What's wrong with America's economy?

dblboggie wrote:Where did this come from Bubbles and who is the author?

BubbleBliss wrote:What's wrong with America's economy?
Its politicians are failing to tackle the country’s real problems. Believe it or not, they could learn from Europe
Apr 28th 2011 | from the print edition


PESSIMISM about the United States rarely pays off in the long run. Time and again, when Americans have felt particularly glum, their economy has been on the brink of a revival. What the author does not note is exactly why the economy has turned around... Carter was followed by Reagan for instance. Carter was a big government liberal, Reagan, a small government conservative. Carter created the Dept of Energy and the Dept of Education – both of which have been utter failures and a complete waste of taxpayer dollars. Carter also introduced an energy policy that included price controls (never, ever a good idea) and “new technology” (yes, that’s how long we’ve been at this “new technology” thing in the field of energy – how has that worked out for us?) And of course the 70% marginal tax rates during Carter’s years did little to stimulate the economy.

Think of Jimmy Carter’s cardigan-clad gloom in the inflation-ridden late 1970s, or the fear of competition from Japan that marked the “jobless recovery” of the early 1990s. Both times the United States bounced back, boosted on the first occasion by Paul Volcker’s conquest of inflation and on the second by a productivity spurt that sent growth rates soaring in the mid-1990s even as Japan stalled. Again, the author fails to note exactly WHY the US “bounced back.” He makes it seem like something that just occurs naturally without any action or input required of our elected representatives. But, of course, this is just not true. Volcker had little to do with the “conquest of inflation” and everything to do with Reagan’s vision of what would really send our economy into overdrive by cutting all marginal tax rates – while attempting to cut government spending (an objective he did not succeed in nearly as well as he would have liked given a majority Democratic Congress).

That record is worth bearing in mind today. Americans are unhappy, and becoming more so, about their country’s prospects and politicians’ efforts to improve them. In a new New York Times/CBS News poll, seven out of ten respondents said America is on the wrong track. Almost 60% of Americans disapprove of Barack Obama’s handling of the economy, and three out of four think Congress is doing a lousy job. Now here, the author has it perfectly right.

This malaise partly reflects the sluggishness of the recovery. Though unemployment has been falling and share prices are close to a three-year high, house prices are still in the dumps and the price of petrol has soared to levels not seen since the summer of 2008. But it’s not all about oil or indeed the short term. A careful reading of the polls suggests that Americans’ worries stretch well beyond the next couple of years: about stagnating living standards and a dark future in an economy slow to create jobs, saddled with big government deficits and under threat from China. Tellingly, a majority now regard China, not America, as the world’s leading economy. Of course what the author neglects to mention here is the all-out war that Obama and the Democrats have declared on private-sector businesses and his constant hue and cry to raise taxes on businesses and entrepreneurs not just directly but indirectly through the so-called “health care reform” bill, by executive fiat via the EPA and the enforcement of “cap-and-trade” via regulatory means not sanctioned by Congress as well as his administration’s defense of unions and his attempt (via the NLRB) to circumvent the private vote in the unionization of private-sector businesses. This “malaise” can easily be attributed to these measures which the people can easily see thanks to our alternative media.

Are these worries justified? On the plus side, it is hard to think of any large country with as many inherent long-term advantages as America: what would China give to have a Silicon Valley? Or Germany an Ivy League? But it is also plain that the United States does indeed have long-term economic weaknesses—and ones that will take time to fix. The real worry for Americans should be that their politicians, not least their president, are doing so little to tackle these underlying problems. Three failings stand out. Damn skippy these worries are justified! The President and the Democrats in Congress aren’t even remotely serious about addressing these problems – hell, they are looking to further magnify these woes through their measures. And the Republicans, particularly the Speaker of the House, are doing precious little to dispel the source of these worries, still bowing to fears of how the mainstream media will portray them if they take a principled stand and do something serious about our current economic situation.

The competitiveness canard

The first failing, of which Mr Obama in particular is guilty, is misstating the problem. He likes to frame America’s challenges in terms of “competitiveness”, particularly versus China. America’s prosperity, he argues, depends on “out-innovating, out-educating and out-building” China. This is mostly nonsense. America’s prosperity depends not on other countries’ productivity growth, but on its own (actually pretty fast) pace. Ideas spill over from one economy to another: when China innovates Americans benefit. There is no question that Obama is misstating the problem! Hell... Obama IS the problem. And the entire industrialized world benefits when ever any of those countries innovate. This too is just basic macroeconomics.

Of course, plenty more could be done to spur innovation. The system of corporate taxation is a mess and deters domestic investment. This is the understatement of the century. See above.

Mr Obama is right that America’s infrastructure is creaking (see article). But the solution there has as much to do with reforming Neanderthal funding systems as it does with the greater public spending he advocates. Too much of the “competitiveness” talk is a canard—one that justifies misguided policies, such as subsidies for green technology, and diverts attention from the country’s real to-do list. Again, I largely agree with the author here, though I would submit that much of this infrastructure is the responsibility of the various states and not the federal government – though there are legitimate federal infrastructure needs.

High on that list is sorting out America’s public finances. The budget deficit is huge and public debt, at over 90% of GDP when measured in an internationally comparable manner (see article), is high and rising fast. Apart from Japan, America is the only big rich economy that does not have a plan for getting its public finances under control. The good news is that politicians are at last paying attention: deficit reduction is just about all anybody talks about in Washington, DC, these days. The bad news—and the second reason for gloom about what the politicians are up to—is that neither party is prepared to make the basic compromises that are essential to a deal. Republicans refuse to accept that taxes will have to rise, Democrats that spending on “entitlements” such as health care and pensions must fall. No real progress is likely until after the 2012 presidential election. And the antagonism of today’s deficit debate may even harm the economy, as Republicans push for excessive cuts in next year’s budget. The only part I disagree with here is that the author’s assertion that taxes must rise. I do not believe this is the case in the slightest. We have a spending problem, not a revenue problem. When taxes are low for a predictable period of time (say 10 years, as with the Bush tax cuts), this spurs economic growth, which in turn always increases federal tax receipts (revenue). The federal government takes in more money with lower tax rates than it does when tax rates are higher. There is an historical record which backs this up. The problem has always been that faced with this increased revenue, politicians cannot resist increasing federal spending above those revenues; new programs, new or increased benefits, ever more federal spending and an expansion of federal power is what always greets any increase in federal revenue. THIS is our problem. We do NOT have a revenue problem, we have a spending problem.

When growth doesn’t bring jobs

Meanwhile, the biggest dangers lie in an area that politicians barely mention: the labour market. The recent decline in the jobless rate has been misleading, the result of a surprisingly small growth in the workforce (as discouraged workers drop out) as much as fast job creation. A stubborn 46% of America’s jobless, some 6m people, have been out of work for more than six months. The weakness of the recovery is mostly to blame, but there are signs that America may be developing a distinctly European disease: structural unemployment.

Youth unemployment is especially high, and joblessness among the young leaves lasting scars. And we can thank the minimum wage for this! Who in their right mind would hire a young, unskilled youth with no work-ethic record at nearly $8.00/hour??? It is insanity, and we can thank the extra-constitutional interference of our federal government for this mess.

Strong productivity growth has been achieved partly through the elimination of many mid-skilled jobs. And what makes this all the more worrying is that, below the radar screen, America had employment problems long before the recession, particularly for lesser-skilled men. These were caused not only by sweeping changes from technology and globalisation, which affect all countries, but also by America’s habit of locking up large numbers of young black men, which drastically diminishes their future employment prospects. America has a smaller fraction of prime-age men in work and in the labour force than any other G7 economy. Some 25% of men aged 25-54 with no college degree, 35% of high-school dropouts and almost 70% of black high-school dropouts are not working (see article). The real problem here is the high rate of blacks that drop out of high school. And I would trace that back to LBJ’s “Great Society” program and his so-called “war on poverty” which basically enslaved blacks to the federal government via welfare and other entitlement programs which inculcated a sense of entitlement over the decades – a sense of entitlement that did not exist before LBJ. The black nuclear family was in much better shape in the 50’s and early 60’s than it was after LBJ. As for the problems of hiring lesser skilled employees, again, we can thank the federal minimum wage laws for this problem. Thanks to those laws, employers are faced with hiring unskilled workers are unreasonably high wages and training them up to a level where they are earning their minimum wage and then taking it from there, or finding another way to get the same amount of work done cheaper. This isn’t rocket surgery; businesses are compelled to select the least expensive means of accomplishing their tasks. This is common sense. Businesses are in the business of making money!

Beyond the toll to individuals, the lack of work among less-skilled men could have huge fiscal and social consequences. The cost of disability payments is some $120 billion (almost 1% of GDP) and rising fast. Male worklessness has been linked with lower marriage rates and weakening family bonds.

All this means that grappling with entrenched joblessness deserves to be far higher on America’s policy agenda. Unfortunately, the few (leftish) politicians who acknowledge the problem tend to have misguided solutions, such as trade barriers or industrial policy to prop up yesterday’s jobs or to spot tomorrow’s. That won’t work: government has a terrible record at picking winners. Instead, America needs to get its macro-medicine right, in particular by committing itself to medium-term fiscal and monetary stability without excessive short-term tightening. But it also needs job-market reforms, from streamlining and upgrading training to increasing employers’ incentives to hire the low-skilled. And there, strange as it may seem, America could learn from Europe: the Netherlands, for instance, is a good model for how to overhaul disability insurance. Stemming the decline in low-skilled men’s work will also demand more education reform to boost skills, as well as a saner approach to drugs and imprisonment. Indeed, we do need to get our macroeconomic house in order. Rather than following the clearly failed Keynesian model, which calls not only for reducing taxes but also for increasing government spending (we’ve done the latter, but not the former), we need to copy the policies that JFK, Reagan and Bush 2 applied; cut taxes. The only way out of our mess is to grow our economy while shrinking federal spending. This is the real solution. A solution the author completely neglects.

Technology and globalisation are remaking labour markets across the rich world, to the relative detriment of the lower-skilled. That’s why a rosier outlook for America’s economy does not necessarily mean a rosy future for all Americans. Mr Obama and his opponents can help to shape the process. Sadly, they are doing so for the worse rather than the better. Sooner or later, the buggy whips are no longer needed, and the buggy whip makers are out of a job unless they retrain. That is the way of the world. Progress always comes at a temporary price. But it always ultimately results in a better quality of life for all when all is said and done.

BubbleBliss wrote:I don't necessarily share the views of the author, I just thought it would spur some debate in here.