GROWING, GROWING, GONE?

He looked at us, Dean and me, with an expression that seemed to say, “Hey now, what's this thing we're all doing in this sad, brown world.” ~ Jack Kerouac, On the Road

We’ve barely begun to travel on the president’s road to alleged greatness and it has already turned into quicksand.

Mostly because of the president’s flurry of ukases – aka, executive orders (EOs) – that have closed our borders in the guise of “national security” and begun to dismantle the Obama accomplishments. These executive orders are not like those of the past. They appear to be uncoordinated, skeletal, rushed tweet-like summary statements rather than well-considered, substantive pronouncements, as past presidents’ ones have been. No real core, no measured assessment, no pre-coordination with affected agencies; nothing but a glorified headline press release that employees of executive agencies have to guess what they mean and what they’re supposed to do as a consequence. Pundits have told us that DJT “thrives on chaos;” now we’re all suffering from it; wondering how to make “You’re fired” mean something.

At this point, the prime example is he-who-must-be-named Micro-Man’s Jan 27 EO on immigration that indefinitely barred Syrian refugees from entering the United States, suspended all refugee admissions for 120 days and blocked citizens of 7 Muslim-majority countries, refugees or otherwise, from entering the United States for 90 days.

This decree has unleashed confusion and turmoil throughout the immigration system, including airports in the US and overseas. It prompted protests and legal action. Emigrating Christians appear to be spared these administrative shackles that seem only applicable to Muslims, despite frantic counter-statements by the president’s embattled cohorts. Ah, chaos.

But let’s travel on the road beyond SFO, LAX, OGG and JFK and head to making America great again through Micro-Man’s promised, magnified economic growth.

A large part of post WWII American greatness is tied to our impressive macroeconomic growth. In real (inflation-adjusted) terms, our 2016 GDP is almost 4 times larger than it was 50 years ago, quite an accomplishment, which averages to yearly growth of 1.4% through the ups and downs of our last half-century of business cycling. The chart below shows annual real GDP growth for each president since Reagan in 1981. The growth rates for the two most recent presidents, Barack Obama and George W. Bush, are noticeably lower than that of either Bill Clinton or Ronald Reagan. Where has all our growth gone?

Source: Bureau of Economic Analysis

Micro-Man has stated that as president he will oversee “tremendous” economic growth. In September 2015 he said, “We're looking at a 3%, but we think it could be 5%, it could even be 6%.” Twelve months later his campaign estimated that the economy would expand at an annual rate of between 3.5% and 4%, following his proposed overhaul of the tax code. Then one month later, during his Las Vegas debate with Hillary Clinton, he tenaciously doubled down on producing increased annual GDP growth, “I actually think we can go higher than 4%. I think you can go to 5% or 6%.” After his election victory, Steven Mnuchin, who DJT has nominated to lead the Treasury Department, and be responsible for implementing the president’s economic agenda, backtracked on his boss’s Olympian growth goals, and stated in an interview, “I think we can absolutely get to sustained 3% to 4% GDP [growth], and that is absolutely critical for the country.”

Because so much depends on it, I hope our economic growth will increase, but seriously doubt it can happen at the fantasy-levels of 5% or 6% per year, given the policy ideas DJT and real Republicans have already declared. For some perspective, even 4% annual nominal GDP growth means the US would need to add $754 billion – slightly larger than Turkey’s GDP (ranked 18th largest in the world, with a population of 80.3 million) to our GDP. That yearly increase would be a very heavy lift and require policies that will not be considered even in a tweet by Micro-Man.

Economists generally agree (I know, I know, it’s almost oxymoronic to state that economists agree on anything, but…) that sustained macroeconomic growth requires increases in the number of employed workers, increases in capital stock (e.g., factories, machinery and equipment), increases in labor and capital productivity (aka, total factor productivity) and technological advancement.

By examining each of these key drivers of growth during the recent past, we reach a somber conclusion: US macroeconomic growth will not soon increase from the most recent 1.5% to 2% annual rate to even 4%. If Republicans reduce government support services as expected, this will mean serious economic challenges for millions of Americans that have nothing to do with growth. 

Increases in the number of employed workers will fall due to policy and demographics. Donald Trump and his Republican supplicants are all too busy denying visas, closing borders and building walls that will prohibit immigrant labor – be they unskilled, semi-skilled or those with H1B visas – from entering the US. The rising retirement of Baby Boomers means the number of US laborers will be barely growing, despite Millennials’ additions. The labor force is anticipated to grow at an average annual growth rate of just 0.5%, from 2014 to 2024, the lowest in several decades. The US total fertility rate now is at its lowest in a long time – 1.87 children per woman. So much for expecting the number of employed workers to increase. More positively, the US capital stock has steadily increased for decades. The St. Louis Federal Reserve Bank estimates in 2014 that the US capital stock was $51.2 trillion. But capital stock increases alone cannot pull growth rates up.

Total factor productivity (TFP), which combines productivity changes in labor with that of capital, has been growing at a smaller rate than previously. Over the past four quarters ending in the third quarter of 2016 the Federal Reserve Bank of San Francisco calculated that TFP grew at a diminutive annual rate of just 0.32%. Because TFP encompasses the benefits derived from technological improvements, economists believe it is a central source of growth within an economy. So the decades-old reduction in productivity growth is a significant and puzzling concern for economists and policy-makers, excluding today’s president.

One likely drag on productivity growth is the enduring reduction in government-funded non-defense R&D spending. The Obama administration’s proposed FY2016 budget called for a modest increase in R&D funding over last fiscal year. This proposed budget now is no longer relevant and a new, summary one may be produced by the new president. Outlays for all R&D would have represented 3.5% of all federal spending in FY2016, continuing a long decline.

Professor Robert J. Gordon has made a compelling case that the days of 3% to 4% annual growth for the US are behind us. Historic growth rates are gone. His captivating book, The Rise and Fall of American Growth, comprehensively documents the reasons for his dour prognosis. Prof. Gordon’s calculation of total factor productivity shows that for the decade ending in 2014 the annual change in TFP was a small 0.7%, the second smallest since the decade ending in 1930. There are 4 general reasons, which Prof. Gordon labels “headwinds,” that are now flying in the face of growth. They include rising inequality, poor-quality education, our aging population and rising government debt that can reduce productivity gains relative to increases in people’s standard of living. He forecasts that average growth in real income per person over the next quarter-century will be a minute 0.7% per year—almost one-half the already-small 1.3% per year rate realized in the 2000–2015 period.

Thus, looking at the near future, it’s unlikely that US economic growth can rise to historic levels, say even 3% per year. It’s gone unless public policies are enacted to reduce inequality, improve public education, increase labor-force size and participation and reduce government debt including the oncoming onslaught of baby boomers’ Medicare/Social Security transfer payments. If enacted, such policies could increase productivity and standards of living. But they won’t be by Micro-Man. His flighty day-by-day policy agenda offers no hope of that happening. It’s likely we’ll revert to Kerouac’s sad, brown world with unknown, unintended consequences.

UNINTENTED CONSEQUENCES: From Invisible Hands to Kudzu

Sooner or later everyone sits down to a banquet of consequences. ~ Robert Louis Stevenson 

Disregard the Laws of Supply and Demand. The most powerful principal of economics is the Law of Unintended Consequences, which states that any purposeful action will always produce some inadvertent outcomes. As Harvard economist Gregory Mankiw stated last year, “Unintended consequences are the norm” for economic policy-making. This is not just a recent thought.

Social scientists and political economists have long recognized the importance of unintended consequences. John Locke argued in 1691 for the defeat of a British Parliamentary bill designed to cut the maximum permissible rate of interest from 6% to 4%. He believed that instead of benefiting borrowers, as intended, it would hurt them. To the extent the law was obeyed, Locke concluded, the chief results would be less available credit and a redistribution of income away from “widows, orphans and all those who have their estates in money.” Sen. Bernie Sanders and Hillary Clinton should take note of Locke’s Enlightenment Age concerns about unintended consequences when they espouse reducing allowable interest rates for student loans.

Another early example of unintended consequences is Adam Smith’s notion of the “invisible hand,” discussed in his 1776 foundational treatise The Wealth of Nations. Smith declared a person earning money by their own labor not only benefits themselves, but unknowingly, also benefits society. This was expressed with his enduring, covert image, “By directing that industry in such a manner as its produce may be of greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

Here are 4 modern examples of unintended consequences.

Ethanol.  First, a current and timely example is US biofuel policy. Timely because the geographic kernel of this 40-year old issue is where corn farmers and other Iowans will decide their 2016 presidential preference in a mere 7 days. Although we’ve been besieged seemingly forever by constant media balderdash about the Feb 1 Iowa caucuses (see below), Iowa’s “Big Corn” agricultural-industrial complex has played a keystone role in formulating our national, subsidy-based biofuel policy long before corn ethanol was first mandated by Congress in 1988. An ethanol-based supplement, MTBE, was added to gasoline when lead was removed in the 1970s, until MTBE was found to harm the environment. In 2011, the US produced 13.9 billion gallons of ethanol fuel. By 2010 over 90% of all gasoline sold in the US was blended with 10% corn-based ethanol.

Iowa corn farmers (and other mainly rectangular-states’ corn farmers) love the Renewable Fuels Standard (RFS) that was established by Congress in 2005. It mandated that a minimum of 4 billion gallons of biofuels (principally corn-based ethanol) be used in 2006, rising to 15 billion gallons by 2022. The cumulative corn ethanol subsidies between 1995 and 2012 have been estimated to be $15 billion.

Does the RFS make the environment as green as the fatter wallets of corn farmers? No. Federal biofuel policy, mainly based on corn ethanol, has been shown to actually harm the environment, increase CO2 emissions, raise the price of gasoline, increase corn’s price and reduce the availability of other food grains. These harmful unintended consequences are not limited to the US. In 2007, US government corn-ethanol subsidies contributed to riots in Mexico due to the ensuing increased cost of corn and tortillas. A World Bank report stated that large increases in biofuels production in the US and Europe were the main reason behind the steep rise in global food prices.

Services.  Second, over the past 4 decades the composition of the US economy has steadily changed from producing goods to providing services. This shift has produced unintended macro consequences. The services sector accounts for 77.8% of our GDP. This sector is more labor intensive than either the extractive (mining, drilling and agriculture) or goods-producing sectors. Thus the share of service jobs has steadily grown; from 76% of all private-sector jobs in the mid-1990s to 86% of our labor force in 2015. About 73% of all new private businesses are service companies; it’s where our renowned entrepreneurial spirit is most energetic. Think Airbnb, Google and Uber. However, almost 50% of all low-wage workers in the US are employed in just 2 service industries, retail and leisure/hospitality.

One of the foundations of sustained economic growth is improved productivity. But the shift to being a service economy is one factor that has unexpectedly reduced our prospects for historic-level economic growth. Our average real GDP growth from 2010 through 2014 increased a meager 2% per year, less than half the rate between 1974 and 2014. A leading reason for this significant reduction in GDP growth is that productivity in the services sector has dawdled compared with other sectors. The Brookings Institution determined that the growth of multifactor productivity (MFP), which measures the changes in output per unit of combined inputs (not just labor, but also capital, energy and materials), was only 20% as high for services as MFP for manufacturing between 1987 and 1997. I found that from 1997 to 2013 (the latest available year) the services’ sector multifactor productivity growth “deficit” was 8.2%, compared with MFP for manufacturing.

How can our macroeconomic growth increase as much as it used to, given the predominance of services? No one knows how to reinstate such higher growth rates for an $18.1 trillion economy like ours. Or maybe Nobel-laureate Prof. Robert Gordon may be correct in the thesis of his new book, The Rise and Fall of American Growth. His thesis is the internet revolution has been hyped and the “golden age” of American growth may be over. Nevertheless, that hasn’t stopped Republican candidates from fecklessly promising to restore 4% growth if they are elected. However it might happen, this unintended consequence won’t be easy, quick or inexpensive to remedy.

Election polls.  Third, the media has become more poll-focused during our incessantly-covered presidential election season. This focus has unpredictably produced more inconsistent (and probably unreliable) poll results. Have you received a call from some pollster? If not, consider yourself lucky.

A recent count showed that during the last 30 days, there were 11 pre-election polls in the 3-million strong Hawkeye state and 10 polls in the 1.3 million person Granite state, as well as 9 national polls. All this attention for the 30th and 42nd most populous states? Amazing. The polling firms are circling like moths ever-closer around the media spotlights. Because the attention given to the first 2 primaries is no surprise, such firms have been more than happy to call corn farmers and Yankees virtually 24/7 to satisfy the media’s interest in “real information.” But the polls rarely offer meaningful, consistent evidence about actual voters’ preferences and intentions.

On January 24 Real Clear Politics listed 16 polls’ results for Iowa and New Hampshire conducted during the past 4 days! The results for Iowa included margins of +11 points, +1 pt, +14 pts and +15 pts that Donald Trump will allegedly beat Ted Cruz. On the Democratic side, margins for Hillary Clinton beating Bernie Sanders include +9 pts, +29 pts, and +9 pts, and one poll has Bernie Sanders beating Hillary Clinton by +18 pts. The bywords seem to be “pick a number you like, almost any number, and you’ll likely find a poll that has it.”

The increased dependence on polls comes despite a very mixed performance record. Polls of the 2014 congressional and gubernatorial elections miscalculated the margins in assorted races. Most prominently, the Real Clear Politics average of polls predicting the Kentucky governor’s election had the Democrat winning by 5 points. He lost by almost 9. Oops. One unspoken key fact about any of these poll results is that most voters have not yet decided who they’ll vote for. For example, in a New Hampshire poll conducted last week only one-third of Republicans stated they have chosen a candidate to definitely vote for. In other words, notwithstanding the fancy graphics and earnest words declared by talking heads at CNN, NBC, Fox, or in the New York Times or the Wall Street Journal, poll results are likely just imaginary numbers. At this point, any and all poll results mean   next   to  nothing.  

Kudzu.  A final example involves a natural item with widespread unintended consequences – Japanese arrowroot, aka kudzu. This plant was imported to the US from its native eastern Asia via the Philadelphia Continental Exposition in 1876 as an ornamental shrub. By the 1940s Southern farmers had been paid by the US Soil Conservation Service to plant more than one million acres with this invasive vine to control erosion. Kudzu was all too happy to inhibit soil erosion and overwhelm many native plant species as it spread throughout (and beyond) the South. It is reputed to grow one foot per day. Recently it was estimated to have spread to 7.4 million acres. In 1997 kudzu was placed on the Agriculture Department’s “Federal Noxious Weed List.” Take that, kudzu! 

HOLIDAY WISHES

How glorious the greeting the sun gives the mountains. ~ John Muir

‘Tis the season for greetings and thanks. I have much to be thankful for, including the care and support of wonderful family and friends who have helped me surmount many challenges on my way to beginning my 8th decade this year. Who’d of guessed my attained longevity was even possible; certainly not my doctors when I was first diagnosed as a type 1 diabetic over 60 years ago. Praise be.

Here’s my holiday wish list.

1)      Halt perpetual campaigning for the presidency.  [Or, create a much smaller box for politicians to throw sand at each other while campaigning.] Exactly 242 years ago today (Dec 16, 1773), American activists held their now-revered political protest, the Boston Tea Party, against the British that ultimately led to the American Revolution. Ten years after their Party, we had won our hard-fought freedom from King George III. I venerate our independence, but there’s one British tradition that I’d like to resurrect now in the USofA; short political campaigns. Today, there are still 327 days left to our November 8, 2016 election and we’ve already been swamped by politicians’ campaigning and fund-raising and media overload about it. Politicians please stop; media folks (all of you), please stop - NOW. Take at least a 5-month break.

The full-fledged campaign season in the UK is a matter of months, not years like in the U.S. Senseless amounts of time, effort and money are now being devoted by the politico-media industrial complex towards a small number of farmers in Iowa, an even smaller number of Yankees in New Hampshire and soon everyone else. In 2012, Barack Obama and Mitt Romney eventually spent more than $1 billion each in their bids for the presidency. In contrast the two major British political parties together spent less than $40 million in their 2015 national Parliamentary elections. At this point, it’s utterly unclear what US citizens gain by spending 50 times as much as UK voters do on national elections. Let’s be revolutionaries again, limit US congressional and presidential elections to a mere 6 months’ of effort. The sizeable money saved can instead be devoted to truly productive efforts like improved K-16 education and hunger eradication (see my #4 wish, below).

2)      Put more money under the trees of low-wage earners.  The government reported recently that average hourly wages increased only 2% over the last year. That’s barely adequate for the more than 25% of low-wage workers who are parents. The federal minimum wage remains a paltry $7.25/hr.; 29 states and the District of Columbia have higher minimum wages. The federal minimum wage should be raised to $12/hr. by Congress as a New Year’s present for these needful 21 million workers, despite the certain hysterical cries of fact-free Republicans’ false predictions of doomsday hyperinflation. Just do it, now.

3)      Stop the inflated use of absurd adjectives.  Yup, you read this right, this wish is entirely particular and on the tiny end of the macro importance scale that my other 4 wishes may possess. Nevertheless, it bothers me when I read descriptions of wine that include pompous taste sensations like toasted brazil and hazel nuts, Meyer lemon curd and white nectarines. Really? And now, such pretense has oozed beyond the grape to the once-humble coffee bean. Here are 2 representative descriptions of Starbucks and Peets coffees: notes of hazelnut (how come hazelnuts influence both wine and coffee?) and caramel with a malty sweetness, and winey grape juice acidity with apricot sweetness.[1] Come on, I don’t want to go to a taste-bud academy to become appraised of these phantom tastes; I’m simply interested in enjoying a fine cup o’ Joe and glass of vino. Stop the adjectives; just pour the wine and coffee.

4)      A bigger helping of economic growth.  The President and Congress should get off their economic derrieres and initiate expenditures that can increase overall economic growth to benefit everyone. Average yearly economic growth since the end of the recession has been a wholly inadequate 2%. There’s no mystery about what fiscal policies can do this; public spending on much-needed infrastructure, education, job-training, R&D and investment. And, yo Janet Yellen, please corral the Fed’s inflation-fearing cowboys in its meeting today and do not raise the Federal Funds interest Rate, which can reduce our growth prospects. The results of such increased spending might, with a bit of luck and time, provide jobs and income to the all too many folks who feel worried and economically-displaced, including those who mistakenly support entirely unqualified, fear-mongering candidates like the Donald. Jobs always displace anxiety. Start getting us really growing again.

5)      Large lumps of coal for Republicans. With all too few exceptions, virtually all Republicans have once again been naughty and un-nice this past year. They are fabricators of fantasy facts and full of self-righteous hypocrisy, among other transgressions. These fear-mongering prevaricators of military action, nativist open-door closing and disdain for regular folks' continuing economic plight have thwarted all efforts to enact needed environmental policies and improved economic growth (see #4, above) and equity. For these indiscretions, Santa should place 2 large lumps of soft Kentucky coal under the pillows of each demagogic Republican Presidential candidate and Congressperson, and at least 4 big coal lumps for Congressional leaders Rep. Paul Ryan, Rep. Kevin McCarthy, Sen. Mitch McConnell and Sen. John Cornyn.

As Pete Seeger asked, “When will they ever learn?” Excellent question. Although I’m hugely dubious, maybe they'll get my carbonic message on the 25th from Santa and change their ways for the good of everyone in 2016. Hope springs eternal, especially after the Winter Solstice.

I wish you a wonder-filled Christmas, Hanukkah, Kwanzaa, Saturnalia and New Year.

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[1] If these adjective-filled descriptions are appealing to you, they respectively refer to Starbucks’ Nicaragua El Suyatal coffee and Peets’ Las Nubes Microlote #49. Note even the beans’ titles are high on the pomposity scale. I wonder what #48 tastes like. So it goes… 

4% GROWTH AND OTHER FANTASIES

Economic growth doesn’t mean anything if it leaves people out. ~ Jack Kemp 

There’s now a 16-ring circus of candidates performing for the 2016 US presidential election. Four Democrats and a dozen Republicans have thrown their collective hats into the 24/7 blazing media spectacle. As the New York Times recently pointed out, each of these men and women are searching for economists to dance with them in their efforts to formulate economic positions, distinguish themselves from the other 15 hopefuls, and ultimately win the nomination and presidential election that’s now a mere 504 days away, OMG.  

Even at this prematurely early date, several candidates are running up economic policies on their flag poles to see which way the political winds blow them. Given the clear need to attract media attention, the candidates’ economic proposals can be quite fantastic, including re-treads from long-ago campaigns.

For example, Rand Paul has revived the flat tax concept from a 20-year slumber that was last seen on its death bed after being proclaimed by presidential candidate Steve Forbes; you remember him don’t you? Mr Paul’s one-more-time-with-feeling flat tax includes eliminating the federal corporate income tax (hats off to corporate lobbyists) and replacing it with what’s commonly called a value-added tax (VAT), although Mr Paul pointedly calls his proposed 14.5% tax a “business activity tax.” His tax scheme is a combination of a 14.5% personal income tax together with the 14.5% VAT, which is a type of sales tax that virtually every person and every organization would have to pay directly or indirectly. What’s the likelihood of such a regressive, federal VAT replacing the dearly-unloved corporate income tax? Slim to none, once you multiply the chance that Mr Paul will be elected president (currently he’s given an 8% likelihood of capturing the nomination at fivethirtyeight.com) by the even smaller chance that Congress – even a Republican one – would actually produce such a fundamental change in tax policy.

A more interesting economic policy objective was proclaimed by Jeb Bush last week. Namely, that if elected president he would usher in increased real (inflation-adjusted) economic growth of at least 4% per year for a decade.

The US has indeed carried on without historically-strong macroeconomic growth for some time. Our GDP growth this year is expected to be a miserly 1.9%. Since 1975, the average yearly GDP growth has been 2.8%, which is nearly 2% less than it was from 1945 to 1975. As our economy has grown and developed, if for no other reason than its impressive size, it has become more challenging to sustain previously-attained annual growth rates. As they say, quickly turning a very large ship, like the Titanic (or the US economy), is next to impossible.

The US nominal GDP is now $17,665 billion. Four percent of our GDP is thus $706.6 billion, which is the about same size as the Philippines’ GDP (PPP), the world’s 30th largest economy. That’s a lot of economic activity (and money) to add each year. The figure below shows the annual economic growth attained by each of our 5 most recent presidents. The average growth rate attained by the 3 Republicans is 20% less than that achieved by Presidents Clinton and Obama. Other economic studies have also shown that growth under Democratic presidents since Truman has been greater than under Republicans.

Even though accelerating economic growth is a worthy goal that has many benefits, it’s highly unlikely Mr Bush could achieve 4% real annual growth. Although his statement provided a good media soundbite, it’s more fantasy than eventual fact.

Increasing economic growth requires changes in several factors. First, a noteworthy increase in the working-age population is needed, as well as in the proportion of this demographic group who are actually employed. Second, a substantial change in federal fiscal policy has to occur (e.g., policies that promote investment and spending); third, productivity must be amplified; and last, macroeconomic growth rarely increases suddenly, it takes time.

Given that Republicans generally want to lock the US’s borders to all immigrants (and deport all 11 million “illegals”), it’s hard to imagine our working-age population increasing – especially when the US fertility rate now is 1.9 births per woman, less than the 2.1 births per woman “replacement” rate needed to keep the population stable. In addition, the labor-force participation rate, measuring the percentage of the work force who’s actually working or looking for a job, is as low as it’s been since 1978 – not a good sign for increased growth. Federal spending on research and development (R&D) has declined over 30% between 1995 and 2015. Finally, due to Republican intransience, Congress has rebuffed its responsibilities to complement the Federal Reserve’s efforts in improving our economic performance by passing fiscal policies that promote private investment, R&D and other growth-oriented spending like on infrastructure. Thus, Republican candidates like Mr Bush call for increased growth, but have refused to create policies that can produce it.

The Republican candidates are instead espousing policies that pander to the insular, right-wing Republican base that demands smaller government and ever-lower taxes. This base includes many older citizens whose economic and financial literacy is chillingly deficient. Here’s a sad indicator of this basic lack of understanding. A decade ago, the University of Michigan added 3 questions to its Health and Retirement Study, a biennial survey of Americans over 50:

■ If $100 earns 2% per year, in five years will you have more than $102, less than $102 or $102?

■ If the interest rate on your savings is 1% per year and annual inflation 2%, could you buy more, less or the same with your money in a year’s time?

■ Is it true or false that buying a single company stock usually provides a safer return than the stock of a mutual fund?

Woefully, only about 33% of all respondents answered all 3 questions correctly. Here[1] are the answers.

My bet is that the two-thirds of respondents who answered incorrectly have little or no sense of how to assess the future for themselves or the nation. In economic terms, they maintain an infinite discount rate. For a variety of reasons, they’re only concerned about the present moment. Such typical older households have only $110,000 saved for their retirement.

This broad-based financial illiteracy provides a basis for the fantasy that Republican members of Congress are willing to create policies that stimulate longer-term macroeconomic growth, something they haven't done in over 6 years, and despite pronouncements by their presidential hopefuls.

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[1] Answer to Question 1: more than $102. Q2: you would be able to buy less. Q3: it’s false. 

GIVING CREDIT WHERE IT'S UNDUE? NO.

Austerians want tribute for doing nothing.

Republicans demand praise for the US's modestly-growing economic pie, despite trying to shrink it. It's an Olympian level of chutzpah. Several news reports, including this one, recently stated that the GOP wants some credit for getting the US economy growing once more. To me it's an unassailable example of the GOP leadership suffering from political Alzheimer's. John Boehner, Mitch McConnell and their congressional amnesiacs expressed upset that President Obama has received (deserved) praise for helping to lower the unemployment rate – now at 5.6% - and increase the GDP's growth – now at 5%.

In my book, their consistent efforts to thwart the Obama administration's every attempt to increase government spending and offer vital economic benefit for middle- and working class citizens earns them a leaden medal, certainly not a bronze one.

Speaker Boehner actually criticized the administration for average hourly wages failing to increase. It's yet another example of the GOP's empty fiscal pot calling the economic kettle black. After all, the Republicans have stymied any rise in the federal minimum wage, as well as predominantly opposed increases in state-based minimums. Ominously, their new control of Congress will likely result in Congress doing nothing to help the majority of Americans escape continuing economic challenges. Why? Because they're "austerians."

Austerian is an inventive term applied to politicians (and economists) who have dogmatically stuck to austerity-focused public policies – ones that reduce debt and government expenditures – despite elevated unemployment and frail growth. Austerians in Congress have prevented needed expansionary fiscal policy efforts from being enacted during the past 5 years and regularly raised the fearful specter of high inflation if the government spends more on unemployment support, infrastructure or education. Their fears are completely unfounded. How much have overall prices increased during our fragile recovery? The latest Consumer Price Index increased 1.3% on an annual basis. That's almost 50% lower than the Federal Reserve's 2% inflation rate target. With broader austerian policies in place, Europe is actually experiencing deflation, elevated unemployment and an incipient recession.

Austerians include virtually all GOP and Tea Party members in Congress, as well as several governors; including Sam Brownback in Kansas whose disastrous fiscal efforts have burdened everyone in the Sunflower State. Other members of the austerian alliance include foreign heads of state like German Prime Minister Angela Merkel. In 2 weeks she'll likely face another show-down with a new Greek government. This face-off could lead to the Grexit (the departure of Greece from the Euro-zone), if the European Community (economically lead by Germany) doesn't re-negotiate with Greece and it defaults on its loan obligations. Once again, we'll see who blinks first, and whether her long-standing austerianism bends at all. I bet not.

The nascent Austerian school of economics, just across the philosophical border from the Austrian school of economics, is populated with conservative economists and similarly-minded politicians, who aren't burdened by the facts of recent history. In sum, the austerians have done nothing to get the economy growing again (or improving the lives of 99.5% of its citizens). Austerians have been myopically focused on halting the Affordable Care Act, increasing income and wealth disparity and ending nonexistent inflation.

Yet they want credit for doing worse than nothing. It's enough to turn a skeptic of American politics into a true cynic.

MY HOLIDAY WISH LIST

The excellence of a gift lies in its appropriateness, not its value. ~ Charles Dudley Warner

Merry Christmas, Hanukkah, Kwanzaa, Saturnalia and Brumalia. And, in that spirit, here's my wish list to Santa for this holiday season.

1)  A large box of judicial equity. During the past several weeks I've been affected, like many, by the horrible killings of Michael Brown and Eric Garner at the hands of local police. The lives of these 2 men are the latest in an all too long line of black men slain by men in blue under highly-questionable circumstances. Two grand juries now have independently decided not to indict the policemen who directly caused these men's deaths. Indignation about these jurisprudential decisions, let alone the killings themselves, has been widespread. Always willing to jump on the opportunity to showcase turmoil-the-making, the media has publicized demonstrations, thankfully after Ferguson, mostly peaceably mobilizing in cities across America. Outrageously, the Wall Street Journal ran an AP story which implied that a cause in Mr Garner's death was New York's high taxes on cigarettes. [Mr Garner was allegedly selling non-taxed cigarettes before being confronted and slain by cops.] OMG.

Politicians have echoed their anodyne, incomplete statements that these men's deaths are tragic and that law-enforcement tactics need to be modified via "retraining" police officers. At best, such "retraining" is a necessary but hardly sufficient remedy for these crimes. It's hard, very hard, to "retrain" culture with an immediate effect, which is what's needed. De-militarizing police departments and tactics is an unstated, but needed initial step.

Why hasn't any public authority demanded that the process and rules governing our grand jury system needs to change? Like all grand juries, these juries' deliberations and proceedings were held behind tightly-closed doors. Among other fundamental issues surrounding this system, so-called experts have cited the inherent conflict of interest that envelops local prosecutors and police interactions with police violence cases. Of the 2,700 cases heard by grand juries between 2004 and 2011 where police officers' actions resulted in the death of a civilian, only 41 (1.5%) resulted in charges of manslaughter or murder being brought against the cop. Talk about bias. Grand juries are mandated by the 5th Amendment to our Constitution. The Magna Carta – soon to celebrate its 800th anniversary – formally created and authorized grand juries at the strong behest of King John's nobility. Eight-hundred years is enough. In 2015, we need crucial changes made so real justice can be ultimately served in such appalling cases as Mr Brown's and Mr Garner's.

2)  A big package of economic growth. The US economy needs to grow faster. It has been limping through our "recovery" since June 2009 from the Great Recession at a paltry annual growth of 2.3%. Thus, the usual elixir of higher macroeconomic growth has been missing, much to the detriment of the vast majority of people. Our economy needs to marinate in expansionary fiscal and monetary policy for quite a while. As I've mentioned in previous blogs, this resuscitative package can take many forms but ultimately first needs to be put under the trees of middle- and working-class Americans.

3)  A present of broader economic equity. The inequitable distribution of income and wealth in the US needs to change in favor of the lower 80% of income- and wealth-holders. Such a present will not only promote more economic equity, but more growth and a greater sense of fairness for all. This gift of equity will provide priceless benefits.

4)  A wet present followed by wisdom. In these vanishing days of 2014, I offer thanks to Chaac, Tloloc and Zeus for the recent rains we've received here in California. I hope this wetness continues often enough so our drought finally subsides. But us water users (meaning everyone) and politicians (all of them) must become wise and brave enough to enact new water-use policies that recognize fresh water is always a limited, vital resource. These policies must raise the price of and mandate the recycling of this necessity. Building more dams and aqueducts isn't the answer. Water policy must require efficient and appropriate usage at all times. 

5)  Large lumps of coal to Congressional Republicans. Finally, virtually all Congressional Republicans have been naughty this past year. These stalwarts of mis-placed austerity and disdain for regular folks' continuing plight have thwarted all efforts to enact any real expansionary fiscal policy to improve growth and equity. For this, Santa should place a large lump of Kentucky coal under the trees of each Republican Congressperson, and at least 2 big lumps for Rep. John Boehner, Rep. Kevin McCarthy, Sen. Mitch McConnell and Sen. John Cornyn. Hopefully, they'll get the message from Santa and change their ways to qualify for actual presents next year. We all hope so.  

Happy New Year!

FOR WHOM THE TOLL CHIMES

Never mistake motion for action. ~ Ernest Hemmingway

Our young people are suffering mightily. The combined, ruinous effects of fiscal policy idiocy, minimal macroeconomic growth, and much reduced wealth/savings and stagnating wages for the majority of American working adults has devastated the employment possibilities for young people throughout this country and beyond. Over the past 5+ years, all too many Millennials are becoming our Lost Generation. The chart below shows the shameful youth unemployment rates that persist in too many so-called developed nations. In May, the US teenage unemployment rate is an astonishing 322% more the overall US unemployment rate. As high as our youth unemployment rate is, it's less than one-half as large as either Spain's or Greece's youth unemployment.

Meanwhile members of the Senate sit on their derrieres and pat themselves on the back for adding billions of unnecessary dollars to "strengthen" the US-Mexican border with ever-longer 20-foot high fences, drones, cameras, hired-guns, guards and electrified razor wire. Congress has delusionally dismissed the facts of immigration: the number of immigrants seeking legal or illegal entry into the US has decreased by 80% during the past decade. Members of Congress still live on their mental plantations of the past [decade, century?]. Perhaps this all too common evidence of reality-denial by public decision-makers should be added as yet another "disease" in DSM-5.

Congress and the President have not addressed far more consequential economic issues concerning our nation's present and future. These concerns including encouraging equitable macroeconomic growth that supports hiring workers, especially young people, and improving the incomes of more than the top 0.001%. Last week, the Bureau of Economic Analysis reduced its estimate of this year's first-quarter GDP growth to a moribund 1.8%. Parsimonious conservatives continue to endorse cutting education, training and support programs' budgets and worry about non-existent inflation. Businesses remain reluctant to hire more workers, especially young ones, when Congress is retreating. Meanwhile many corporations sit on mountains of retained earnings and cash. This is most definitely not the needed counter-cyclical fiscal policy that I explain to high-school economics students.

Congress' and the President's dismissal of youth's travails borders on myopic madness. It doesn't have to be this bad; look at Canada in the figure, which has the lowest youth unemployment of any OECD nation. But even its 13.5% rate is quite high by recent historical standards.

In 2012, of the 2.1M 16 to 24 year olds who want a job but can't find one, 217,000 were so discouraged that they dropped completely out of the labor force. The labor force participation (LFP) rate for US teenagers is now 35.0%, the lowest of any category of US workers and the lowest in decades. The LFP rate for all US workers has dropped to 63.4%, also low by historical standards. Most of the decline in the US unemployment and LFP rates is caused by workers (like teenagers) leaving the labor force (not "actively" looking for work), rather than actually finding jobs. There has been no improvement in youth employment for almost 5 years, especially for those who haven't gone to college or who are non-white.

I've mentioned before the problems facing our Millennial generation, and unsurprisingly no Federal programs have been created to remedy this generation's considerable economic plight. In fact, interest rates on Stafford student loans doubled on July 1 – from 3.4% to 6.8% – because Congress couldn't find time to authorize the continuation of lower rates before it adjourned for its extended July 4^th vacation.

The meager life of all too many US young people – as well as their compatriots in Europe, South America, Africa and Asia – has not been a priority for politicians. However, as politicians across the globe have seen, they disregard these issues at their own peril. Witness the "revolutions" and massive displays of public upset in Egypt, Brazil, Turkey, Chile and China.

When youth movements like Occupy here and tamarrod in Egypt figure out how to organize people within the political process – and not just for impressive public demonstrations – and be clearer about what they want (not just what they don't want), politicians will be forced to remedy the issues that young people are facing.

What types of public actions can help Millennials gain a more assured economic life here in the land of the free (disregarding the ever-present PRISM, of course)? There are at least 4 inter-related types of human-capital investment programs that in the past have proven their worth for improving people's economic well-being now and in the future.

First, immediately resume subsidized public loan programs for post-high school education. This includes re-funding Federal Stafford loans at below-market interest rates and increasing similar State-specific education loan programs.

Second, increase funding for Community Colleges and vocational programs (including high-school programs especially those that include joint private-public sector participation). By "vocational" programs I'm not talking about traditional wood shop classes, I'm referring to a broad array of classes from mobile software development to applied engineering to health-science that provide skills which will remain in demand by private employers.

Third, Federal and State post-high school education funding should be provided only to institutions that limit student cost increases to less than the yearly inflation rate. Continued super-escalation of tuition and fees should not be allowed to continue. In other words, Federal and State education funds should be provided only if colleges, universities and other education providers' student expenses are reduced in real (inflation-adjusted) terms. With the sizeable fiscal leverage that Federal and State government agencies have on all types of educational institutions that charge tuition and fees, and assuming these agencies – such as the Dept of Education, National Science Foundation and Dept of Health & Human Services – wish to exercise this leverage on behalf of enrolled students (rather than administrators; always a large assumption), I'm sure tuition and fee increases can be much moderated as soon as such policies are enacted.

Fourth, create a multi-year public job corps program that principally focuses on youth without college degrees. Sure, all age groups need more employment opportunities, but our future rests most directly on having 16 to 24 year olds in full-time jobs, and especially "disadvantaged" youth – principally Hispanic, Black youth without college degrees who are not enrolled in post-high school education programs. Remember, although much media attention is deservingly made of under-employed college graduates (7.0% of youth with a BA or more are now unemployed), the unemployment rate for youth with only a high-school degree is 18.5%; with less than a high-school degree it's 28.5%. These numbers support the well-recognized maxim; the longer you stay in school and get decent grades, the more likely you'll find a job.

Current unemployment rates for Hispanic-Latino youth and Black-African American youth with only a high-school degree are disproportionately huge, 34.8% and 40.8%, respectively. A job corps program that helps such youth would initially be expensive, but the nation's overall, longer-term health requires it. The economic benefits of this investment would be both broadly-received and substantial. Very few voters disparage the G.I. Bill (the Servicemen's Readjustment Act of 1944) that provided an expansive range of benefits to returning US soldiers, including cash payments of tuition and living expenses to attend college. [US public debt right after WWII was as high as it's ever been, 122% of GDP. This debt didn't cripple us, as conservatives now expect, and we survived to become a mega-power. We will carry on now as well, in spite of Republicans' ill-founded prophecy of certain economic catastrophe.]

This pioneering, publicly-funded human capital investment law paid for itself and more. Like the G.I. Bill, the youth job corps outlays can create hundreds of thousands of jobs for currently-displaced young people that would buoy our economy and thus benefit everyone.

Should we middle-aged (and beyond) citizens be uncharacteristically magnanimous about spending billions on such youth-oriented programs? Absolutely. Because Millennials are now starting to pay for our public retirement and Medicare expenses. And because Millennials are our future; the better off they are, the more protected we Boomers (and the rest of the US) will be. The Millennials' economic welfare is vital at this point if the rest of us want to enjoy a sustainable, secure future. We need to act now and mitigate the toll that our youth are suffering from.

BEYOND THE CLIFF, A QUARTET FOR GROWTH

"The growth and development of people is the highest calling of leadership." ~ Harvey S. Firestone

With considerable justification the Democrats have been gleefully pleased with last Tuesday's election events and been pointedly stating that Republicans have no hope of future electoral success.[1] President Obama has been re-elected and the Dems have managed to retain control of the Senate. And for what it's worth, the Dems filled 2 more seats in the House. This is both a relief and good for the USofA.

Nevertheless, it's entirely understandable why the President hasn't been shouting "gotcha" from the Oval Office. As he properly mentioned in his victory address, there's still a lot of work to do. Most immediately, this political work involves spurring the country's economic growth in a more balanced and sustainable manner.

The President and Republicans will need to first resolve the December 31^st "fiscal cliff." I hope Mr Obama will not now begin actual negotiations with John Boehner about the Cliff. The Cliff's curtailments are large, over $650 billion. Unsurprisingly, the Congressional Budget Office has stated the obvious, that if such spending reductions and tax increases are allowed to remain in place for a while, they could drag the economy back into another recession. So there are strong incentives for a political agreement to be forthcoming promptly.

But the President should not negotiate the Cliff; he should use the Cliff to negotiate a broader agreement to foster sustainable and balanced growth. Negotiating in mid-November would diminish the President's leverage, which will only grow as the clock keeps on ticking towards New Years. Instead, he should continue to make clear public statements emphasizing his flexibility and absolutely adhere to increasing taxes on the rich and wealthy. The House Republicans, despite their flimsy denials, are in a self-constructed cage with nefarious help from folks like Grover Norquist. They should not quickly escape the consequences of being caged in by unsuitable policy and dogmatism that lost them the election. And the President should take full advantage of this.

I recommend that President Obama forcefully support a quartet of economic actions that will produce needed economic growth, reduce of our structural deficit and detour the Cliff. These actions are presented below in my November 8^th letter to the President. Will the Democrats and Republicans have to make some compromises for this agreement to be successful? Yes, as my letter illustrates. The rich/wealthy must pay more tax, education must be improved and entitlements must be more means-based.

 If Republicans remain intransigent (not an unlikely possibility), Mr Obama should be fully prepared to jump off the cliff, let the Bush tax cuts expire and have the sequestered budget reductions proceed. No worries, he's got an election victory and broad public support to act as his parachute. In other words, please Mr President don't blink before the clock strikes 12 on New Year's Eve unless you have received an acceptable and binding agreement from Mr Boehner and Mr McConnell to resolve the nation's broader economic challenges. This Cliff is made for you Mr President and it can be the opportunity that fosters our nation's longer-term economic progress. Here's my letter.

November 8, 2012

President Barack Obama

1600 Pennsylvania Ave., NW

Washington, D.C.  20500

Dear President Obama:

First, congratulations on your impressive re-election win yesterday. Now you are facing the challenge of moving our macroeconomy forward to promote both greater growth and greater equity. This letter offers several ideas about how you (and Congress) can accomplish this.

Like others, I believe your campaign's economic goals are correct; the US needs to increase our economy's growth in a sustainable, equitable fashion that benefits all citizens, not just the richest and wealthiest. I believe sustainable and equitable are necessary descriptors for any macroeconomic policy objectives you may be considering.

I hope you give serious thought to the following quartet of macroeconomic policy actions that I propose for legislation that Congress should pass and be executed by you by Feb. 28^th, 2013. I believe these actions will get the US moving in the right direction and involve everybody (including you and me) making changes and sacrifices needed to create this essential macroeconomic re-balancing.

These actions will promote broad gains from higher, fairer GDP growth. As you know, returning to substantive and balanced economic growth will resolve many issues we are now facing as a nation. Increased growth is the most effective antidote for elevated unemployment, middle-class income stagnation and lack of consumer and business confidence.

This quartet of actions focuses on achieving two important, inter-related goals: (1) improving the economic well-being for the majority of citizens (not just the top 1%); and (2) encouraging the GDP to grow more sustainably, at least 3.2% per year. Here are my 4 fiscal policy actions.

1.  Improve economic fairness.  (A) Individuals with annual gross incomes exceeding $250,000 will be subject to a minimum Federal tax rate of 35% on all income, regardless of source - the current effective tax rate for many wealthy people who earn most of their income from investment returns (rather than wages) is in the range of 14-20%. (B) The social security (FICA-payroll) tax will apply to all earned income, and not be limited (as it is now) to the first $110,100 earned, with no FICA tax applied thereafter. This needed change will accomplish two important objectives, provide more funding for Social Security (see #2 below) and require those most able (richer tax-payers) to pay more for this keystone program. (C) Payroll taxes for employees and independent contractors with incomes less than $70,000/yr (roughly the US median family income) will be cut by 3% for up to 2 years or when the unemployment rate is 7% or below. (D) Salaries and expenses of Congress members and the President will be immediately reduced by 8.1% (see below). Starting Jan 1, 2014, these leaders' salaries will be adjusted yearly by the annual change in median US household income. What's happened to the incomes of Joe and Jane America will equitably happen to our leaders as well. This adjustment will provide a modest fiscal incentive for public leaders like you to create policies that actually increase median income, something that hasn't happened in too long a time.  [US real median household income in 2011 was 8.1% less than real median income in 2007.] 

2.  Remember Sandy: enhance environmental quality, now.  Beginning October 1, 2013, the Federal government will institute a national carbon consumption tax. This charge will apply to all fossil-fuel usage that produces air and/or water pollution that is subject to EPA air- and water-quality standards. My proposed tax on fossil fuel usage would be in proportion to the fuel's carbon content and no lower than $100/ton of CO2 produced. The carbon charge will be annually adjusted using the CPI energy cost index. This tax's potentially regressive impact on lower-income people will be reduced by providing an income tax credit (from funds received from the carbon tax) to families whose annual income is 200% or less of the poverty line. [In 2012, the annual income for a family of 4 people earning 200% of the Federal poverty line is $46,100.] Twenty-eight percent (28%) of revenues from the tax will be spent on research and development for non-fossil technologies (e.g., solar, wind, geothermal).  [This charge will provide significant economic incentives for fossil-fuel users to switch to greener technologies.] 

3.  Reduce entitlement program costs fairly.  Medicare and Social Security benefits will be reduced by 4% for all people earning more than $250,000/year, by 2% for people earning less than $250,000 but more than $70,000, and no reduction for people earning less than $70,000. In addition, minimum qualifying retirement age for Social Security will be increased by two (2) years starting Oct 2013.  [Federal, state and local governments' expenditures on pensions and health care represent 13.6% - $1.96 trillion – of all govt expenditures, the single largest (and fastest growing) type of govt spending. These expenditures are a principal cause of the nation's structural deficit. They need to be trimmed to promote long-term fiscal health and growth.] 

4.  Implement fiscal policy actions to promote durable economic growth.  (A) The Dept of Education will coordinate $50.4 billion of increased spending to invest in teaching and improve the effectiveness of public K-12 schools and public two- and four-year colleges-universities in qualifying states. To qualify, states must first commit to increase their public education funding by at least 5% based on their 2010 public education expenditures. The cost of these government education expenditures will be partially balanced by imposing a 0.03% (a rate of $3 per $10,000) financial transactions tax effective Feb 1, 2013.  As Nelson Mandela correctly observed, "Education is the most powerful weapon which you can use to change the world.”  [This quite tiny tax has been termed by some the "Robin Hood" tax. It could raise $35B in tax revenues per year. Improved public education will magnify our citizens' economic prospects.]

(B) The Dept of Commerce will administer $40.2 billion of spending to upgrade US internet infrastructure (II). This will include requiring telecommunications and internet providers to install 4G Wi-Fi and broadband fiber-optic cable directly to consumer's residences during the next 30 months. These expenditures will partially fund this needed electronic infrastructure investment by private providers. Internet providers will receive a 5% investment tax credit (ITC – a type of subsidy for business investment) on this new investment to encourage telecommunications/internet providers to implement these needed improvements. This funding will be allocated based on the 2010 population of each state and its population density; the more populous and dense the state, the more funds will be proportionately allocated. With these subsidies, individual customers' internet service charges will not increase more than the annual change in the CPI over the next 3 years. The cost of these government II expenditures will also be partially financed by increasing the Federal Universal Service Charge (telephone) tax and the FCC User Fee by 5%.  [US "data highways" are in woeful shape; our internet speeds rank 26th in the world, just behind Hungary. Overall, US speeds are only one-quarter as fast as the top-ranked nation, South Korea. We must do better if we want domestic commerce to grow substantially during the coming decade.]

Thank you.

                                                                                                  Sincerely yours,

                                                                        Bruce A. Smith

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[1] The Dems can be forgiven for their glee, but will do well to remember that politics is always kaleidoscopic and changing; just like life in general, nothing is permanent.