending.
In my opinion, “America’s existential threat is fiscal” (Glenn Hubbard and Tim Kane).  In other words, as important as it is to boost the economy and create more jobs, and this is very important indeed, it is more urgent to get deficit spending under control and to do this quickly.  We can actually accomplish both of these critical tasks simultaneously, as I discussed in my post of September 20, 2013.

The Link between Education and Prosperity, Part II: Educare

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In my previous post, “The Link between Education and Prosperity”, I looked at data from Paul Peterson and Eric Hanushek which show a very close connection between high school academic achievement and rate of economic growth for various countries around the world.  They point out, for example, that only 32% of U.S. high school students are proficient in mathematics, as compared to 49% in Canada, and that closing this achievement gap would boost our rate of GDP growth by almost 1%.  But they also point out that the math proficiency rate for white students in the U.S. is 42% with much lower proficiency rates for both African American and Hispanic students.  In other words, almost 2/3 of the American-Canadian math proficiency gap can be explained by poor performance of American minority students, many of whom grow up in poverty.
In yesterday’s New York Times, James Heckman, a Nobel prize winner in economics, has an article “Lifelines for Poor Children” which points out the importance of investing in effective early childhood development from birth to age 5.  “High-quality early childhood programs are great economic and social equalizers – they supplement the family lives of disadvantaged children by teaching consistent parenting and by giving children the mentoring, encouragement and support available to functioning middle-class families.”
High quality early childhood education is expensive and it is very important for all levels of government, especially at the federal level, to operate more efficiently.  How is it possible to expand early childhood education under such very tight financial constraints?
The key is to build it into our existing Head Start program on which we are currently spending over $8 billion per year.  Many experts acknowledge that academic gains from Head Start are short lived, seldom persisting even into 3rd grade.  But there are existing models for much more effective early childhood education, such as the program run by Educare in Omaha and other cities.
In short there is a cost effective way to provide “lifelines for poor children”, for their own good and also for the benefit of society as a whole, and we should expect our national leaders to move in this direction.

How Can We Boost Stagnant Wages?

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Today’s Wall Street Journal has a column by Neil Shah, “Stagnant Wages Crimping Economic Growth”, pointing out that the average hourly pay for non-supervisory workers, adjusted for inflation, has declined to $8.77 last month from $8.86 in June 2009, when the recession ended.  It has also been reported recently, e.g. in the New York Times, that U.S. medium household income, now at $52,100, has not nearly recovered from its prerecession peak of $55,500 and is even below its $54,500 level in June 2009, at the end of the recession.
Lower income for workers and households mean lower consumer spending.  This is a major reason for our economy’s low annual growth rate of only 2% of GDP since the end of the recession.  Of course, the high unemployment rate, currently 7.4%, as well as increasing global competition, contribute to downward pressure on wages.  But there is another factor, directly under government control, which is a major contributor to stagnant and declining wages.
Washington Post columnist, Robert Samuelson, in a recent column reprinted in the Omaha World Herald, reported that, from 1999 to 2013, wages and salaries rose 50% (adjusted for inflation) while health insurance premiums increased 182%.
Most health insurance is provided and largely paid for by employers and is therefore an indirect form of compensation.  The huge disparity between wage gains and health insurance premium increases in recent years means that wages are being held back by the rapidly increasing cost of health care.  The U.S. spends 18% of GDP on healthcare, twice as much as any other country and this is clearly out of line.
The best single thing we can do to slow down healthcare inflation is to remove the tax exemption for employer provided healthcare (and offset it with lower overall tax rates).  Employees would then pay taxes on their health insurance benefits as part of their pay. This would have the beneficial effect of making consumers far more conscious of the true cost of healthcare and therefore consumers a strong incentive to hold down these costs.
It is up to Congress to change this provision of the tax code.  Let’s insist that they get this done!

Is the Cost of Health Care Under Control?

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Today’s New York Times reports that “Health Care Costs Climb Moderately, Survey Says”.  The average annual insurance premium for a family rose 4% in 2013 compared with a 1.1% overall rate of inflation, according to the Kaiser Family Foundation which conducted the survey.  Since 1999 health insurance premiums have increased by almost 300% while consumer prices have increased by 40%.  As insurance premiums rise, deductibles are also getting bigger.  About 38% of all covered workers now face an annual deductible of $1000 or greater.  Dr. Drew Altman, CEO of the Kaiser Foundation, refers to this “quiet revolution” as an attempt by consumers to keep the cost of health insurance from rising even more quickly.
A 4% increase in insurance costs may seem moderate, but at almost four times the rate of inflation, it is really very large.  Obama Care is unlikely to have any impact in holding down such a rapid increase and, in fact, is likely to make matters worse because of massive new health care regulations which are coming.  The basic problem is that America spends 18% of GDP overall on health care, almost twice as much as any other country.
What can we do about this?  One major step would go a long way.  We need to remove the tax exemption from employer provided health insurance.  Employers could still provide health insurance for their employees, but the cost would be added to an employee’s salary for tax purposes.  This can be offset with a lower tax rate, of course.  But it would make employees, i.e. all consumers, far more conscious of the cost of healthcare and therefore to have a direct incentive to hold down these costs.  For example, Dr. Altman’s “quiet revolution” would pick up steam as employees raise deductibles even higher in order to lower overall costs.
How can we get going in this direction?  The Employer Mandate of Obama Care should be repealed, and not just postponed for a year.  Ideally, removing the tax exemption for employer provided health insurance would become part of the broad based tax reform which is so badly needed to stimulate the economy.
Our fiscal and economic problems can be addressed with smart leadership.  We should insist that our national leaders get going on such badly needed reforms!

One Way to Solve the National Debt Problem

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In today’s New York Times, the economists Glenn Hubbard and Tim Kane write that “Republicans and Democrats Both Miscalculated”.  They say that “when the Congressional Budget Office recently lowered its forecast of future deficits, many voices on the left claimed that the problem had been overblown by ‘austerity scaremongers’” and that “some voices on the right have renewed calls to ‘starve the beast’ now that deficits are under control.”  But they point out that just because the deficit is likely to shrink for the next couple of years, CBO also projects that it will soon be back up to a trillion dollars per year indefinitely into the future.  And this is all optimistically assuming full employment, robust growth and moderate interest rates.
The Hubbard/Kane solution is to amend the Constitution with a flexible Balanced Budget Amendment.  Its features would include: 1) a provision that spending in a given year would not exceed income averaged over the previous seven years, 2) no restriction on tax rates which would have to be hashed out by Congress and 3) an exception to spending restraint for national emergencies.
There are, of course, valid objections to a Balanced Budget Amendment to the Constitution.  It reduces the flexibility of Congress and the President to act as needed.  It would be much better for Congress to act in a fiscally responsible manner on its own initiative.  But we all know that this doesn’t happen.  The pressure is always to adopt new spending programs and never to cut existing programs, no matter how ineffective they are.
Debt is the “single biggest threat to our national security” declared Admiral Mike Mullen, the former Chairman of the Joint Chiefs of Staff.  Many other prominent citizens express similar thoughts on a regular basis.  It is really just basic common sense that no governmental unit can flagrantly ignore this fundamental economic principle year after year without very serious repercussions.  It is (well past) time to force our national leaders to bite the bullet and do what almost every sane person knows what must be done.

The National Significance of the Municipal Pension Crisis

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The New York Times reported yesterday that “Chicago Sees Pension Crisis Drawing Near”.  “A crushing problem lurks behind the signs of economic recovery in Chicago: one of the most poorly funded pension systems among the nation’s major cities. … The pension fund for retired Chicago teachers stands at risk of collapse.”
William Daley, former chief of staff for President Obama and now a Democratic candidate for governor of Illinois says that “Anyone who thinks that this is just a problem on paper, those are the same people who looked at Detroit 20 years ago and said, ‘Don’t worry about it, we can handle it.’”  Chicago Mayor, Rahm Emanuel, another former chief of staff for President Obama, says that “What the system needs is a hard, cold, dose of honesty.  I understand the anger.  I totally respect it.  You have every right to be angry because there were contracts voted on.  People agreed to something.  But things get updated all the time.”
Just as Chicago and Illinois need a cold dose of honesty about the public pension crisis in that city and state, so does our entire country need a cold dose of honesty about our national fiscal crisis.  Shall we wait 20 years or until this problem explodes in our faces (or our children’s faces), or shall we start to deal with it now, while we can still proceed in a rational manner?
Our current public debt (on which we pay interest) is now $12 trillion.  With artificially low interest rates, we are paying “only” $250 billion annually in interest on this debt. When interest rates resume their historical average of 5%, our annual interest rate will jump to $600 billion.  Where will we find an additional $350 billion per year for interest payments alone?  Will we take it from entitlements, from social services for the poor, from our defense budget?  Or will we just increase our deficit even more to pay for it?  It will have to come from somewhere!
Wake up, America!  Learn from the municipal pension crisis.  Now is the time to get things straightened out.  Further procrastination will have dire consequences.

The New York Times is in Denial

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An editorial in yesterday’s New York Times, “Republican No-Shows in the Budget Wars”, ridicules House Republican leadership for having the temerity to propose $4 billion in cuts from this year’s budgets for transportation and housing, and expecting Republican representatives to support such “draconian” cuts.  “But the House’s skittishness at the decidedly unpopular costs of some of the party’s budget strictures presented a revealing tableau of both hypocrisy and weakness: Republicans could not pass their own cramped vision of the future.”
The underlying problem is that the House Budget for discretionary spending for 2014, at $967 billion, is almost $100 billion less than the Senate’s $1058 billion budget.  The House insists on continuing the sequester cuts for the full ten years agreed upon when the sequester mechanism was set up two years ago.  The Senate is ignoring the sequester agreement because it wants to replace it by a combination of milder cuts and tax increases.  The Republicans would prefer to replace the across-the-board sequester cuts by a more rational budget cutting plan but the Democrats are unwilling to negotiate such a plan.
The Democratic Party, and its media supporters such as the New York Times, simply refuses to acknowledge that the United States has a fiscal problem.  $6 trillion in deficit spending in the last five years apparently does not make a serious impression.  The mantra is that we’ll worry about our enormous deficits, and exploding national debt, later, after the economy more fully recovers from the Great Recession.  But after four years of recovery such an argument makes no sense.  There are lots of effective ways to boost the economy but continued artificial stimulus (deficit spending) is not one of them.
Wake up, Keynesians!  We need to turn things around and the sooner the better.  Stop ridiculing the mostly Republican fiscal conservatives who are valiantly striving to accomplish this herculean task under the most trying circumstances.

What Is the Best Way to Help the Middle Class?

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An article in yesterday’s New York Times, “Obama Says Income Gap Is Fraying U.S. Social Fabric”, quotes the President that “If we don’t do anything, then growth will be slower than it should be.  Unemployment will not go down as fast as it should.  Income inequality will continue to rise.  That’s not a future that we should accept.”  He says that “I will seize any opportunity I can to work with Congress to strengthen the middle class, improve their prospects, improve their security.”
A recent editorial in The Wall Street Journal, “The Inequality President”, shows with a chart that median household incomes have fallen from $54,218 in June 2009 as the recession ended to $51,500 in May 2013.  As the WSJ says, “For four and a half years, Mr. Obama has focused his policies  on reducing inequality rather than increasing growth.  The predictable result has been more inequality and less growth. … The rich have done well in the last few years, thanks to a rising stock market, but the middle class and poor have not.”
There are many things that Congress and the President could do to boost the economy if they were willing to work together and compromise.  Obamacare doesn’t need to be repealed, just modified by dropping the employer mandate which is a job killer.  Broad based tax reform, with lower tax rates, paid for by eliminating tax preferences, would be a big boost to investment, risk taking and entrepreneurship.  A reasonable compromise would be to use a part of the revenue raised from eliminating loopholes for deficit reduction.
But little progress will be made unless the President is willing to show leadership by rising above partisanship.  There are all sorts of ways he could do this.  One simple way would be to show that he understands the seriousness of the rapidly growing national debt by supporting some of the many thoughtful proposals for more government efficiency.
A large majority of people want our first African-American President to be successful.  But right now he is not on track to achieve this.

Should the Federal Government Bail Out Detroit?

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The former Obama administration auto czar, Steven Rattner, wrote in yesterday’s New York Times that “We Have to Step in And Save Detroit” from bankruptcy.  Detroit has $18 billion in liabilities, half of which are for municipal employee pension plans and retiree health benefits.  Mr. Rattner says that “It isn’t fair to cut pensions.  The workers didn’t cause this mess.”
Many state and local governments are indeed in terrible financial condition because of the cost of public employee pensions.  There have already been several municipal bankruptcies around the country and there will be many more.  The state of Illinois is in particularly bad financial shape, for the same reasons as Detroit, and will almost certainly have to declare bankruptcy in the near future.
The basic problem is that state and municipal governments often have so-called “defined benefit” pension plans for their employees rather than the “defined contribution”, or 401(k), retirement plans used by private business.  Defined benefit plans guarantee a certain level of pension payment, based on the employee’s salary, regardless of the investment returns of the contributions to the fund.  Defined contribution plans, on the contrary, only pay out in benefits what has actually been accumulated in investment earnings.  For a defined benefit plan the employer (i.e. the government and therefore the taxpayers) is at risk for any shortfall in funding.  For a defined contribution plan, the individual employee is at risk for underperforming investment of the fund.  The only viable solution to this massive problem is for state and local government to shift as rapidly as possible from defined benefit to defined contribution retirement plans.
For the federal government to jump in and bail out one particular struggling municipality would create a moral hazard.  Every other state and local government with the same problem, numbering in the hundreds or thousands, would want equal treatment.  The federal government can’t afford such an expense because of its own perilous financial condition.  Furthermore, federal aid would just delay the fundamental changes in fiscal policy which must be made at the state and local level.
It is a very bad idea for the federal government to bail out Detroit!

Should the Employer Mandate Be Repealed?

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In last Sunday’s New York Times the columnist Ross Douthat makes an excellent case in “A Hidden Consensus on Health Care”,  that Obamacare’s employer mandate, recently postponed for one year until January 1, 2015, should be repealed altogether.  The reason for delaying its implementation is because of the complexity of the process for the government to gather all the necessary information about a company’s employees and coordinating with IRS tax returns to verify incomes.  This is, of course, a mammoth job.
Furthermore, small and medium sized companies, near the 50 employee cutoff for mandatory coverage, will not have to immediately slow down their growth, in order to avoid the health insurance requirement.  This could help boost the economy in the short turn.
In addition, as Mr. Douthat points out, it is the tax exemption for employer provided health insurance which is the biggest impediment for getting the cost of healthcare under control.  It means that employees are shielded from the true costs involved in receiving care and therefore have little, if any, incentive to hold down the cost of their own care.
If this tax exemption was eliminated, perhaps as part of a broad based tax reform initiative, then employers could still offer an optional health insurance benefit to their employees but it would be taxed as part of their total pay.  This would give employees an interest in holding down the cost of their own insurance.  And they would also have the option to shop around on the private market, perhaps on the new exchanges, for a better deal.
The Employer Mandate is thus altogether a dead weight on our struggling economy.  It’s certainly beneficial to have it postponed for a year.  Let’s go the rest of the way and repeal it altogether!   This would be a significant step towards true healthcare reform!