My last post makes the case that the “American Idea” is thriving, contrary to a sense of gloom from many quarters. For example, the Democratic Party is so tied up with complaining about Donald Trump, that it is failing to address the fundamental reason why Mr. Trump was elected President last fall: the plight of blue-collar workers.
For well-known reasons (globalization and the growth of technology), blue-collar workers are not yet enjoying the full benefits of rising prosperity as much as the college educated managerial and professional classes. The basic reason for this is:
Slow economic growth, averaging just 2% of GDP per year since the end of the Great Recession in June 2009. Our currently low unemployment rate of 4.2% and the prospects for regulatory reform and tax reform suggest that growth might start picking up soon.
Faster growth is already occurring in the area of ecommerce, see here and here.
Fulfillment center weekly wages are 31% higher on average than for brick-and-mortar retail in the same area.
Ecommerce workers are not likely to be college graduates but need a mixture of physical and cognitive skills.
In the past two years the ecommerce industry has added 178,000 jobs in electronic shopping firms and another 58,000 jobs for express delivery companies. At the same time brick-and-mortar retail full time equivalent jobs have dropped by 123,000.
Americans spend 1.2 billion hours per week shopping in brick-and-mortar stores. Since 2007, roughly 64 million hours per week of these “unpaid hours” have shifted to fulfillment center workers and truck drivers. In this way unpaid household shopping hours are turning into paid market work.
The economics of manufacturing will likely soon be changed in a similar manner from producing and distributing goods in bulk to small-batch manufacturing closer to the customer.
Conclusion. “The internet of goods,” spearheaded by Amazon, has already increased the productivity and wages of many retail (fulfillment center) workers and will soon do the same thing in manufacturing. This is private enterprise at its finest.
My last post noted that with our unemployment rate down to 4.2% and with median household income having increased by 3.2% in 2016, the emphasis now should be totally directed to addressing our number one long term problem:
Massive national debt. With a deficit of $668 billion for Fiscal Year 2017, our debt now stands at 77% of GDP (for the public part on which we pay interest), the highest it has been since the end of WWII. It is predicted by the Congressional Budget Office to go much higher without significant changes in current policy.
Obviously our annual deficits are way too large and we need to shrink them dramatically. One way to start doing this is to speed up economic growth which will increase tax revenue especially by creating more jobs and better paying jobs. Faster economic growth is quite feasible and this is one of the main goals of tax reform, now being considered by Congress. But it needs to increase growth without increasing the deficit which is entirely doable.
But there is another big reason for revenue neutral tax reform as well. The dollar has depreciated by 10% in 2017 while the stock market has increased by 13%. The S&P price-earnings ratio has risen to 30 at present which is way above average. All of this means that we are in a loose money financial bubble. For Congress to make our annual deficits worse than they already are, with deficit increasing tax reform, would make this bubble even bigger and therefore be highly irresponsible.
Conclusion. When interest rates return to much higher normal levels, as they inevitably will, interest payments on our debt will grow dramatically and cause a huge budget crunch. If ignored, this situation will eventually lead to a new fiscal crisis, much worse than the Financial Crisis of 2008.
With the unemployment rate now down to 4.2% and household incomes having recently reached an all-time high, the first order of government business should be:
Fiscal responsibility which means to start reducing the size of the national debt, which is now 77% of GDP (for the public part on which we pay interest), the highest since the end of WWII. The only practical way to do this is to begin to shrink the size of our annual deficits from the very high level of almost $700 billion for the 2017 Fiscal Year which just ended on September 30.
A responsible budget for the 2018 Fiscal Year can have a deficit of at most $500 billion which amounts to 2.5% of our total GDP of $20 trillion. A realistic forecast for economic growth in the coming year is 2.5% of GDP which means that a deficit for the 2018 FY of $500 billion would at least not increase our debt as a percentage of GDP.
Budgets for later years need to actually shrink (not just hold steady) the debt. The goal should be to decrease annual deficits down close to zero which would mean achieving a balanced budget. The Congressional Budget Office projects that the cumulative deficits will climb by $10 trillion over the next ten years under current policy, pushing the debt up to 91% of GDP in 2027.
Tax reform, to be considered next by Congress, is likely to stall if it is not pursued within a sensible fiscal policy just as healthcare reform stalled last summer. Sensible tax reform, both growth enhancing and revenue neutral, is quite doable and will make the debt problem that much easier to solve.
Conclusion. It cannot be emphasized too strongly that our rapidly growing debt puts us in a dire fiscal bind. We must change policy significantly and soon or else we will put our prized liberty and prosperity in grave danger.
In my last post I made the case that the two fundamental principles for effective tax reform are:
Faster economic growth, to create more jobs and bigger pay raises.
Revenue neutrality, since more debt at this time is just too risky.
And then I went on to suggest the specific changes in the tax code which would achieve these goals:
Reducing the corporate tax rate to approximately 20%.
Full expensing for business investment replacing depreciation spread out over many years.
Simplification of rules for individuals such as fewer tax rates and fewer credits.
Achieving revenue neutrality by eliminating as many deductions as necessary to pay for the above tax rate cuts.
There are different ways to accomplish all this and I recently described one attractive plan put together by the Tax Foundation. The Republican Congressional Leadership (Big Six) has proposed a different plan which has been analyzed by the nonpartisan Committee for a Responsible Federal Budget. Unfortunately CRFB concludes that this plan will cost $2.2 trillion over ten years in lost revenue. But it could be modified in the following ways to become revenue neutral:
The mortgage interest deduction is maintained but limited to one dwelling and $500,000, down from the current limit of two homes and $1 million.
The tax exemption for employer provided health insurance is limited. This not only increases tax revenue but also forces the 150 million Americans who receive health insurance from their employer to take an active role in holding down the cost of healthcare.
Drop the proposal of establishing a maximum “pass through” rate of 25% for business owners. Any such proposal would be subject to wide spread abuse. Businesses would be benefitting from the full expensing provision above and their owners should pay taxes at the same rates as everyone else.
Keep the estate tax until annual deficits are greatly reduced. It only brings in $20 billion per year but every little bit helps.
Conclusion. These common sense changes in the Big Six plan would make it revenue neutral and still capable of achieving a significant boost to the economy.
The readers of this blog know that my favorite topic is our very large national debt, now 77% of GDP (for the public part on which we pay interest) and predicted by the Congressional Budget Office to keep steadily getting worse, without major changes in current policy.
It is also well documented (see chart) that our entitlement programs of Social Security, Medicare and Medicaid are the drivers of the huge annual budget deficits which make the accumulated debt so much worse and worse.
The economist John Cogan has an informative interview in yesterday’s Wall Street Journal explaining why entitlement spending is so difficult to control. First of all, according to Mr. Cogan, only three modern presidents have made any effort to control entitlement spending:
FDR who persuaded Congress to repeal unjustified disability entitlements to 400,000 WWI, Philippine War and Boxer Rebellion veterans.
Ronald Reagan “slowed the growth of entitlements like no other president ever had.”
Bill Clinton’s welfare-reform plan not only reduced welfare’s burden on taxpayers but also benefitted the recipients, whom the old program had been harming.
Mr. Cogan identified three necessary political conditions for any entitlement reform. They are:
Presidential leadership “without which there has never been a significant reduction in an entitlement.”
Significant agreement among the general public and the elected representatives that there’s a problem.
Bipartisan consensus on the solution for correcting the problem.
Conclusion. Think about it. This is a quite a gloomy assessment. Nothing will get done on the primary reason for our huge debt problem without both presidential leadership and bipartisan political support. When is this going to happen?
The United States faces many challenging problems but the biggest one of all is our national debt, right now 77% of GDP, the largest since right after WWII, and predicted by the Congressional Budget Office to keep getting steadily worse without major changes in current policy.
The only practical way to reduce the debt is to start shrinking our annual deficits, $680 billion for the current 2017, down to a much lower level, ideally close to zero, over a limited time period, perhaps ten years or so. This urgent need will, of course, be very difficult to accomplish.
Military spending. The military analyst, Mark Helprin, makes a cogent argument that the most effective way to defuse the North Korean nuclear threat is for President Trump to ask Congress “for an emergency increase in funding to correct the longstanding degradation of American military power.” This would, among other things, provide for “a vigorous acceleration of every aspect of ballistic-missile defense.”
Omaha Rapid Bus Transit. Omaha NE (where I live) is spending $15 million in local funds for a $30 million bus system upgrade, subsidized by the Federal Transit Authority, which has an annual budget of $8.6 billion. The new ORBT will have sleek 60 foot-long buses as well as 27 individual modern bus stop shelters at a cost of $260,000 each. The system will be operational in 2018 and Mayor Jean Stothert says, “I’m looking forward to being one of the first riders.”
Conclusion. Who can argue with upgrading ballistic-missile defense at a time when we are threatened by a madman in North Korea? And, it is nice for Omaha to have a sleek modern rapid transit bus system on Dodge Street but should it be 50% subsidized by the federal government at a time when the U.S. is drowning in debt? There will always be enormous pressure on Congress to increase funding for popular projects.
Who is going to stand up and say no?
The economy has been chugging along at about 2% annual GDP growth ever since the end of the Great Recession in June 2009. Unemployment has been steadily dropping and is now a fairly low 4.4%. Low wage earners are now even beginning to see bigger gains in pay.
Most people would like to speed up economic growth even more. Tax reform will help in this regard but so will sensible deregulation. Barron’s has an excellent article this week about deregulating Wall Street by William D. Cohan.
According to Mr. Cohan:
GDP growth is highly correlated with bank lending.
The Dodd-Frank Act, passed by Congress in 2010, has disproportionately burdened community banks, despite their having no role in the financial crisis.
More than 1700 U.S. banks have disappeared since Dodd-Frank was passed.
Senator John Kennedy (R, LA) has introduced a bill which would exempt community banks and credit unions with assets of less than $10 billion from the Dodd-Frank Act.
As a result of Dodd-Frank, big banks are now required to have more capital and less leverage. Today a bank’s assets would have to fall about 7% before a bank’s capital would be wiped out, as opposed to only 2% in 2008. This makes them safer.
Prior to 1970 the Wall Street partnership structure ensured that bankers had plenty of skin in the game – essentially their full net worth was on the line every day.
Today bankers and traders are rewarded for taking risks with other people’s money. Mr. Cohan recommends that the top 500 traders and executives at every big bank have a significant portion of their net worth on the line.
Conclusion. Mr. Cohan’s program would not only give a big boost to the economy by enabling community banks to lend more freely but would also make our financial system safer by requiring top financiers to have skin in the game.