Thoughts about Recent Economic and Political
Developments
The economy is not great but it is doing better than most
people think
Third quarter real GDP increased 2.5%, the largest increase
since the third quarter of 2010 (also a 2.5 increase). The economy
was even stronger than the headline number as the change in
inventories subtracted 1.1% from the growth rate. Excluding
inventories real GDP increased 3.6% compared with 1.6% in the
second quarter. State and local government spending
subtracted 0.2% from the growth rate, the fifth consecutive quarter
that this sector has had a negative impact on GDP growth.
A job is a job whether it is in the public sector or the
private sector
The Republicans in Congress are refusing to pass the President's
jobs plan claiming it will not increase employment. However, Mark
Zandi, Chief Economist at Moody's Analytics, estimates the jobs
bill will add 2.5 million jobs, reduce the unemployment rate by 1%
and increase GDP growth by 2%. The president is now hoping that he
can win support for some of the individual provisions such as the
proposal to allocate $35 billion to local governments to prevent
the layoffs (or allow the hiring) of teachers and public safety
workers. This does not seem unreasonable has the public sector has
shed 1 million jobs since May 2010 while the private sector has
added 2.8 million jobs. The Republican response was that they
could not support this proposal because it did not create private
sector jobs. First, there is no difference in terms of
economic effects between a $40,000 private sector job and a $40,000
public sector job. Second, as hard as it is to believe some public
sector jobs might be more important than some private sector jobs.
Does anyone really believe a video store clerk is more important
than a teacher or a pizza delivery job is more important than a
policeman or fireman? Third, most public sector jobs pay a living
wage with decent benefits while many private sector jobs do not. We
need to create as many good middle class jobs as possible. We
cannot have a strong economy without a strong middle class.
Income inequality is a serious economic and political
problem
The Congressional Budget Office just issued a report confirming
what we already know, income inequality is increasing dramatically.
From 1979 to 2007, the after-tax income of the top 1% of households
increased 275%. The incomes of those in the middle increased 40%
and the income of those at the bottom increased only 18%. The top
1% earned 17% of all income in 2007, up from 8% in 1979. The bottom
20%'s share fell from 7% to 5%. From 1979 to 2007, about 80%
of all income gains went to the top 1%. The U.S. has a more
unequal distribution of income than almost every other developed
nation. When this issue is raised conservatives claim that it is
class warfare. I like what Warren Buffett said, "There's class
warfare, all right, but it's my class, the rich class, that's
making war, and we're winning." Some conservative economists argue
that income inequality is good as it encourages entrepreneurship
and investment, which creates wealth for society. I agree
that everyone should have the opportunity to get rich and we should
not stifle individual initiative but how large do the incentives
need to be. In the 1960s, CEO's earned about 40 times as much as
the average worker. Today the ratio is about 260 to 1. Is a
CEO now more than 6 times as valuable relative to his employees as
he was 50 years ago? I don't think so. John F. Kennedy once said, a
rising tide lifts all boats. That no longer appears to be the case
and the implications for our economy and our political system
should be a concern to everyone.
Tax reform should not increase income inequality
Everyone running for office has a tax reform plan of sort.
Whether it is Herman Cain's 9-9-9 plan, or Rick Perry's fair tax,
or Michele Bachman's no tax on anyone, one consistent feature is
that taxes would go up on the middle class and down for
wealthy. I agree that the tax system should be simplified and
that consumption-based taxes make sense. I would like to see most
exemptions and deductions eliminated and a progressive income
tax with lower rates for both individuals and corporations
combined with a low rate value added tax (similar to a national
sales tax). A generous family deduction should be included to
shield low-income households from a tax increase.
Regardless of how we reform the tax system, more revenue will be
needed. Federal revenue is about 15% of GDP, the lowest level
since 1950, and the United States has lower taxes than all but 2 of
the 34 OECD (developed) nations. Historically, federal
revenue has been about 18% of GDP. In 2000, revenue was 20.6% of
GDP. With the baby boomers retiring and rising health care
costs rising, federal revenues will have to be higher than 18% of
GDP, even with deep cuts in spending. Any agreement to raise
revenue should include some mechanism that would reduce taxes if
stronger than expected economic growth pushed revenue above a
certain % of GDP, 20% for example.
