Things are Looking Good but Can We Afford to be Complacent?

 

Everybody should read Tyler Cowen’s compelling new book, “The Complacent Class.”  As I have discussed in two recent posts, here and here, Mr. Cowen lays out the thesis that America has lost much of its dynamism in recent years because life has become so comfortable for so many people, especially the professional elites.


But now things are looking even better yet:

  • A global economic upturn is under way, especially in manufacturing.
  • The Federal Reserve is continuing to raise interest rates, confident that fundamental data on employment and inflation (see chart) is looking more and more positive.

  • Progress is being made on fixing the American healthcare system even if it’s not as good as it could be.
  • The Republican Congress and Trump Administration are united in their desire for corporate and business tax reform which will give the American economy a big boost when it gets done.

These trends auger well for the American economy in the immediate future. However there is one very dark cloud on the horizon:

  • Our national debt (the public part on which we pay interest) is now 77% of GDP, the highest since the end of WWII and is predicted by the Congressional Budget Office to keep steadily getting worse without fundamental changes in public policy. In fact, the debt limit, which had been suspended in November 2015, was reinstated by law on March 16. It will have to be raised in the next few months in order to avoid default by the federal government.
  • I fervently hope that the fiscal conservatives in Congress (such as the Republican Study Group and the Freedom Caucus) will insist on real fiscal restraint going forward as their price for voting to raise the debt limit.

Conclusion. We affluent Americans are so wrapped up in enjoying our good fortune that we lose track of a huge problem on the not so distant horizon. Our prosperity is being heavily financed with borrowed money and we will soon have to pay the piper, unless we are willing to bite the bullet.  Do we have the political will to do this?

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The Dangers of Complacency

 

My last post, “What Ails America? I. Complacency,” lays out the thesis of the economist Tyler Cowen that American society has become much too complacent, i.e. self-satisfied, in recent years.  In particular:

  • Fewer Americans are moving.
  • Segregation (by income, education, social class and race) is increasing.
  • Americans have stopped creating. New business creation is down and monopolies are getting stronger.
  • Matching (i.e. assortative mating) is on the upswing.
  • Calm and safety above all is the predominant attitude.

These societal trends are normal and even desirable in many respects. But they can lead to stagnation.  Eventually needed social change will boil over in uncontrollable ways and America will undergo a “Great Reset.”


This will likely involve major events such as:

  • A major fiscal and budgetary crisis. Currently our public debt (on which we pay interest) is 77% of GDP, the highest since just after WWII. It will keep rising steadily without a major change in public policy. When interest rates return to more normal higher levels, interest payments on our debt will be a huge drain, without letup, on our tax revenue.
  • The inability of government to adjust to the next global emergency which comes along. When the financial crisis came along in 2008, debt was at the much smaller level of 38% of GDP. This allowed for temporary fiscal stimulus and larger deficits to ride out the resulting recession. With our currently high debt level, we’ll have far less flexibility when the next recession comes along.
  • A rebellion of many less-skilled men. The median male wage (adjusted for inflation) was higher in 1969 than it is today. In fact, the take-home pay for typical American workers has been falling since the end of the Great Recession in June 2009. To a large extent this explains the rise of Donald Trump.
  • A resurgence of crime. A new crime wave will probably be internet related. There are now tens of millions of identity thefts, phishing attacks and successful but fraudulent pleas for cash every year. Internet crime is calmer than traditional crime and less visible. But the next crime wave could badly damage internet commerce.

 

Conclusion.  Mr. Cowen paints a depressing picture for the future of American society.  Of course, it is possible to turn some or all of these negative developments around.  But will a complacent American populace have the political will to do it?

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What Ails America? I. Complacency

 

The economist, Tyler Cowen, has just published a very interesting new book, “The Complacent Class,” which makes a strong case that American society has lost much of its dynamism in recent years largely because of our increasing fascination with the world of information.

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Here are some of the features of societal complacency:

  • Fewer Americans are moving. There is less rapid job turnover today and a lower rate of entry for new businesses. Large firms are replacing smaller firms and they have less employee turnover. Globalization exports some jobs from the U.S. but leaves the country with a more stable set of jobs overall. The lack of geographic mobility is holding back income mobility.
  • The Reemergence of segregation. In fact there is more segregation by income, by education, by social class and by race. The most heavily segregated cities are the high-tech, knowledge-based metros. This is because the rich and well-educated are keener to live together in tighter bunches and groups. In addition, nationwide the average black student attends a school which is only 8.3% white.
  • Americans have stopped creating. Startups were 13% of the firms in the country in the 1980s but only 7% today. It is harder for new firms to get up and running and successful firms stick around longer. Market concentration is growing in the U.S. There are only two major phone carriers, four major airlines, and major health insurance companies are likely to consolidate from five to three. Nearly 2/3 of publicly traded companies were selling in more concentrated markets in 2013 than in 1996.
  • Matching continues to spread. In the 1930s 1/3 of urban Americans married people who lived within five blocks. For couples who married between 2005 and 2012, 1/3 of them met online. In other words, “assortative mating” has become much more common. Family-connected decisions accounted for 1/3 of the rise in income inequality from 1960 to 2005. Internet matching also helps in job searches. Clearly, matching is disproportionately benefitting better-educated and more productive workers.
  • Calm and safety above all.  Physical disruptions, in the form of riots or protests, are harder to accomplish these days compared to the 1960s and 1970s.  Police departments are more sophisticated and use managerial science, information technology and surveillance to control potential troublemakers.  Antidepressants are now used by tens of millions of Americans.  The heavy use of electronic screens keeps kids calmer and more tranquil.  Our more “feminized” culture is allergic to many forms of conflict.

Conclusion. “Americans are working harder to postpone change or to avoid it altogether. This is true for corporate competition, changing residences or jobs, building things, and social relationships.”  This “complacency” has huge political ramifications.  Stay tuned!

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Labor’s Share of National Income Is Falling

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.

A Pessimistic View of America’s Future II. What Does Everyone Want?

 

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!

A Pessimistic View of America’s Future

 

The George Mason University economist, Tyler Cowen, has written a provocative new book entitled “Average is Over”, which has just been reviewed by the Economist: “The American Dream, RIP?” .  His thesis is that the slow recovery of middle class jobs following the Great Recession of 2008-2009 portends a new economy more and more devoid of middle class jobs and broad prosperity.
Mr. Tyler says that “An elite 10-15% of Americans will have the brains and self-discipline to master tomorrow’s technology and extract profit from it.  They will enjoy great wealth and stimulating lives.  Others will endure stagnant or even falling wages as employers measure their output with ‘oppressive precision’.  Some will thrive as service providers to the rich….Young men will struggle in a labor market which rewards conscientiousness over muscle.”  Some highly motivated individuals, born poor, will be able to move into the elite group with cheap online education.  This creates overall a sense of “hyper-meritocracy” at the top which “will make it easier to ignore those left behind.”
What Mr. Cowen has done is to take the strong social and economic forces of globalization and technology, add to this mix emerging machine intelligence (Google is a prime example) and then to use his vivid imagination to conjure up an image of what life will be like in the not so distant future.  America will still likely be the dominant country in the world but the historically strong middle class will shrink as the rich become richer and the poor become poorer.
Is this pessimistic vision of America’s future inevitable?  Is there anything we can do to at least slow down if not to reverse these trends?
Speeding up economic growth is our only chance to turn things around and mitigate this grim future.  Better K-12 education (and therefore early child education as well) will help in the long run.  In the short run, broad based tax reform, healthcare cost control, relaxing overly burdensome regulations, and immigration reform are the four things which will help the most.  The same old basic stuff is what we need to do!  Tyler Cowen’s story just makes the need for such changes more compelling and more urgent!