Commentary by Robert Kleine: Thoughts about Recent Economic and Political Developments

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.

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