What’s Wrong

If the economy is so good and getting better, why do people feel so bad about it? Are they being misled by demagogues? Don’t know what they’re talking about? Nostalgic for an imaginary past?

The U. S. Council on Competitiveness, armed with data from the Gallup organization, presents an alternative answer in a new report—the popular view is right:

THE UNITED STATES HAS NOW had seven years to recover from the worst of the Great Recession. During that time, job growth has been steady, if unspectacular, and the unemployment rate has fallen from 10% to just under 5%, where it stands as of this writing. Stock prices, meanwhile, continue to reach and surpass new highs. Leading politicians and commentators reassure the public that everything is getting better.

And yet, there is a pervasive sense that the economy is not working, as documented in Gallup survey data and many anecdotal media accounts. The people are right. The economy is not working well. But the problems did not start with the Great Recession. For decades, the nation’s income, measured as GDP, has barely grown overall; on a per capita basis, median household income peaked in 1999; the subjective general health status of Americans has declined, even adjusting for the aging population; disability rates are higher; learning has stagnated; fewer new businesses are being launched; more workers are involuntarily stuck in part-time jobs or out of the labor force entirely; and the income ranks of grown children are no less tied to the income ranks of their parents

Among their key findings:

  1. The problem is severe.
  2. Conventional theories are unpersuasive and often ignore long-term problems.
  3. Changes in living standards are fundamentally linked to changes in how the quality of goods and services relate to their cost.
  4. Deterioration in the quality-to-cost ratio for healthcare, housing and education is dragging down economic growth.
  5. The U.S. population’s health has stagnated or even declined on several measures since 1980, especially for the working-age population.
  6. Housing costs have swallowed up a larger share of income without a corresponding increase in quality.
  7. Educational quality is weak and stagnant at all levels.
  8. A number of indirect consequences result from rising inefficiency in healthcare, education and housing
  9. In these sectors, regulations have caused damage, which has accumulated over decades.
  10. Reviving growth will require a new strategy

A couple of observations. None of these problems is recent. How far back do they go? More than 30 years, possibly as much as 40 years. The problems have festered for a very long time and will take a long, persistent effort to remedy.

Very few of these problems can be solved just by throwing money at them. In education we’re already spending a multiple of what was spent 25 years ago in real terms and have very little to show for it.

And the problems won’t be solved by replacing Democrats with Republicans or vice versa. The policies that put us into the fix we’re in have had bipartisan support. The “Washington consensus” has failed, whether because inadequately or improperly applied, practically unworkable, or just plain wrong.

Read it and weep.

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No Surprise

If any of you is surprised at Time having named Donald Trump Man of the Year, where have you been for the last year and what techniques did you use for avoiding the news of the day? I could use the advice.

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Productivity: Not Growing or Declining?

I’m afraid that the report that Robert Samuelson is highlighting in his recent Washington Post column is sugar-coating the problem if anything:

Unless you’ve been vacationing on Mars, you know that productivity is the catchword for economic efficiency — and also that we’re facing a quiet productivity crisis. Gains in productivity have slowed to a crawl or stagnated. Unless they revive, prospects for higher living standards will fade or vanish.

The conventional solution is more innovation, driven by advances in science and technology. We need the equivalent of the invention of the computer chip or the Internet. Nope. That’s too simple, says economist Jonathan Rothwell, author of the report for Gallup, the polling firm.

A huge part of the productivity slowdown, Rothwell contends, is the poor performance of these three large sectors of the economy: health care, education and housing. These sectors have gotten bigger, he says, without getting more productive. As their costs escalate, they absorb more of families’ incomes, making it harder to satisfy other wants.

The size of these three sectors has increased from 25 percent of national spending (gross domestic product) in 1980 to 36 percent of GDP in 2015, Rothwell estimates.

Do you know what those three sectors have in common? They’re all subsidized ferociously. In two of the three, education and health care, not only are they not getting more productive they’re actually getting less productive. Outputs per input are actually declining in those sectors. I have documented that so frequently over the years I feel no need to go over the territory again.

How do you increase the productivity of the entire economy when 36% of it is either not increasing in productivity or actually decreasing? That’s not a rhetorical question. How do you do it? I really want to know.

As a sidebar and to highlight the difficulty in increasing GDP growth over our present phlegmatic 1.6%, it is definitional that there are only two ways to increase GDP. Either you’ve got to increase productivity or you’ve got to increase the number of workers without decreasing productivity. Increasing the number of workers without decreasing productivity implies very selective immigration. Increasing productivity by definition implies capital investment.

IMO our gravest economic problem has been very low non-real estate domestic business investment. The problem goes back long before the Great Recession right to the end of the 1990s.

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Can We Reduce Income Inequality?


This is the first post in a two post series. I’ll publish the second part dealing with ways and means tomorrow.

When I read this piece on income inequality at the Washington Center for Equitable Growth by Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, the first thing that came to mind, perhaps unkindly, was to wonder how much insight three French economists actually have into the conditions that go to producing income inequality in the United States. I suspect that they’re better equipt to describing what has happened than to explaining why it happened or proposing solutions. For good or ill the United States is not France.

Make no mistake about it, the inequality in the distribution in income in the United States has increased prodigiously over the period of the last half century. Here’s just one illustration:

In 1970 the incomes of big company CEOs was about 20 times those of their workers. Now it’s hundreds of times greater. That hasn’t happened all at once—it has taken place over years—but it was off to the races starting in the early 1990s. What happened in the early 1990s isn’t a state secret. Two of the major developments include changes in the rules governing the taxability of executive compensation to favor stock options and China’s pegging the yuan to the dollar.

The second thing that occurred to me was that if there’s a better illustration than the graph at the top of this post of a point I’ve made around here often, that the U. S. is better understood as simultaneously a rich, developed country and a middle income developing country than it is a single mostly homogeneous country like, say, Denmark, I don’t know what it would be.

There’s pretty clearly a point of inflection around 1980. What happened around then? Among the things that would appear relevant are

  • The stock market took off after 17 years of slumber, i.e. practically no gains.
  • We started experiencing a surge in immigration, largely from Mexico.
  • China opened up its economy to trade with the rest of the world.

The third thing that occurred to me was should we try to do something about it and if so what? My country, the country that I grew up in, the one I wanted, and the one in which I expected to live was much more egalitarian than the United States of today. It was not perfect but with the exception of blacks in the South and to a somewhat lesser degree in the North it was much more equal.

The solution to that inequality seemed simple: improve the conditions of blacks. The situation now is much more complicated and may have become intractable.

I don’t relish the idea of a United States permanently divided into a small mostly white aristocracy, a medium size, struggling white or brown middle class, and a large, permanent brown or black underclass.

The discussion of ways and means for addressing the problem of inequality have typically suffered from a fallacy of composition. In my post tomorrow spitballing some ideas for dealing with the problem, I’ll divide my comments into the .1%, the 1%, and the rest of us. Attempting to come up with a single one-size-fits all solution that addresses the challenges posed by the .1% (people with annual incomes greater than $2 million), the 1% (people with annual incomes greater than $300,000), and the balance of the population IMO produces more heat than light.

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The Worst Case Scenario

In his post at The Week Jeff Spross outlines the state of the economy in a way completely consistent with the way I see it:

Contrary to some triumphalist assessments you may have read when everyone still thought Hillary Clinton was a shoe-in, the economy is not doing well. Labor force participation and the prime-age employment ratio are still unusually depressed, and under-employment is still unusually high. The rate of wage growth still shows we haven’t flipped from workers competing for jobs to employers competing for workers. Costs of health care, housing, education and such are still crazy high compared to past decades, and huge numbers of American households are still financially insecure. Simply put, the economy still kind of sucks.

Since 1980 kicking the economy into recession may have required an external shock but, contrary to opinion, the business cycle has not been repealed. There will be another recession. We just don’t know when. And unless present circumstances change, something which appears unlikely, there will be few tools to counter the next recession when it occurs.

That’s why I’m not as concerned about the worst case scenario that worries Mr. Spross: what happens if Donald Trump is super popular in four years? I think the odds are that we’ll have a recession in the next four years and it will be blamed on him. Otherwise, I think he’ll be a little less popular in four years than he is now which is not very popular at all.

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A Little Late With That Warning, Chief

I think that Richard Cohen is a little behind the curve with his warning, issued today in the Washington Post:

Trump has shown a daunting disregard or ignorance of the Constitution and of law. Regarding the use of torture, he has said that the military must follow his orders — even if they are illegal. More recently, he declared that flag-burning should be a crime and that flag burners be punished by “perhaps loss of citizenship or year in jail.” The remark was one of his off-the-cuff inanities — since 1989, flag-burning has been protected political speech, and citizenship, we’d like to think, is forever. The tweet — so few words, so much meaning — spoke to Trump’s abysmal lack of knowledge but, more important, contained an emotional truth. Trump despises dissent and often reacts emotionally to setbacks or challenges.

For the last eight years we have been treated to an administration with a stunningly casual disregard for constitutional limits. The Obama Administration has been reversed by the Supreme Court in unanimous decisions more than any other modern presidential administration.

I didn’t vote for Trump. I wouldn’t vote for Trump. I don’t support Trump. I like good, honest government and the rule of law and that isn’t dependent on the color of the tie of the president or the letter behind his or her name.

Here’s a novel idea. Why doesn’t Congress do Congress’s job and limit the president to doing the president’s job? An idea so crazy it might work.

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Playing the Palace

Our friend, James Joyner, proprietor of Outside the Beltway, is one of the participants in the NYT feature “Room for Debate” today. Their subject is the nomination of Gen. Mattis as Secretary of Defense and, more generally, civilian control of the military.

I have no opinion on the actual subject matter other than to point out that the military is among our most respected institutions while newspapers are among our least respected. I think we’d be better off as a country with a military that was a little less respected and newspapers that were a lot more respected.

On a side note if you believe in technocracy isn’t a general as Secretary of Defense a natural choice? I agree more with G. K. Chesterton who observed that there are some things that are too important to leave to the experts.

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The First Step

As I anticipated yesterday, the editors of the New York Times are complaining about Donald Trump’s kvetching about the popular vote today:

The long-running Republican war against the right to vote has now gone national at the instigation of President-elect Donald Trump, who has promoted the lie that millions of illegal votes were cast in the presidential election.

There is not a scintilla of evidence for this claim, and Mr. Trump’s own lawyers have admitted as much, stating in a court filing opposing a recount in Michigan that “all available evidence suggests that the 2016 general election was not tainted by fraud or mistake.”

Yet one after the next, leading Republicans are spreading this slander of American democracy, smoothing the way to restrict voting rights across the country.

Actually, as Pew Research helpfully pointed out, there is plenty of reason to think that there are substantial problems with our system or rather systems of voter registration. 30 million bad registrations are a lot of errors.

We have no way of knowing who benefits from our lousy system. It could be Republicans, it could be Democrats, it could be a wash. We can’t know without rolling up our sleeves and fixing it.

They say that the first step towards recovery is recognizing that you have a problem. Rather than denying the problems that actually exist I wish the editors of the NYT were championing a movement to reform our systems of voter registration.

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China Is Changing (Updated)

One of my posts yesterday touched on the subject of the timeliness of revisiting establish U. S. policies, particularly with respect to our traditional postures in East Asia. A comment was made in the comments thread of that post that had such merit that I don’t want it to be lost in there.

In that comment sometimes commenter CuriousOnlooker concisely summarized the assumptions in place when our China policies were formed and how weak those assumptions are now:

The current American policy on China and Taiwan rests on assumptions from when Nixon reoriented policy in the 1970’s. The assumptions were,
(1) Previous previous policy failed with Asia being unstable and the US having fought poorly in Korea, Vietnam.
(2) Mainland China is a lesser threat then the Soviet Union and both China and the US have a stronger interest in weakening the Soviet Union then each in working with the Soviet Union.
(3) Mainland China is a 3rd world country, so any commerce with it, won’t meaningfully hurt the US, and needs to be encouraged as an investment in the future
(4) Taiwan is also a backwater, with no American core interests involved.
(5) Most people in Taiwan still view themselves as “Chinese”

Read the whole comment. To make a very long story short, China is changing very rapidly while our policies have remained the same.

Until relatively recently China’s leaders have mostly been old revolutionaries. President Xi in contrast came of age during the Cultural Revolution. I suspect that’s one of the factors motivating him to consolidate power as he is clearly doing. Leaders who came of age during the Cultural Revolution will inevitably have different views than those who have come of age after the Tiananmen Square crackdown. How that will be reflected in Chinese politics or foreign policy we can only imagine.

I have long thought that American politicians have long erred in imagining that China’s leaders are just like them. They aren’t. Our systems are different enough that completely different strategies are required to assume or retain power. We ignore those differences at our peril.

One last remark. I have more knowledge of Russia and Russian politics than I do of China and Chinese politics but I strongly suggest that Russia and China cannot maintain any lengthy alliance. China presents grave risks to Russia, particularly Asian Russia which is geographically most of the Russian Federation, and those risks can’t just be waved away. If we were not maintaining as steadfastly adversarial stance with respect to Russia that we have been, the Russians would, correctly, see China as the greater threat to them.

Update

While you’re forming an opinion on the merits of the issue, you owe it to yourself to read this piece from William Murchison, formerly an editor for the Dallas Morning News:

When President Jimmy Carter, in 1978, said he was ending diplomatic relations with the Nationalist Chinese government in Taiwan, The Dallas Morning News, a journal widely admired at the time for its robustly conservative viewpoint, called the administration’s action “shameful.”

I should know. I wrote the editorial.

Why choose the word “shameful”? For a very good reason. By giving the back of his diplomatic hand to the Nationalists so as to embrace, and cavort with, the communists of the mainland, Carter brought shame to his country.

Update 2

George Friedman remarks on how the circumstances under which our policy with respect to Taiwan have changed:

Much time has passed since that deal, and a few things have happened. The Soviet Union collapsed. The Vietnam War ended. Vietnam is the U.S.’ partner and is hostile to China. Chairman Mao is dead, and China has surged economically as the last generation’s low-wage, high-growth economy. The U.S. is obsessed with the Islamic world. The foundations of the agreement on Taiwan have evaporated, but the reality is the same. Taiwan is an independent country despite what anyone – including Taiwan – says, and it is a close U.S. ally.
In addition, Chinese exports have undercut American industry, as the movement of the U.S. industrial sector to China, among many other countries, has created an economic and social crisis in the U.S. Trump won the election because of that social crisis, and one of his major commitments was to restructure the U.S.-China relationship.
Hence the phone call. By making the call Trump signaled to China that he is prepared to act unilaterally if the Chinese are not prepared to renegotiate the relationship, and everything is on the table. Trump selected a high-visibility, low-content issue – Taiwan – to demonstrate his indifference to prior understandings. Critics say Trump attacked the foundations of U.S.-Chinese relations. It’s true in a way, but Trump had pledged to change the foundations of that relationship.

The one thing I think that Friedman gets but past presidents and the foreign policy establishment don’t is that we’re actually bargaining with China from a position of strength. Our position is actually stronger than theirs but you’d never guess it from all of the bowing, scraping, and forelock-tugging.

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Problems With Our System of Voter Registration

You might want to take a look at this report from Pew Research from 2012 on the problems with the U. S. system of voter registration. It’s pretty eye-opening. Among their findings:

  • An eighth of registrations are in error in one form or another.
  • About 1% of all registered voters are deceased.
  • About 2% of voters are registered to vote in more than one state.
  • Our system or, rather, lack of system is absurdly antiquated and expensive.

That’s a bit worse than my little anecdotal observations. What we saw was that about 2% of registrations in our precinct were in error. Of course, our precinct is a very orderly one.

On top of all of this many jurisdictions have no way of detecting invalid registrations. It’s really a mess.

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