Good news and bad news on the economy.

The American economy is huge (producing $18 trillion worth of goods and services every year) and growing (GDP is projected to double over the next fifteen years).[1]  Business analysts had projected that the American economy would grow at a rate of 2.5 percent in the second quarter of 2016.[2]

What’s the good news?  If you leave out business inventories, then in the second quarter of 2016, the rest of the economy grew at 2.4 percent.  Also, consumer spending (which makes up roughly two-thirds of the economy) grew at a rate of 4.2 percent.  This reflects the belated rise in wages (by 2.5 percent over last year) and the fall in gasoline prices.  The United States International Trade Commission projects that the Trans-Pacific Partnership (TPP) trade deal could add 128,000 full-time jobs and $42.7 billion to the GDP by its fifteenth year.

What’s the bad news?  First, companies have been meeting the rising demand in part by drawing down their inventories, rather than by making new stuff to keep their inventories stocked.  If you include inventories, then the economy grew at a rate of only 1.2 percent.  This is half the rate calculated if inventories are excluded.

Second, the fall in energy prices has caused energy companies to shut down a lot of production rather than investing; in other sectors, the strong dollar is choking off a lot of sales, so companies aren’t investing as much.

Third, the TPP’s projected job creation and GDP growth projections are pretty small compared to the over-all economy.  In addition, it is projected to increase wages by only 0.19 percent over where they will be otherwise.

Fourth, the growth of labor productivity holds the key to economic progress.  Labor productivity is the amount of output (stuff) per hour of work.  If labor productivity increases, the employers get more stuff to sell at the same labor cost as before.  That allows for higher profits, or lower prices to buyers, or higher wages to workers, or—the trifecta—all three.[3]  Between 1870 and 2013, the American economy averaged 2.3 percent growth in productivity each year.   This made for a gigantic rise in living standards.[4]  However, that average disguises differences in productivity growth during the sub-periods.  From 1948 to 1973, the annual growth in productivity averaged 2.8 percent.  From 1973 to 1995, it averaged 1.4 percent.  From 1995 to 2010, it averaged 2.6 percent.  From 2010 to 2013, it averaged 0.7 percent.[5]

Apparently no one knows what caused the shifts.  No one knows why it suddenly dropped in 1973 or why it dragged along at a low level for two decades; no one knows why it shot up in 1995 and stayed at a high level for fifteen years; no one knows why it fell again in 2010 (after the end of the financial crisis); and no one knows what the poor performance of the last few years portends or when it will end.  However, in the first quarter of 2016, it fell by 0.6 percent.

The future is uncertain.  Over the short-run, will companies begin investing to meet rising consumer demand or will the investment decline undermine the growth of consumer spending?  Over the longer-run, will productivity growth begin rising or will it continue to limp?  Will rejection of the TPP leave world trade as it is or will it begin a downward spiral in trade?

[1] Eduardo Porter, “Uneasy Alternative to an Imperfect Trade Deal,” NYT, 27 July 2016.

[2] Neil Irwin, “What’s Right and Wrong With the Economy,” NYT, 2 August 2016.

[3] See: Henry Ford.

[4] Alan Blinder calculates this as a 25-fold increase.

[5] Alan S. Blinder, “The Unsettling Mystery of Productivity,” WSJ, 25 November 2014.

It ain’t necessarily so 2.

The current presidential candidates are selling snake oil when it comes to the economy.[1]

“The economy is rigged”—Bernie Sanders, with Hillary Clinton yapping along behind.  The economy is “rigged” only in the sense that economic change has assigned a lot of value to skills and education, and virtually no value to just showing up.  In a period of economic transformation, a modern economy shifts resources from low-productivity sectors to higher-productivity sectors.  All those in the skilled and educated sectors profit, while those in the less-educated and less-skilled sectors lose.  That isn’t the same as saying—as Sanders and Clinton imply—that a cabal of Wall Street bankers are making all the decisions for the nation at large.

“We don’t make things anymore”—Donald Trump.  In fact, it depends on what the meaning of “we” is.  On the one hand, the total value of goods manufactured in the United States is at its highest level, almost 50 percent higher than in the late 1990s.[2]  On the other hand, employment in manufacturing has declined by 29 percent over the same period.  Under the pressure of foreign competition, productivity in manufacturing has increased through new technological innovations.  Indeed, in the many days ago, it was the competition from highly productive American manufacturing that forced adaptation on foreign countries.

“I do not believe in unfettered free trade”—Bernie Sanders.  The North American Free Trade Agreement (NAFTA) and the proposed Trans-Pacific Partnership (TPP) have been condemned for exporting jobs to developing countries.  In fact, most academic economists—highly astute people on the left—believe that the evidence shows that free trade has been good for the United States.  It has destroyed some jobs, but it has created many others.  Job loss at big, old-fashioned firms is easier for the media to document than is job-creation at many small firms.

“I want to make sure the wealthy pay their fair share, which they have not been doing”—Hillary Clinton.[3]  While exceptions exist, the Congressional Budget Office (CBO) reports that the fabled top “one percent” of earners pays at a rate of 33 percent, while the middle three-fifths of earners pay at an average rate of 13 percent.[4]

“The Laffer curve.  HA!”—me.  Republicans promise that big tax cuts will lead to robust economic growth.  The Mellon Plan of the 1920s and JFK’s tax cut of 1963 seem to bear out this claim.  However, the Reagan and Bush II tax cuts did not stimulate much economic growth.[5]  Still, tax cuts leading to growth has become a Republican mantra.  Actually, the amount of growth from tax cuts is very uncertain.  What is certain is the impact of further tax cuts on the deficit.  Tax cuts will produce bigger deficits.  According to one estimate, Donald Trump’s tax plan would reduce federal income by 29 percent.

What Bernie Sanders, Donald Trump, and Hillary Clinton are trying to say is that Americans have become uncomfortable with adapting to change and competition.  That is easy to understand.  From 1945 to the 1970s, the American economy led the world.  Americans got used to high incomes from less work.  Then, the rest of the world caught up.  Sometimes this came in the form of better quality goods; sometimes in the form of lower prices.  Now it’s up to us to learn how to compete again.

[1] Gregory Mankiw, “The Economy Is Rigged, And Other Campaign Myths,” NYT, 8 May 2016.

[2] That is, during the now longed-for “golden years” of the Clinton administration.

[3] Asked to define “fair” taxes on the upper 40 percent of earners, my beloved sister-in-law says, “well, more.”


[5] To be fair, the Reagan administration also had to wring-out a lot of inflation by slamming the brakes on money creation.  This led to high interest rates, slow growth, and high unemployment.

The Roosevelts versus Ronald Reagan.

Back at the start of the Twentieth Century, Theodore Roosevelt had posited that big business and a foreseeably big labor would require a big government to balance their power and solve complex new problems. For a long time, it appeared that “the Republican Roosevelt”[1] had been prescient. The New Deal, launched by his cousin Democrat Franklin D. Roosevelt, greatly expanded the government’s role in the economy. That trajectory continued until the election of Ronald Reagan in 1980. Since then, Republicans have inveighed against the expansion of state power (unless national security can be invoked). What do Americans think about this issue in the early Twenty-First Century? A January 2014 opinion poll captured a fundamental division of opinion.[2] A majority (57 percent) agreed with the statement that “we need a strong government to handle today’s complex economic problems.” However, a very substantial minority (41 percent) rejected that idea in favor of letting a free market operate without “the government being involved.” To belabor the obvious, 57 + 41 = 98 percent of Americans. There is no uncertainty in the minds of Americans about this issue, no mushy middle ground on which compromise is possible. Two tribes confront each other. In Europe, on the other hand, there is a broad consensus on the role of government in the economy.

This has important implications for the economically-battered ordinary American. In 2010, the median wage was $26,364. After adjusting for inflation, this was the lowest real median wage since 1999.[3] In 2014, American median net worth per adult hit $44,900. Japan, Canada, Australia, and many Western European countries ranked ahead of the United States, which came in at 19th .[4] Apparently, if Americans are offered a choice between earning another $20,000 a year and getting another month of vacation, they would take the pay.[5] One could interpret this as Americans being workaholics. One could also interpret it as a sign of the economic stress under which many Americans are operating.

The question is what to do about this pathetic performance. The opposing positions generally pit redistribution through taxation policies (i.e. “strong government”) against pro-growth and social mobility policies (i.e. “let the market operate”).

If you combine federal, state, and local taxes, Americans are among the lowest taxed people in the developed world. Here the US ranks 31st, trailing most of the countries with higher median net worth.[6] Where does American federal spending go? Almost two thirds of it (65 percent) goes to three categories: Social Security (24 percent); Medicare/Medicaid/CHIP (22 percent); and defense (19 percent).[7]

None of this goes to the question of which group is correct. Perhaps neither one is entirely correct. Europeans are laboring under an “austerity” that would never be tolerated in the US. It does suggest that there is a core dispute that is more powerful—and important—than the “culture wars” that obsess the media and Democratic activists. Hence, Bernie Sanders.

[1] As Yale historian John Morton Blum called one of his books.

[2] “Poll Watch,” The Week, 17 January 2014, p. 17.

[3] “Noted,” The Week, 4 November 2011, p. 18.

[4] “The bottom line,” The Week, 20 June 2014, p. 34.

[5] “Poll Watch,” The Week, 24 July 2015, p. 15.

[6] “Noted,” The Week, 25 April 2014, p. 16.

[7] “Noted,” The Week, 25 April 2014, p. 16. It is worth pointing out that most countries don’t spend anything like the share of the budget on defense as does the US. Instead, they rely on the US in an emergency. That frees up a lot of resources for social programs. Then the federal nature of American government means that much spending is done by state and local authorities. Some European countries, in particular, have a more centralized system.

Long-Term Trends 1.

The United States faces one long-term problem in how to support its existing entitlement programs (Social Security, Medicare/Medicaid) and other discretionary spending as the “Baby Boom” takes up the rocking chair. A growing economy will more easily support these programs without drastic tax increases or spending cuts. A second long-term problem is that the national debt accumulated by many years of deficit spending has reached 75 percent of Gross Domestic Product (GDP) and is primed to go higher. This alarms some people more than other people.

President Obama is committed to stabilizing the national debt as a share of GDP at around 73 percent of GDP between now and 2025. This will a lot easier with a growing economy than with a lame one. So, how to foster growth?

As the US economy emerges from the “Great Recession” its long-term future will be determined in part by the absolute number of workers employed and the productivity-per-worker.[1] According to some measures, the US economy is in trouble in these areas.

The “labor participation rate” (the share of the population in work or looking for work) However, between 1950 and 2000, the participation of men in the labor force fell from almost 90 percent to about 70 percent. Over the same period, women’s participation rose from about 30 percent to about 60 percent. Then over-all rate fell from 66 percent (2007) to 62.9 percent (2014). The conventional explanation is that the prolonged recession dumped people into despair. Still, it is worth considering a couple of other possible factors. For one thing, the recession also coincided with the early stages of the “baby boom” taking retirement. If so, then there is a limited chance of luring them back into the labor force. The Congressional Budget Office (CBO) projects a 62.0 percent participation rate by 2019. For another thing, the decline may reflect a cultural preference for parents to spend more time with young children in the absence of compelling incentives to try to work.

The Obama administration has proposed ways to get as much participation as possible out of the labor force that remains.[2] Increasing the labor force is one element of this strategy. The Obama administration has proposed increasing immigration in order to expand the labor force and offering expanded maternity leave in order to keep women in the labor force. Other measures would include a $500 tax “credit” for working couples. This could be used to off-set child-care and commuting costs. Perhaps that will lure stay-at-home Moms and Dads into the labor force. A separate proposal increases the child-care tax credit. A third measure would offer the Earned Income Tax Credit to workers without children. This proposal tries to draw more single men into the job market.

Increasing productivity is more of a problem. Productivity increased by about 1.3 percent/year from 1973 to 1981; by about 1.7 percent/year between 1981 and 1990; by about 2.1 percent/year between 1990 and 2000; and by about 2.7 percent/year between 2001 and 2007. Productivity gains had already begun to slow by 2004, even before the “Great Recession.” Since 2007, productivity has increased on an average of 1.3 percent per year.[3]

A bunch of these proposals have also been advanced in the past by Republicans like Rob Portman and Paul Ryan. (See: “RomneyCare.”) It will be interesting to see if the Republicans know how to take “Yes” for an answer.

[1] Greg Ip, “Economy’s Supply Side Sputters,” WSJ, 19 February 2015.

[2] Nick Timiraos, “Obama Sees 20 Rocky Years as Boomers Retire,” WSJ, 20 February 2015.

[3] There is an obvious problem with how Greg Ip slices up the periods. A full–decade average for 2001 to 2010 would both reduce the gains from 2001 to 2007 and would increase the numbers for 2007-2010.

The economic mess and policy.

Median income, adjusted for inflation, is about $3,600 less than when President George W. Bush entered the White House and about $2,100 less than when President Obama entered the White House. America has not recovered from the “Great Recession.” We are rolling up on fifteen years of falling incomes after a long period of rising incomes. In contrast, upper income groups are seeing their wealth and incomes rise. Something is wrong.

What do economists suggest about reviving economic growth? They suggest improving education because America has lost its one-time enormous lead over other nations in terms of human capital. They suggest improving our crumbling infrastructure because roads, bridges, airports, and telecommunications are all falling behind needs. They suggest sorting out the messy tax code to reduce distortions in economic activity. They suggest cutting the cost of health care, which drags on the economy and cuts down money wages.[1]

The problem with these sorts of policies is that they will take a long time to play out, have an uncertain effect, and are complicated to understand. Hence, both side look for nostrums that look good on a bumper sticker. For Republicans, the solution tends to be cuts in taxes on high income-earners and corporations. These are the “job creators.”

What do the Democrats want to do to raise stagnant incomes among middle-class “workers”?[2] Well, they haven’t done much for quite a stretch so far as voters can tell. It should surprise no one if lots of them sit out an election. To counteract this trend, Democrats have adopted the cause of a higher minimum wage. In the near future they may turn to a “middle-class tax cut.” It seems most likely that this “cut” would actually take the form of “tax-credits.” These could be presented as tax incentives to save for retirement or for college education. Democrats favor paying for these cuts through higher taxes on upper-incomes. This would be popular with most Americans, who want more money for themselves and resent wealthy people.

How likely is this to happen? On one sense, very likely. The anti-tax frenzy that has gripped America for several decades has led to all Americans paying lower taxes than the historical trend since the Second World War. President Obama was happy to make most of the Bush-era tax cuts permanent.

In another sense, very unlikely. Such policies would have to pass through the House of Representatives. According to one analysis, the House is almost certain to remain in the hands of Republicans for the next decade. Only 28 of the Republicans’ 244 House seats are in districts that voted for President Obama in 2012. The Democrats now hold 188 seats. If all of those seats were moved from Republican to Democrat candidates, then the two parties would tie in the House. Such a shift is very unlikely, given the advantages of incumbents and the unreliable turn-out among Democratic voters. For the last decade American politics has see-sawed between Republicans and Democrats, but what Americans seem to like is a divided government that can’t accomplish anything.

David Leonhardt, “The Great Wage Slowdown, Looming Over Politics,” NYT, 11 November 20014.

Nate Cohn, “The Enduring Republican Grip on the House,” NYT, 11 November 2014.

[1] In fact, health care costs have stopped rising and in some cases have fallen. The reasons for this are subject to debate. It seems unlikely that the Affordable Care Act has anything to do with this—yet.

[2] OK, I’ll leave aside the whole issue of how “workers” used to mean “blue-collar.” Don’t want to suggest that America is really confused about the whole issue of social class.


A fine kettle of fish.

Wage increases haven’t kept pace with inflation for at least a decade. Generally, American families earn less than they did in 1999. A host of factors lie behind this depressing trend. There is intensifying competition from overseas (globalization); there is the difficulty of workers adapting to technological changes that wipe out lower skill/lower wage jobs while creating higher skill/higher wage jobs; and there is a government that is managing the past more than helping create the future. Still, there are a couple of factors that capture the attention.

First, America has been suffering from slow economic growth for quite a while. Why have we suffered slow growth? One answer is that high energy costs exert a drag on the economy. Beginning with the oil shocks of the 1970s, energy costs rose until the 1990s. They dropped for most of that decade, but have returned to the post-1970s “normal” in this century. Energy costs work like a regressive tax: everybody drives, so everybody pays the same gas tax; high energy costs for employers drive them to hold down other costs, like wages, or to pass them on to consumers. Another answer is that American workers used to have an enormous education advantage over most foreign workers. Now other countries have moved forward, while Americans have remained stuck in neutral. This affects productivity in a competitive economy.

Second, what growth that has occurred has flowed toward those already at the top of the pyramid. Health care costs reduce real incomes. Either employers resist wage increases in order to provide health insurance or employees without work-provided health insurance have to pay their own costs. The long rise in health-care costs cut into the rise in pay for most people. It took a proportionately smaller share from the incomes of the well-off. They plowed the difference back into investments.

Are there any grounds for even a modest optimism? Yes. First, “fracking” has greatly increased the supply of cheaper energy in America. Second, the incessant talk about the importance of education for getting a decent job has led to an increase in the number of high-school and college graduates. In 2000, 29.1 percent of 25 to 29 year olds had a college BA; in 2008, 30.8 percent did; and in 2013, 33.6 percent did. Third, for reasons that are much debated, health-care costs have stopped rising for the last few years. This should allow pay to rise as well.

None of this means that we’re home free. The way forward is shrouded in fog. Short-term results haven’t been very satisfying. American voters clang back and forth between “Hope” and the “Tea Party.” The partisan “grid-lock” in Washington may be less of a cause of our troubles than a symptom of those troubles.[1]

This analysis raises a couple of questions.

First, how do we improve the educational preparation of American workers? Shove 50 percent or more of Americans through college? Create a trades-oriented alternative to college?

Second, how do we get health-care costs down? Western Europe and Japan spend two-thirds the share of GDP on health-care as does the US and get better results, so it can be done.

Third, where do we stand on the cheap energy versus the environment issue? Global warming argues for alternatives to burning carbon; jobs and economic growth argue for it.

Fourth, what is a government supposed to do in a highly complex society and economy? After the “London whale” and the Chrysler recalls, the “regulatory state” has a black eye. That’s hardly a reason to believe in the pure rationality of the market economy

[1] David Leonhardt, “The Great Wage Slowdown Of the 21st Century,” NYT, 7 October 2014.