Campaign issues: revving up the economy
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SAFE posed the following question about the economy (which is commonly equated with abundant jobs and rising pay levels) in its 6/9/15 letter to presidential candidates.
Although the unemployment rate has fallen considerably since the 2008-2009 recession and is now back to an essentially “normal” level of 5.5% (May 2015), the workforce participation rate has fallen to its lowest level since the late 1970s/early 1980s. Do these results reflect real economic progress, or is the key point that so many working age Americans are choosing to stop looking for a job and live on the dole? Tax work, subsidize idleness, and batten down the hatches, 2/17/14. And if the second premise is correct, what should be done about it?
To the extent that the state of the economy and policies to achieve better results are being discussed, by the apparent finalists in the presidential race and many others, there seems to be a bias in favor of government action. Never mind the lack of evidence that the government is equipped to create good paying jobs, one proposal after another implicitly rests on the premise that reliance on private enterprise and a free market is passé.
Our survey of the debate begins with nostalgia for the past and ends with trepidation about the future.
A. The good old days – It’s been suggested that liberals and conservatives alike are fixated on the past. Liberals yearn for conditions in the 1950s and 1960s, while conservatives revere the Reagan era. The Fractured Republic: Renewing America’s social contract in the age of individualism, Yuval Levin, amazon.com, 2016.
The Left looks back to the middle of the twentieth century, when unions were strong, large public programs promised to solve pressing social problems, and the movements for racial integration and sexual equality were advancing. The Right looks back to the Reagan Era, when deregulation and lower taxes spurred the economy, cultural traditionalism seemed resurgent, and America was confident and optimistic. Each side thinks returning to its golden age could solve America’s problems.
America has changed greatly over the years, and the economic conditions that prevailed in the 1980s or earlier are gone for good. It would seem that political leaders/candidates should be offering ideas for the future, not talking about how things used to be.
That’s not to imply that all of the changes have been for the worse; there are some big pluses as well as minuses. The Fractured Republic, 2016.
. . . the large, consolidated institutions that once dominated our economy, politics, and culture have fragmented and become smaller, more diverse, and personalized. Individualism, dynamism, and liberalization have come at the cost of dwindling solidarity, cohesion, and social order. This has left us with more choices in every realm of life but less security, stability, and national unity.
In line with their respective fixations, liberals and conservatives propose incompatible agendas. How can Americans decide where the country should be going? A reviewer of Mr. Yuval’s book praises him for not touting one agenda or the other, but rather advocating further dialog. Disunited we stand, Barton Swaim, Wall Street Journal, 5/23/16.
This is where so many books of cultural and political criticism go wrong. Their critiques may be reasonable, but their proposals depend largely on people of one ideology or viewpoint persuading everybody else, or at least a majority, of the truth. A book by a conservative or liberal author treats ideological adversaries as obstacles to be persuaded or displaced, as if winning some metaphorical “war of ideas” will somehow get us back on the equally metaphorical “right track.”
B. Current state –According to the latest jobs report, 38,000 jobs were added in May and previous estimates of jobs added in March and April were adjusted downward by a total of 59,000 jobs. The unemployment rate fell by 0.3 percentage points to 4.7%, primarily due to statistical adjustments that reduced the number of people in the “civilian labor force” by 458,000. The labor force participation rate declined to 62.6% vs. 63.0% in March and 62.8% a year earlier. Economy disappoints with 38,000 jobs in May, unemployment, Joseph Lawler, Washington Examiner, 6/3/16. Jobs report, Bureau of Labor Statistics, June 2016.
Policy makers appeared to be caught by surprise, and it soon became evident that the Federal Reserve wouldn’t follow through on a previously indicated interest rate increase. Weak US jobs report kills hope for June Fed rate hike, Christopher Condon & Jeanna Smialek, Bloomberg.com, 6/3/16.
Odds of a June hike implied by futures trading, which had risen as high as 34 percent in late May as Fed officials hinted at their eagerness to raise rates, tumbled to just 4 percent following the employment report. The odds are based on prices in federal funds futures contracts.
In hindsight, it’s easy to understand the hiring slowdown. Jobs are a function of production, and US economic growth has been lagging of late. Make America grow again, Holman Jenkins, Wall Street Journal, 4/28/16.
. . .the first quarter is further evidence of what has been the weakest economic expansion in the postwar era. The 0.5% growth [annual rate] is subject to revision but it follows 1.4% in the fourth quarter. Growth over the last six months has averaged about 1%, and under 2% over the last 12 months. The usual definition of recession is two consecutive quarters of negative growth, which we barely ducked.
Employee productivity is eroding too, providing additional reason to question whether robust job growth – and the rising pay levels that workers are hoping for – should be expected. Weak productivity, rising wages putting pressure on US companies, Josh Mitchell, Wall Street Journal, 6/7/16.
Labor productivity, or the amount of goods and services employees produce per hour worked, fell at a 0.6% annual rate in the first quarter, the Labor Department said Tuesday. The drop, while less steep than initially estimated, extended a troubling slowdown that has hindered the economy’s ability to lift Americans’ living standards. *** Productivity grew an average 2.2% since World War II but has expanded just 0.5% over the last five years. Only in the five years through late 1982 has it grown as slowly.
For all these clues, most economists and other presumed experts had predicted robust employment growth in May. This reflects the tendency of forecasters to assume that established trends will continue aside from known differences such as the Verizon strike. Everybody was wrong about the latest jobs report, Rick Newman, yahoo.com, 6/3/16.
Bloomberg surveyed 81 economists on their predictions for the nonfarm payroll number for May, the closely watched figure that represents the net number of new jobs. The average prediction was for 161,000 new jobs, which turned out to be 123,000 too high. *** Ten big Wall Street firms [produced forecasts ranging from] 125,000 new jobs (JP Morgan Chase) to 165,000 (Goldman). That’s a narrow band of predictions that averaged 146,000.
Is an economy possible in which jobs are abundant and pay levels are steadily rising? Maybe, with a robust economic growth rate, but that’s not how the current situation is perceived. Critics cite anemic overall growth, declining household income, and growing income inequality. 2006 v. 2016, Terry Jeffrey, townhall.com, 6/8/16.
•America has seen 10 straight years (2006 through 2015) without a single year of 3 percent growth in real GDP. In the first quarter of this year, real GDP grew at an annualized rate of just 0.8 percent.
•As noted in the Census Bureau’s latest annual report on income and poverty in the United States, September 2015: “Median household income was $53,657 in 2014, not statistically different from the 2013 median in real terms, 6.5 percent lower than the 2007 (the year before the most recent recession) median ($57,357), and 7.2 percent lower than the median household income peak ($57,843) that occurred in 1999.”
Median household income (MHI) was only about $6,000 higher in 2014 than in 1970, by the way, which works out to an inflation-adjusted increase of 13% (about 0.3% per year) over the 44-year period. Income and poverty in the United States, US Census Bureau, figure 1, September 2015 (download PDF).
Decline of the institution of marriage has resulted in smaller household units, so tracking MHI may understate the benefits Americans have derived from economic growth. Note that per capita GDP nearly doubled between 1970 and 2014, while hourly salaries and wages rose about 45%. Hourly wages for nonsupervisory employees are up some 20% since 1995, after a previous decline. Lagging long-term wage growth, YiLi Chien & Maria Arias, Federal Reserve Bank of St. Louis, 2015.
Both of the presumed presidential candidates have thrown out ideas for creating more good paying jobs.
Hillary Clinton proposes new or enhanced social welfare benefits, to be funded by higher taxes on the affluent, and government support for “green” job programs. She supports a big hike in the minimum wage. She has stated that her husband (who served as president during the last period of solid jobs growth) would be one of her key economic advisers.
Donald Trump vows to “make America great again” (a slogan used by Ronald Reagan in the early 1980s). He envisions big tax cuts for everyone, slashing regulations, securing the border, great trade deals, harsh penalties for US companies that move operations overseas, and perhaps (despite initially stating otherwise) a higher minimum wage.
Clinton’s plan is more or less the polar opposite of SAFE’s agenda (approve the Keystone pipeline, prohibit regulation of carbon emissions, repeal the minimum wage, etc.). Less is more: a 10-step plan to reboot the economy 9/2/13.
Trump’s plan is a mixed bag. His tax cut plan appears irresponsible (12/7/15), and we rated his trade policies as “unacceptable” (3/21/16). Slashing regulations could be constructive, but he hasn’t provided much in the way of specifics. While it would be good to enforce the nation’s immigration laws, the ideas Trump has thrown out for doing so seem to be nonstarters.
For what it’s worth, recent polls indicate that Trump’s economic message is resonating with the electorate. Gallup: Trump is the jobs president, 52%-45%, Paul Bedard, Washington Examiner, 6/10/16.
C. The future – This country (like others) has experienced enormous changes in recent decades. The development and utilization of new technologies has provided unprecedented availability of information and speed of communication. It has become possible to do things with relative ease that were formerly unimaginable. Computer champions in chess and Go – GPS navigation – the ever more accessible internet - smart cell phones – drones - 3D printing - etc.
The breakthroughs are far from over, and the pace of change seems to be accelerating. Among the products now being developed: driverless cars - real artificial intelligence - virtual reality - robot soldiers – and much more.
Technological advances have always fueled productivity increases and economic growth, so one might think Americans would be feasting on new opportunities. But the rate of economic growth seems to be slowing, as has already been noted. Could it be that this time is different?
Various explanations for the disconnect have been offered. New technology won’t necessarily be used productively, e.g., what if people spend hours checking posts on Facebook and the like? Time and effort are required to become adept in using computerized medical records, and in the meantime doctors are reportedly seeing fewer patients. Introducing new systems requires upfront investment, and many industries haven’t taken the plunge yet. Why the economic payoff from technology is so elusive, Steve Lohr New York Times, 6/5/16.
Some observers suggest there is far more involved this time than the extension of human capabilities. What’s coming, they say, is computer-driven devices that can be programmed (or even learn) to do everything human beings can do and more, which may result in widespread displacement of human workers. Robots will take over most jobs in world by 2045, economictimes.indiatimes.com, 6/6/16.
The latest comes from Moshe Vardi, professor at Rice University, Houston, who delivered a talk to the American Association for the Advancement of Science, exploring the question: "If machines are capable of doing almost any work humans can do, what will humans do?" Vardi reckons that half of workers across the globe will be replaced by machines within the next 30 years, wiping out middle-class jobs and "exacerbating inequality.” He noted that robots would take over in many spheres of life, including automated driving and sex robots. ***this future is likely to mean humans have much more leisure time — indeed we may only work a handful of hours per week.
Trepidation about the consequences of technological advances is nothing new, and the concerns about robots taking over may be overblown. No doubt the number of people engaged in mass production operations (farming, mining, manufacturing) will decline, but we would envision plenty of unsatisfied human desires (people are rarely satisfied for long) to fuel demand for new products and services. Some harbingers of the “sharing economy” have already surfaced, such as Uber car transportation and Airbnb accommodations.
How should compensation levels be set in the new economy? Our answer would be supply and demand, and if some people earn a lot more than others so be it because they are presumably adding more economic value. Government intervention in the name of social justice, combatting inequality, or protecting established industries could have counterproductive results, so the government’s role should be held to a minimum.
Raising the minimum wage to $15 an hour may sound like a noble idea to some, for example, but it would surely accelerate the replacement of humans by machines in fast food establishments as well as pushing up prices. Want robots at McDonald’s? Hike minimum wage: [billionaire Sam] Zell, Matthew Belvedere, cnbc.com, 9/3/14.
"If you double the cost, there's no question that everybody will figure out ways to use less people," Zell argued. "I think minimum wages have always been a poor substitute for economic policy." The training experience and discipline gained from entry-level jobs at McDonald's or other service companies provide value to workers beyond just the wage they receive, he added.
Another proposal under consideration is to pay all adults a universal basic income (UBI) of $13,000 per year, with $3,000 earmarked for healthcare coverage and $10,000 spendable for any purpose. Up to $3,500 of the UBI would be recoverable from recipients with earned income in excess of $35,000 per year. The cost (aggregate amount unstated) would be offset “by getting rid of Social Security, Medicare, Medicaid, food stamps, Supplemental Security Income, housing subsidies, welfare for single women and every other kind of welfare and social-services program, as well as agricultural subsidies and corporate welfare,” thereby supposedly saving about $200 billion in 2014 rising to nearly $1 trillion per year by 2020. A guaranteed income for every American, Charles Murray (American Enterprise Institute), Wall Street Journal, 6/3/16.
Mr. Murray presents UBI as a “conservative” proposal, likening it to the negative income tax plan Milton Friedman suggested some 60 years ago. And yet it’s very up to date, he says, with Switzerland about to hold a UBI referendum and Finland planning a pilot project in 2017.
Artificial intelligence and robots will put many Americans out of work, Murray continues, and the UBI would help to cushion the blow.
. . . it will need to be possible, within a few decades, for a life well lived in the U.S. not to involve a job as traditionally defined. A UBI will be an essential part of the transition to that unprecedented world.
The UBI could serve to reinvigorate voluntary welfare organizations by collapsing the government welfare bureaucracy that has been overshadowing them ever since LBJ’s War on Poverty was launched.
And by giving unemployed people a guaranteed income stream to work with, the UBI would encourage them to make better life choices. Thus, “the unemployed guy living with his girlfriend will be told that he has to start paying part of the rent or move out, changing the dynamics of their relationship for the better.”
Conservatives have noted several drawbacks of the UBI. The first point seems dispositive, and we also agree with the other points.
•Experience suggests that the abolition of Social Security, Medicare, Medicaid, food stamps, and all the other programs mentioned is highly improbable. Is personal responsibility obsolete, Thomas Sowell, townhall.com, 6/7/16.
Professor Friedman's plan for a negative income tax to help the poor has already been put into practice [as the Earned Income Tax Credit]. But, contrary to his intention to have this replace the welfare state bureaucracy, it has been simply tacked on to all the many other government programs, instead of replacing them. It is not inevitable that the same thing will happen to Charles Murray's plan, but I would bet the rent money that there would be the same end result.
•Providing a UBI would imply that able-bodied people aren’t necessarily expected to work, and that is not a socially constructive message. A universal basic income is anti-work, Paul Winfree, dailysignal.com, 2/26/16.
The main effect of a “universal basic income” policy would be to raise the government benefits of able-bodied adults who work very little or not at all. Compared to the present system, such a policy would significantly increase the rewards of non-work relative to work, accelerating the trend to disengagement from labor and increasing long-term dependence and welfare costs.
•No one would turn down UBI payments, of course, but there has been no showing of a widespread need for this enormous new welfare program. Thomas Sowell, op cit.
Just what specific problem is so dire as to cause some conservatives and libertarians to propose that the government come to the rescue by giving every adult money to live on without working? *** Most Americans living below the official poverty line today have central air-conditioning, cable television for multiple TV sets, own at least one motor vehicle, and have many other amenities that most of the human race never had for most of its existence.
Other thoughts: It would make far more sense to reform the current welfare and entitlement programs, which will not be affordable over the long term, than to replace them with a new catchall program. Also, making it easier not to work (the essence of the UBI proposal) is inherently risky. As the scriptural adage goes, “idle hands are the devil’s workshop.”
Finally, the vision of growing ardor for a UBI was dashed by the results of the Swiss referendum. “Marxist dream” crushed – in landslide [nearly 4-1 margin], Swiss reject proposal to hand out free money to everyone, Tyler Durden, zerohedge.com, 6/5/16.
Let’s place our faith in free enterprise until something demonstrably better comes along.
An outstanding piece; I’ve been pondering some of the same questions. The increase in world population and increasing efficiency gains (fewer people needed to do the “work”) via technology are absolutely going in opposite directions, which could seemingly result in large numbers of people having little or nothing to do. This leads to questions like these: (1) What are the implications of having some people work in the face of a growing number who wouldn’t be working? (2) What would be the incentives for people to become educated, and for institutions to continue doing research? (3) Might the end product be a descent into a state of tribal warfare? - SAFE member (Delaware)
The official unemployment rate (U3), currently 4.7%, is clearly understated. An alternative measure (U6) – which counts “marginally attached workers and those working part-time for economic reasons” as unemployed – produces an unemployment rate of nearly 10%. http://portalseven.com/employment/unemployment_rate_u6.jsp Add in tens of millions of working age Americans who have dropped out of the workforce entirely and are subsisting on government payments or jobs in the underground economy, and one arrives at an unemployment rate of some 15-20%. No wonder the economy has been growing so slowly; there are too many free riders. – SAFE director
Oh, my aching brain! What are proponents of “hair of the dog” remedies like the UBI thinking? – Family connection