Can We Agree on a Way to Stimulate Economic Growth?

Last week I tried to make a simple point. Our government needs to prioritize and focus. My preference is to focus on economic growth and security. My assumption is that either candidate once elected with an earnest goal of promoting growth could find enough support to make progress. My second assumption is that a truly positive outcome would take a lot of focus wherein other issues would have to be put on a back burner. I got lots of responses and advice from you. So let me deal with some of that here.

First, even if I am wrong, I am not going to move to another planet. So forget it.

Second, some of you believe that neither party is capable of focusing on economic growth to the exclusion of other policies. And I agree with you. I can’t see them jumping on the growth wagon either. Whatever party wins and wins enough clout in Congress will begin by immediately jabbing its collective finger into the eye of the other party. If Democrats win the first thing they will do is to make abortion available to women who are not even pregnant. And Republicans in their first 24 hours in power will make it legal for kindergarten kids to carry loaded military weapons to class. Okay I jest, but you get the point. I doubt either party is capable of taking over without at least a few na na nas. This will not put anyone in the mood to join hands in even a few off-key gumbayas for economic growth.

But it is worth talking about. Why can’t one side just stick to making us all a little richer?

Third, even without the predictable eye jabbing, can both parties find a way to agree on an economic growth plan? Again, I am not sure they can do that. What is the best way to promote stronger economic growth that will lift most boats? Fuzzy seems to have a very large boat and I don’t even have a boat. So it sounds pretty challenging.

Okay forget boats for a moment. Here is a wild and crazy suggestion for thinking about a solution. Step 1. Recognize that no party in the discussion will get everything they want. It’s called compromise. If you are like Mr Cruz and won’t play unless you can use your own Tom Brady-signed under-inflated legal pad, then go home and don’t participate. Step 2. Write down all the credible policies that could conceivably improve economic growth in the US in the next few years. Yes, write them all down. Step 3. Prioritize all these possibilities in terms of a realistic appraisal of their impacts on economic growth. To do this step each side could pick a few economists who they believe are not wing-nuts and who could actually sit in a room for more than 7 minutes with economists on the other side of the aisle. Step 4. Put these economists in a locked room with only kimchi, soju, a photo of Margaret Thatcher, and only one week’s supply of Charmin. Step 5. Watch the magic happen and make sure that government legislates anything that a majority of these economists agree to. Step 6. If all that doesn't work go back to step 1. 

It sounds crazy but let’s face it, crazy is about all we have today. If any process was to lead to an even half-way intelligent set of economic policies, we would benefit. So as to totally not cop-out on some details of policies let me end by offering some suggestions.

·       Evaluate the full set of government regulations that negatively impact productivity and labor supply. Those that create the largest detriments should be eliminated for a period of three years.

·       Cut some fat out of every government program. Use that fat to fry some really nice pork chops. Or use it for infrastructure.

·       Do something about spending on Social Security and Medicare. Use those cuts to give some targeted tax cuts and/or subsidies that would directly enhance the replacement of worn out machines, software, and so on.

·       Create tax cuts or subsidies that would make it easier for poor people to work and safely provide for their children. More spending on training and retraining would fit here too. 

·       If any of the above leads to short-term increases in the government deficit or national debt, then permit deficits as high as 5% of GDP for two years. If the growth policies work, the deficit will automatically go back to tolerable levels.

I probably missed something so let me know. That list is provided to show that there are ways to get this done. It is not meant to be exhaustive. Notice that I have attempted to be flexible. If you have read some of my past musings you know that I harp consistently about deficits and debt. In the above I am acknowledging that a compromise might involve a temporary increase in the latter. Wow – I may need a visit to my JD bottle once that gets out. But compromise is compromise. I want to see people seriously ponder economic growth. If we stick to “my way or the highway” I can’t see us making any progress. What do you think? 

National Priorities: A New Candidate's Pledge

Mike Pence was quoted describing himself as "a Christian, a conservative, and a Republican, in that order.”

I think that is laudable. Many people say he is a fine man. Others might describe themselves differently. That’s what life is all about…different strokes for different folks. It is nice that we tolerate each other’s personal penchants.

But when it comes to national priorities, we realize that our own personal desires may have to take a back seat to the national interest. When young people are drafted into the military they often serve proudly because their national duty comes before their personal goals. Some of us are dragged kicking and screaming or at least complaining. Maybe we even threaten to move to Canada. I might hate to pay a higher tax rate on my income or have to pay more for my Medicare benefits because I am richer than someone else. But I also realize that being part of the USA I win some and I lose some. Sometimes national priorities do not exactly coincide with my own.

It is in that spirit that I offer a suggestion with respect to the coming election. I am asking Hillary, the Donald, and Alfred E. Neuman (if he decides to run) to consider taking on the following candidate's pledge. Hopefully the pledge would be accompanied by shots of JD but that's optional.

I promise that I will fix the US economy. Fixing the US economy will be my main passion for the country for four years. I realize that sensible economic policies could take all four years of my term and therefore I pledge and promise that in four years the US economy will be humming like never before. If not, then I will forego a second term.  I also promise to do whatever it takes to make Americans safe and secure from terrorism. So as to not take my eye off those two balls I promise to veto all and every legislation that is not directly involved with these two goals. Included in this list of important but secondary goals is anything relating to religious rights, gun rights, abortion, illegal immigration, and income equality. Yes, these and other unmentioned issues are important. And therefore once we have fixed the economy and our security I promise to spend my second term as President restoring the proper importance of these other issues. But for now, we have to provide more and better jobs for Americans and we have to keep our people safe.

Ok I admit that Ruth Bader Ginsberg and I may have been drinking out of the same JD decanter. But come on folks – is it not obvious that we have stuck the proverbial cart before the horse? Are we now dissipating our remaining political energy on things that are preventing us from making any real progress? I think the answer is clearly yes.

I know some people think we need to address income inequality BEFORE economic growth. They do not believe that all boats rise equally. I too doubt they rise equally. But surely you want boats to rise and so far there is little evidence that anything is better for the poor than a rapidly growing economy. As long as we argue about social programs our poor remain the same or they get worse.

If all our energy was producing some progress on the social program side then I would say fine. But all it really has done is create a hunker down mentality among the nation’s extremes on left and right. Apparently standing in the street, singing Bob Dylan songs and lobbing bombs and bullets at each other is more fun than actually talking with someone about real and effective policies. Of course those people who sit in their homes thinking there are no social problems do not help matters either. 

I love all the promises being made this week to heal differences among police and minorities. They swear it is time to talk to each other. You just watch. This will be yet another opportunity for extremists to hijack an important issue and use the occasion to scream at each other even louder repeating oft-heard mantras. If  that is talking to each other then I would rather take a pledge of silence.

Finally, what do we really give up if we put progress on these social policies on hold? What do you really expect to accomplish through more of the same? Despite all the attention given to it, how much did the needle move on abortion in the last four years? How much progress did we make in race relations or illegal immigration? 

So that’s my point. It sounds crazy to some of you to put some vital issues on the back burner for a while. But wouldn’t it be refreshing to have a timeout wherein we all worked together to get economic growth going again? And do that without the din of hatred playing in the background.  Accomplishing that maybe we could move on to learning how to work together on ways to eliminate the rest of our problems!

Free College Tuition

Let’s suppose for a minute that you are not a fiery participant in any wing. That is, you are not easily swayed by slogans and finger-pointing. You are from Missouri the so-called “show me” state. Let’s suppose that no matter what a candidate or a member of government proposes you would at least try to look at all sides of the proposal. Wow. This is already sounding crazy. Where is my JD?  Is there anyone left who thinks that way? Just in case the answer is yes, let’s move on.

Why does Hillary Clinton want to propose free college tuition? In fact, why free anything? Recall that economics teaches that us that stuff usually costs something to make. A My Pillow is the best pillow ever invented. If you watch TV ads you know why.  You don’t expect to get such a pillow for free. Why?  Because its inventor had to make it and all that activity costs money. It seems fair to give Mr. Pillow some money in exchange for his My Pillow. It seems fair too since your life will be totally changed by having a My Pillow (or two of them for the price of one). Imagine how sexy you will look and all the attention you will receive after sleeping on your My Pillow. Clearly it must be worth the asking price.

Why doesn’t Hillary Clinton want to make My Pillows free? I can’t answer that question but let’s now flip over to things the government loves to give away for free. Highways are usually free. You just jump on good old Interstate 5 and go anywhere from San Diego to Seattle. What a deal! No wagon ruts there. I won’t go into a long list of other free items because some of you might get inflamed. But the point is made. The government provides things to us free.

You are scowling. Highways are not free. It costs money to design, build and operate them. Tax payers send checks to local, state, and federal governments to pay for all so-called free stuff, whether it is for highways, schools, or for free drug needles to addicted persons.

Okay, since nothing is really free the main question here is whether you want to pay for stuff directly to a capitalist or to a government. Do you want business people to provide all these things through a market economy or do you want government making the decisions? And now all you Wingers are getting your guns loaded. You lefties don’t trust business people to give us a fair shake. You righties think government is equivalent to robbery. But since we are trying to be non-wingers for a little while today, let’s keep exploring this fascinating topic –more fascinating than a Matt Lauer and Al Roker wrestling match. 

Market economists believe that in some situations markets fail and it is possible that governments should intervene. Any microeconomics text book has a chapter called market failures. You don’t have to be Paul Krugman or Bernie Sanders to believe in market failure. All of us believe! I won’t rewrite the chapter here because a vivid example of market failures comes when two parties transact (you and the makers of Tide) and somehow you pollute other people (who live down the stream where your dirty water flows). Those other people are not represented when you buy Tide, wash your clothes, and dump the water into the stream. Thus those other people have to incur costs to undo the harm you did to them. Those costs escape the economic system unless the government intervenes and makes you and Tide pay for them.

Make sense? It does to me. A similar story relates to highways. Joe’s Highway Company comes to you and asks if you will pay $10 for a nice highway between Bloomington and Lake Lemon. You are a smart cookie and you say no. That’s because you know that Peter and Charles will say yes and then pay. And when they pay, you get to ride the highway for free. This is called the free-rider problem and it can result in not enough highways being built unless government decides that lots of people will benefit and taxes them. Thus more money is raised and more highways gets built.

Enough you say! Okay – government gets to do a few things. But what about free education? Free education satisfies the free rider issue. We all benefit from an educated population. We want our kids to be educated and we want people to pay for it through taxes. While most of us would agree that K-12 gives citizens the basic skills necessary to be good citizens, there is more debate about higher education advancing our kiddies beyond the the necessary levels of reading, writing, and arithmetic. States have subsidized advanced education for their citizens but the question remains as to how much more society benefits from courses and degrees after high school graduation.

College education might simply advance the skills of the person who encounters a degree—and not so much his or her neighbor’s welfare. In that case it makes sense for only the individual to pay for the education.

But what about people who can’t afford a college education? That’s a stickier wicket. We help people with low incomes in many ways. We reduce or eliminate their income taxes and we give them subsidies. We make them eligible for food and housing and heat and medicine and so on. But we don't buy diamond rings or even entry level Fords Fiestas for poor people. Free stuff to the poor has limits. Where exactly does a free college education fit in to that? Is it more like a diamond ring or a chicken in a pot?

Finally, a few more words about unintended effects. Prices are about value. When you say something is free – it is bound to reduce its value.  I worry that free college education will harm one of the strongest industries in the USA – higher education. Free higher education may attract some of the wrong people. Already higher education spends a lot of money and time on things unrelated to education. I fear that making it easier for people to attend will exacerbate those trends. We hear people complaining that college is more about having fun and socialization than about gaining knowledge and skills. Do we really want to spend the people’s money on fun and socialization?

Larry, you don’t give a fig about those young people who are dying to get a college education but can’t afford it. But that is exactly who I do care about. I want them all to attend college. They will be willing to put some skin into the game. Show me how Hillary’s proposal will differentiate between those who will be truly helped and those who will go along for a nice free ride.  Imagine how much more we could devote to those who really want/need the help if we make that distinction. Hillary's proposal includes any household with incomes below $125,000. I wouldn't call a family that makes $125,000 per year poor. Would you? Or is this just about doing something to get Bernie’s supporters to vote for her? Or maybe a backdoor means for government to control costs of higher education?

Fiscal Rock and Hard Place

The rock and the hard place has finally arrived. For those of you not familiar with this terminology, when you are between a rock and a hard place there are no easy or good options to solve your problem. Basically you have let things fester so long that all the reasonable solutions no longer exist. You have procrastinated so long that every solution left is painful.

We see this all the time. It is easy to put off a diet or an exercise program. A diet or exercise program is easy but also so easy to put off until later. But then when you get too heavy or too out of shape, even a small movement in the right direction is much tougher. Geez, do I really have to lose 100 pounds? Yikes. No way. If this seems silly then just read the most current news coming out of Brazil, Argentina, and Venezuela. The past governments spent all the money. Now they have only horrible options.

I wrote two weeks ago about monetary policy and how the Fed still continues to procrastinate about returning to a normal policy. Today’s post turns to fiscal policy. It focuses on how we deal with the fiscal rock and hard place. Basically it is to make believe – make believe that the rock and hard place does not exist.

How can I say that? Easy. I read the latest policy advice coming out of the OECD (Organization for Economic Cooperation and Development). The OECD is a world organization with 34 country members. The OECD studies and writes about the world economy and routinely makes forecasts and gives policy advice.

The latest words from the OECD are titled “Policymakers: Act now to keep promises” can be found at http://www.oecd.org/eco/economicoutlook.htp

I summarize but the main advice given by the OECD is (1) since interest rates are so low countries should enlarge fiscal deficits so as to increase aggregate demand, (2) structural policies should be used to increase productivity growth. Such policies include shifting fiscal policies to increase investment, encourage firm market entry, reform labor and product markets, and improve functioning of financial markets. (3) Avoid further monetary policies since they risk less effectiveness and more harmful side effects.

This advice is totally useless. The OECD must be doing this work on another planet. It flies in the face of what we know and basically proves that we are between a rock and a hard place.

     First, while we all know that monetary policy is now doing nothing but causing imbalances, most countries are fully engaged in almost exclusively relying on monetary policy. The OECD's monetary advice is correct but will fall on deaf ears. They know that so why give it?

     Second, as for using low and negative interest rates to finance further fiscal expansions this advice totally ignores the increased national debt loads in most countries. Sure it is nice to take advantage of low interest rates to borrow. But there are limits to prudent borrowing. Most countries have no room to borrow. This is horrible advice. 

     Finally, the most disingenuous of the policy advice given above has to do with structural reform. Most countries have totally rejected structural reforms because they are too political in nature. Take Paris right now. What self-respecting union is not on strike right now? The current government of France wanted a tiny little bit of labor market reform. Non merci. The best most of us can do is to argue that infrastructure spending is good structural reform. But please – this is just a flimsy excuse to increase debt. As we learned recently from shovel-ready projects  -- infrastructure spending might impact our national economic policies when your grandson becomes eligible for Social Security.

The OECD and others are correct to worry about but short- and medium term productivity and economic growth. But what they don’t want to tell us is that we have procrastinated so long that even sensible policy suggestions seem ludicrous. It won’t take anything creative or fancy to solve problems in most countries. But the politics are too ripe for any of that boring stuff to be supported. Now seems to be the time for impassioned speeches and exaggerated emotion. Make mashed potatoes illegal but never preach the virtues of simple everyday vegetables and modest portions! Get monetary policy back to normal. Get debt back to normal. Don’t throw  business under the bus. But alas, those policies will cause major and painful adjustments. On to snake oil.