US Economy

Does Science Prove that the Modern GOP Favors the Rich?

This essay was posted originally at The Pointwww.sonecon.com

Virtually everyone outside the Trump administration agrees that the GOP tax plans passed by the House and the Senate will aggravate income inequality. In fact, the party-line votes on both plans are the latest instance of a remarkable fact: Over the last 40 years, income inequality has accelerated when Republicans held the White House, the Congress or both, and slowed when Democrats were in charge.

No one is claiming that the GOP created America’s dramatic increase in income inequality. In a recent study issued by the Center for Business and Public Policy at Georgetown University’s McDonough School of Business, our analysis showed that changes in the U.S. and global economies and technology did most of that.

Between 1977 and 2014, the average pre-tax income of the bottom 50 percent of Americans—everyone below median income – increased just 1.7 percent, inching up from $15,948 to $16,216 (2014 dollars). Over the same years, the average pre-tax income of the top one percent soared 207 percent, jumping from $424,631 to $1,305,301.

During these years, Washington stepped in with new spending and tax credits that modestly helped the bottom half of Americans: Their average post-tax income rose 22 percent, from $20,390 in 1977 to $24,047 in 2014. But tax and spending changes had little effect on the top one percent, whose average post-tax incomes still rose 196 percent, from $342,328 to $1,012,429.

Partisan politics also played a major role: The actual income paths of both groups from 1977 to 2014 depended on whether Republicans or Democrats controlled the White House and/or Congress. For example, when Republicans held the presidency, the top one percent’s rising share of all post-tax income accelerated on average by 0.4 percentage-points, while under Democratic presidents their rise correspondingly slowed by 0.4 percentage points. Similarly, the bottom 50 percent’s falling share of post-tax income accelerated under GOP Presidents by an average of 0.5 percentage-points – and again, their decline decelerated by that much under Democratic presidents. 

The story is the same with Congress. During years of GOP control, the decline of the bottom half’s share of national income accelerated, on average, by more than 0.5 percentage-points – and then slowed by about that much when Democrats were in charge of Congress. Party control of the legislative branch had the least effect on the income path of the top one percent: Their rising share of post-tax income accelerated by an average of 0.3 percentage-points during GOP Congresses, and decelerated by that much during years of Democratic control.

Finally, the results when either party controlled both the White House and Congress were the sum of the results for each branch.

This isn’t conventional wisdom dressed up as science; it is a scientific demonstration of how much elections matter. To test the limits, we also conducted a thought experiment: What would the incomes of the bottom half and the top on percent look like, if one or the other party had controlled both branches of government for the entire 37 years? We assume here that the economy’s course was unaffected by our hypothetical one-party government, and that each party maintains the distributional tendencies in tax and spending policy uncovered in our analysis.

With these assumption, we calculate that if Democrats had been in charge the entire time, the post-tax income of the bottom 50 percent, on average, would have been an estimated $526 higher per-year or a total of $19,539 more for the whole period. Moreover, the top one percent would have taken home $14,226 less per-year, on average, or $526,373 less for the whole period.

Operating on the same assumptions, we calculate that Republican control of both branches for the entire period would have increased the post-tax income of the top one percent by $28,029 per year, on average, or $1,037,086 for the whole period; while the incomes of the bottom 50 percent of Americans, on average, would have been $563 less per year, or $20,848 less for the entire period..

Helping the rich and letting those in the bottom half fend for themselves, it seems, is now part of the modern GOP’s DNA – and moderate resistance to that course seems to be embedded in the Democrats’ genes.

Will Cutting Corporate Taxes Raise Wages?

This essay was posted originally at The Pointwww.sonecon.com

Real disputes among professional economists rarely make their way into political debates. But that’s what’s happened with the issue of whether the Trump administration’s proposal to cut the corporate tax rate from 35 percent to 20 percent would mainly benefit shareholders or workers. Both sides make coherent arguments – but in the end, the evidence supports the proposal’s opponents.

Those opponents start with a traditional tenet of public finance: Taxes on assets are borne by the owners of those assets, so cutting taxes on corporations would mainly benefit their shareholders.

The proponents cite another tenet of public finance: Taxes are borne by those unable to escape them or, in more technical terms, corporate taxes fall on the least mobile factors of production. U.S. multinational companies have shifted substantial capital assets to other countries, from their patents to factories;. But American workers are stuck here. This suggests that much of the burden of U.S. corporate taxes could fall on workers – and consequently cutting corporate taxes should benefit them.

Economic researchers have found support for both tenets, but most of the economic literature has estimated that 70 percent to 85 percent of the burden of corporate taxes falls on shareholders and 15 percent to 30 percent on workers. A 2012 study by the U.S. Treasury – one recently excised from the Department’s website – calculated those proportions at 82 percent for shareholders and 18 percent for workers.

Conservatives insist that globalization has rendered those findings outdated. Citing research by Kevin Hassett, chair of the Council of Economic Advisers (and my friend) and others, they point to strong statistical associations between reductions in corporate tax rates over the last two decades and strong wage gains, especially in Eastern and Western Europe. Their logic is as follows: As U.S. and native corporations sited more production in low-tax countries, those capital investments raised both the demand for and productivity of workers in those places, driving up their wages.

I have no doubt that those findings are correct – but it does not follow that cutting U.S. corporate taxes would drive up investment and the wages of American workers.

First, the studies do not show that U.S. companies invested in those countries to avoid high U.S. corporate taxes. Certainly, the large U.S. software and pharmaceutical companies that transferred the ownership of their patents and copyrights to their Irish subsidiaries did so to elude U.S. taxes – transfers which created very few jobs in Ireland. By contrast, U.S. foreign direct investments that involve building factories and setting up new organizations in other countries occur to serve foreign customers in the regions of those investments. Lowering our corporate tax rate will not change that.

Similarly, U.S. and foreign companies invest here to serve the world’s largest national market. Moreover, taxes are not a barrier, since Congress provides a cornucopia of tax breaks to reduce corporate tax burdens well below 35 percent. According to a 2016 Treasury study, the effective corporate tax burden averaged 22 percent over the period 2007 to 2011. Some of that certainly reflected U.S. companies’ foreign earnings that remain untaxed by the United States. But some industries with few foreign operations also paid below-average rates. For example, the effective tax burden on U.S. utilities and real estate companies averaged, respectively, 10 percent and 20 percent. Right now, then, companies can operate in the United States at an effective tax rate equal to or lower than the administration’s proposal.

In the end, the only real issue is whether the tax proposal would induce U.S. or foreign companies to expand their American operations in ways that raise the demand for and productivity of U.S. workers. We cannot know for certain. Nevertheless, the 2016 Treasury study does provide on-point support for its opponents.

The Treasury found that while the effective corporate tax rate averaged 22 percent from 2007 to 2011, it actually fell substantially over those years — from 26 percent in 2007 to 20 percent in 2011. We did experience four years of strong employment gains from 2013 to 2016, which mainly restored jobs lost in the financial collapse and deep recession. Yet, alas, the falling corporate tax burden did not ignite the surge in business investment and wage gains predicted by the administration’s logic. That’s game, set and match for its opponents.

Blame the Economy for Widening Inequality – And Washington for Doing Little about It

This essay was posted originally at The Pointwww.sonecon.com

America’s widening income inequality has become a subtext across most debates in domestic policy. GOP plans to repeal and replace Obamacare failed in large part because virtually every expert warned that the changes would end coverage for millions of people with modest incomes and cut taxes for high-income people. President Donald Trump’s push to cut business taxes will likely meet a similar fate. He shouldn’t be surprised: The populist revolt that helped elect him has been fueled by popular anger over Washington’s incapacity to do anything about how the economy skews its rewards towards those at the top and away from most everyone else.

Ask the right questions, and the income data reveal a great deal about how this inequality took hold over the last 40 years. It is given that the American economy and politics both changed dramatically over this period. But how did each of those forces affect the distribution of incomes? In a new study just issued by the Center for Business and Public Policy at the McDonough School of Business at Georgetown, I used statistical analysis to explore this question. It turns out that we can track the economy’s role in growing inequality by following the changing distribution of all pre-tax income, and then track the role of politics and the government by following the changing distribution of all post-tax income.

It also turns out that the new populists, or at least their feelings, are justified: As economic changes have produced widening income inequality, the government has remained largely though not entirely on the sidelines.

To begin, the data show that rising inequality in the United States began in 1977, and the same data series ends with 2014, giving us 37 years of income information on both a pre-tax and post-tax basis. Over those years, the share of pre-tax national income going to the bottom 50 percent of Americans – that is, not taking account of changes in taxes and government transfers – slumped from 20 percent to 12.5 percent. This was the doing of a changing economy as globalization and technological advances steadily squeezed the wages and working hours of tens of millions of low, moderate and middle-income Americans.

Over the same years, the share of all pre-tax income going to the top one percent of Americans soared from 10.7 percent to 20.1 percent. The economic drivers were the same. In their case, the rapid progress of globalization and new technologies boosted both the returns on capital – think of soaring stock markets – and the compensation of millions of American business executives and professionals.

“Income shares” are economist-speak, so let’s translate them into the average incomes for each group. The results are sobering. The average pre-tax income of the bottom 50 percent of Americans, in 2014 dollars, inched up from $15,948 in 1977 to $16,216 in 2014, for a raise of $268 or 1.7 percent over 37 years. The top one percent lived in a different economy: Their average pre-tax income in 2014 dollars jumped from $424,631 in 1977 to $1,305,301 in 2014, a raise of $880,670 or more than 207 percent.

To see what the government did about all this, we shift the analysis to the two groups’ income shares and average incomes on a post-tax basis. The data show, first, that the government took some steps to soften the blow for the bottom 50 percent of the country and were modestly effective. After taking account of changing tax and spending policies since 1977, the share of all post-tax income going to the bottom half of the country fell from 25.6 percent in 1977 to 19.4 percent in 2014. So, their income share dropped 24.2 percent on a post-tax basis, compared to 37.5 percent on a pre-tax basis.

The difference tells us what the government actually accomplished: Washington managed to offset a little over one-third of the adverse impact of globalization and new technologies for the bottom 50 percent of Americans [1 – (24.2 / 37.5) = 0.355]. Their relief came mainly from government steps to expand the earned income tax credit, broaden access to Medicaid, and provide subsidies for health insurance under Obamacare. Other tax changes made the federal income tax moot for most of this group, but increases in payroll tax rates offset those gains.

Turning to actual incomes, we find that the average post-tax income of the bottom half of the country increased over this period, in 2014 dollars, from $20,390 in 1977 to $24,925 in 2014. That signifies a raise of $4,535 or 22 percent over 37 years – not much, but better than the 1.7 percent gains in average pre-tax income.

Washington has been more solicitous of the top one percent of the country. After taking account of changes in tax and spending policies, their share of all post-tax income jumped from 8.6 percent in 1977 to 15.6 percent in 2014. So, the income share going to the top one percent of Americans increased 81.4 percent on a post-tax basis, compared to 87.8 percent on a pre-tax basis.

Once again, the difference tells us what Washington did: 37 years of tax changes and spending offset about 7 percent of the fast-rising income gains claimed by the top one percent [1 - (81.4 / 87.8) = 0.073]. In more concrete terms, the average post-tax income of the top one percent of Americans increased, in 2014 dollars, from $342,328 in 1977 to $1,012,429 in 2014. That’s a sweet raise of $670,101 or 196 percent over 37 years.

Over nearly four decades, then, Washington demonstrated moderate concern about the declining position of the bottom half of the country while affirming the rising position of those already at the top.

This record tells us it is time to address the real drivers of widening inequality: Shift our focus from half-hearted redistribution to serious economic reforms – aggressive anti-trust for all concentrated industries, for example, and universal access to free retraining at community colleges – that can put average Americans in a better positions to capture the rewards of globalization and technological change. 

The Three Choices for Tax Reform

This essay was posted originally at The Point, www.sonecon.com

Trump administration officials and GOP leaders in Congress are still putting together their tax plan. Nevertheless, the early signs point to decisions that could sink the project or produce changes that would jeopardize economic growth.

Congress can approach changing the corporate tax in one of three ways. It can try to simplify the code, it can reform it, or it can cut it back. The GOP’s current approach appears to start with simplification. Simplifying the corporate tax normally means phasing out a package of tax preferences for particular industries or business activities, and using the revenues to bring down the current 35 percent tax rate to 28, 25 or even 20 percent. This model shifts the burden of the tax among industries but not among income groups, since shareholders continue to bear most of the burden. Such simplification can also attract bipartisan support and produce real economic benefits. At a minimum, it lowers tax compliance costs for most businesses; and if it’s done thoughtfully, it can increase economic efficiency. To be sure, any efficiency benefits will be marginal unless the simplifications are fairly broad and sweeping.

The record also shows that serious tax simplification is very hard to achieve. Support from President Obama and congressional GOP leaders wasn’t enough to advance it in 2014, for the simple reason that most companies prefer their tax preferences to a lower tax rate. They’re not wrong economically: The Treasury calculated in 2016 that tax preferences lower the average effective corporate tax rate to 22 percent, and companies in many industries pay substantially less. Why give up those preferences for a 28 or 25 percent rate? A 20 percent rate could solve the problem for most industries, if anyone had a plausible way to pay for it. Of course, financing a deep rate cut was the border adjustment tax promoted by Speaker Paul Ryan, and which the White House and big importers and retailers quickly squashed.

The second option is genuine reform, where Congress changes the structure of the corporate tax. Economically, the most promising reform would give U.S. companies a choice of tax treatments when they invest in equipment. They could deduct the full cost of those investments in the year they make them (“expensing”) while giving up the current deduction for interest on funds borrowed to finance the investments. Or they could stick with the current depreciation system for their investments, including the deduction for interest costs. If enough companies choose the first route, as they likely would, this reform would spur investment and sharply reduce the tax code’s nonsensical bias towards financing business growth with debt rather than equity. Such a structural reform would make sound economic sense. It also seems as unlikely as serious simplification, because it foregoes the pixie dust of marginal tax rate cuts that GOP supply-siders demand.

That leaves the Trump administration and Republican leaders with option three: Cut the corporate tax rate without paying for it. The President seems to favor this approach. He has called repeatedly for slashing the corporate rate to 15 percent, a multi-trillion dollar change, and paying for a small piece of it by limiting a few personal tax deductions for higher-income people. It’s also catnip for GOP supply-siders who continue to proclaim that a deep rate cut will boost economic growth enough to pay for itself. We’ve tried this t several times already, so we now have hard evidence to evaluate those claims. The actual record shows, beyond question, that such turbo-charged dynamic effects do not occur. The most recent example is George W. Bush’s 2001 personal income tax cuts. His “success” enacting them produced huge deficits and ultimately contributed to the financial collapse that closed down his presidency.

A largely-unfunded cut in the corporate tax rate in 2018 would boost corporate profits as well as budget deficits, but it won’t increase business investment, productivity or employment. Prime interest rates in this period have been lower than at any time since the 1950s, so companies have had easy and cheap access to funds for investment for years. At a minimum, this tells us that there’s no real economic basis to expect businesses to use their windfall profits from a big tax cut to expand investment.

Instead, they’re likely to use some of their additional profits to fund stock buy-backs. The rest will flow through as dividends and capital gains, mainly for the top one percent of Americans who hold 49.8 percent of stock in public companies, and the next nine percent who own another 41.2 percent of all shares. Those lucky shareholders will use much of their windfall gains to buy more stock; and coupled with the corporate stock buy-backs, the boost in demand for stocks will pump up the markets. To be sure, those shareholders will also spend some of their unexpected gains, which will modestly stimulate growth. Once that stimulus dissipates, as it will fairly quickly, the ballooning budget deficits will drive up interest rates and slow the economy for everyone else.

The worst scenario is that large, deficit-be-damned cuts in the corporate tax rate could produce a stock market bubble that could take down the economy when it bursts. The good news is that the current Congress would never enact it. The odds of Democrats supporting Donald Trump on a tax plan to make shareholders richer are roughly the same as winning the Powerball; and the certainty of soaring budget deficits should scare off enough conservative Republicans to sink the enterprise.

The Trump Administration is Disrupting the 2020 Census

The decennial Census is a genuinely powerful institution in American life. I didn’t understand its impact until I oversaw the Census Bureau as it prepared and carried out the 2000 decennial Census, when I was Under Secretary of Commerce for Economic Affairs. Believe me, the upcoming 2020 decennial Census will matter more than you think. Yet, Congress and now the Trump administration have set the 2020 decennial on a course that threatens its basic accuracy. In so doing, they put at risk the integrity and effectiveness of some of the national government’s basic missions.

Normally, the Census Bureau spends the first six years of each decade planning the next decennial Census. The Bureau’s funding ramps up in years seven, eight and nine of the decade, when it tests and purchases its technologies, conducts a nationwide inventory of residential addresses, orders forms, letters and advertising, and begins to lease local offices and train temporary workers. It is expensive to accurately locate and count 325 million people in 126 million households (2016). That’s why, for example, Census funding jumped 96 percent from 1997 to 1998, and more than 60 percent from 2007 to 2008.

The problems began in 2014, when the Congress decreed that the 2020 Decennial Census should cost no more than the 2010 count without adjusting for inflation, or some $12.5 billion. The Obama administration objected, but to no effect – although it’s worth recalling that Bill Clinton took a different tack in 1998, when he vetoed an omnibus budget bill and risked a government shutdown to get rid of a provision that would have barred the Census Bureau from using statistical sampling to verify the 2000 count.

The Census Bureau did what it had to do to live within its new budget constraints: it drew up new plans to cut costs by replacing thousands of temporary Census workers and hundreds of temporary offices with new technologies and online capacities. It also had to do what it shouldn’t have done: To save money, the Bureau aborted a planned Spanish-language test census and didn’t test or implement new ways to more accurately count people in remote and rural area. Census also ended its plans to test a range of local outreach and messaging strategies to get people to fill out their census forms, which are crucial to minimizing undercounts in many minority and marginalized communities.

Even so, the Census Bureau prepared to ramp up funding in 2017 and 2018, as it normally did, under the $12.5 billion cap. Enter the Trump administration, which cut the Obama administration’s 2017 budget request for the Census Bureau by 10 percent and then, this past April, flat-lined the funding for 2018. It is no coincidence that the Director of the Census Bureau, John Thompson, resigned in May, effective in June. It’s a serious loss, since Dr. Thompson directed the 2000 decennial count and is probably the most able person available to contain the coming damage to the 2020 count. For its part, the administration hasn’t even identified, much less nominated, his successor. It is no surprise that the Government Accountability Office recently designated the 2020 Census as one of a handful of federal programs at “High Risk” of failure.

The costs of starving the decennial Census could be great. It not only paints the country’s changing demographic and geographic portrait every 10 years. Its state-by-state counts determine how the 435 members of the House of Representatives are allocated among the states; and its counts by “Census block” (roughly a neighborhood) shape how members of state legislatures and many city councils are allocated in those jurisdictions. That’s just the beginning.

Consider as well that every year, the federal government distributes about $600 billion in funds to state and local governments for education, Medicaid and other health programs, highways, housing, law enforcement and much more. To do so, the government uses formulas with terms for each area’s level of education, income or poverty rate, racial and family composition, and more. The decennial Census provides the baseline for those distributions by counting the people with each of those characteristics in each state and Census block. Similarly, the Census Bureau conducts scores of additional surveys every year on behalf of most domestic departments of government, to help them assess the effectiveness of their programs. Here again, the decennial Census provides the baseline for measuring each program’s progress or lack of it.

Without an accurate Census, many states and cities will be denied the full funding they deserve and need, and the federal government will have to fly blind for a decade across a range of important areas. Moreover, many businesses also rely on decennial data, from retailers and commercial real estate developers to the banks that finance them. Data on the demographics and locations of potential customers not only inform their planning and investments. In some cases, the data actually make their projects possible, for example, when an investment qualifies for special tax treatment if it occurs in places with certain concentrations of low or moderate-income households.

The Trump administration cavalier approach to the 2020 decennial Census is evident in ways other than its funding deficit. A draft executive order, leaked but not issued so far, would direct the Census Bureau, for the first time in over 200 years, to “include questions to determine U.S. citizenship and immigration status.” The Census Bureau is legally required to protect the privacy of all Census data from requests by anyone, including government officials. Unsurprisingly, many people remain skeptical and avoid answering the Census out of fear that other government agencies will access their information. Requiring that Census 2020 probe each respondent’s citizenship and immigration status would turbo-charge those fears among Hispanics and other immigrant groups. The result would be systemic undercounting and underfunding of states, cities and towns with substantial populations of Hispanics and other immigrants.

There is still time for a course correction that could rescue the 2020 decennial Census, in next month’s negotiations over the 2018 budget. With some GOP members of Congress exhibiting a measure of newly-found independence from the Trump administration, Paul Ryan and Mitch McConnell could need Democratic support to pass a budget. A wide range of minority advocacy and business groups, along with most big city mayors, have vital interests in an accurate decennial Census. It’s up to them to pressure Nancy Pelosi and Chuck Schumer to make adequate funding for the Census one of their top priorities. Otherwise, one of the basic mechanisms for fair and competent governance could be disabled for a decade.

This post was originally published on Dr. Shapiro's blog.

It’s Still the Economy, Stupid!

Republicans know that the terrain for next year’s midterm elections could be treacherous. Off the record, they bemoan their inability to enact their agenda and mourn President Donald Trump’s unpopularity. In principle, the GOP still might get its act together and pass a tax reform with new tax breaks for middle class taxpayers. Events unforeseen and unimagined could offer Trump a platform to renew his poplar appeal. Even so, they’re ignoring the signs that a sagging economy next year will dominate the 2018 campaigns.

The current expansion is old – it turned eight years old this month – and its fundamentals are weak. Neither Trump nor Congress has done anything to perk it up. Only the 1990s expansion lasted longer, and it expired two years after its eighth birthday. Comparing the two will not cheer Republicans. At a comparable point in the expansion that defined the Clinton era, March 1999, GDP was growing at nearly a 5 percent rate; over the last year, GDP has edged up barely 2 percent.

The most important difference is what was happening then with productivity, and what’s happening now. In the three years leading up to each expansion’s eighth birthday, productivity had expanded at a 2.4 percent annual rate in the 1990s, compared to 0.7 percent this time. Without decent productivity gains to lift wages and fuel demand, incomes stall and growth slows.

The main reason we’re not in a recession today is the strong job gains of the last three years, and the current 4.4 percent unemployment rate is comparable to the 4.2 percent rate in March 1999. Full employment normally presages a slowdown in job creation. We avoided that in the late 1990s, because the strong productivity growth supported more demand by raising wages. The best measure of that is personal consumption spending, which increased at a 5.9 percent rate in the year leading up to March 1999. But our current predicament includes such weak productivity gains that personal consumption spending edged up just 2.6 percent over the last year.

It’s the same story with business investment, the other domestic source of new demand. In the year preceding the eighth birthday of the 1990s expansion, fixed business investment rose 8.5 percent; over the past year, it grew 4.2 percent or half that rate.

All of these measures presage a slowdown in the U.S. economy next year – GDP gains of 1.5 percent in 2018 is a fair guess – and we could slip into a recession if some adverse event provides the trigger.

Last October, I cautioned Hillary Clinton that she would face these same conditions if she won, but that three initiatives could breathe new life into this old expansion. The first order of business is a dose of demand stimulus, preferably through large infrastructure investments paid for down the line. Trump promised the same thing; but he and the GOP Congress moved quickly beyond it.

The second initiative would focus on energizing productivity growth. My own recommendations last October started with measures to help average Americans upgrade their skills, by giving them free access to training courses at local community colleges. The Trump and GOP budget proposals would cut the inadequate training programs already in place.

The third initiative is a companion piece to promote higher productivity: Jumpstart business investment in new technologies and equipment. That will be harder for Trump than it would have been for Secretary Clinton, because it requires setting aside the supply-siders’ faith in the power of cutting marginal corporate tax rates. Instead, we should focus for now on lowering businesses’ upfront costs to purchase the new technologies and equipment that make skilled workers even more productive.

The measure would offer businesses a choice: deduct the full cost of those new purchases in the year they buy them – it’s called “expensing” – or stick with the current system where businesses depreciate the cost and deduct the interest on funds borrowed to cover it. Expensing is a feature of the Trump and GOP tax proposals, but both plans offer more sweeping and much more expensive changes that appear headed for the same fate as Trumpcare.

The election of Trump and the GOP Congress buoyed business confidence precisely because investors believed they would follow through quickly with an infrastructure stimulus and business tax reforms. Neither seems likely today; and even if one or the other somehow passes in some form late this year, it will probably be too little and too late to revive growth and wages by November 2018. If neither happens, it will take more than tweets to explain to voters why Republican control of both branches of government has failed to improve their lives.

This post was originally published on Dr. Shapiro's blog.

A Department of Jobs, Skills and Economic Development

This essay was originally published on Medium.

Much of the structure of the government of the United States was designed and built in the middle part of the last century. The creation of the Department of Homeland Security in the aftermath of 9/11 was the last big structural change. In a time of rising global competition and technological change, it is time to fashion a new government department focused solely on creating good jobs for Americans, and helping American succeed in a new world of work that requires very different skills. Let’s call it the Department of Jobs, Skills and Economic Development.

It is remarkable to consider that the executive branch of our government has no one person or department truly responsible for creating good jobs for the American people, and ensuring our workers have the skills to succeed in a changing world. These responsibilities are scattered throughout the federal government, residing in the Departments of Commerce, Labor, Treasury, Housing and Urban Development, Education and Agriculture, the United States Trade Representative, the Export-Import Bank, the Overseas Private Investment Corporation, the Small Business Administration and throughout the White House itself. A new Department of Jobs, Skills and Economic Development would consolidate these many disparate activities and programs in a single place, allowing for greater efficiency but also far greater strategic focus and coordination. The process of building the Department would force a debate about all the programs it would inherit, and whether they are working or can be improved. Redundant or under-performing programs could be eliminated, freeing up resources for higher priority projects. It would be a powerful department, but also should by design be a modern and skinny one — lean and mean.

 

Congress and the White House would ultimately decide what would end up in this new department and what would remain in other places, but certainly one could imagine some of these other departments and agencies getting subsumed entirely into this new mission. This new department (DJSED) would work closely with the economic development agencies and other agencies of the states, and learn from their best practices. Policymakers can also study how other nations tackle these challenges, and draw from their experience. The balkanization of these responsibilities in Congress would also end, and allow far greater strategic focus from our elected representatives.

One of the things this new Department can focus on is what I call a “safety net of skills and knowledge.” In the industrial age we created a safety net for our people, one that included health care and income support. It is also now time we committed to create a true system of lifetime learning, one that anticipates our citizens will need the acquisition of new skills to become routine and persistent throughout their lives. There are many ways this new 21st century safety net can get constructed and built, many pieces of it already exist, and it will evolve and mature over time. But it is something that our emerging Millennial politicians should put their minds to and help build over the coming decades. Like the Department itself, this new digital age safety net would be about taking things that are already getting done and organizing them in a way that makes them far more focused and effective.

The Department could also expand the small Economic Development Administration currently in the Commerce Department, and give it a more expansive mission that could even include national infrastructure and transportation planning and travel, tourism and trade promotion. It would work closely with the fifty states, supporting their ongoing locally driven initiatives. All fifty states have an economic development agency focused on creating growth and good jobs for their communities for a reason. It works. It is long past time the federal government and the nation had one too.

Perhaps the most important reason to create this new Department is that in my mind the only way we can respond to both the enormity of the task in front of us, and its urgency. We simply have to do more than we are doing today to help the American people succeed. And whatever we do needs to be dramatic, something real and tangible, not something that is nibbling around the edges of what is perhaps the most important challenge America faces today. We need to let the American people know we hear them, and are changing the way we do business here in Washington to make their lives better. There may be other ways of attacking this problem but creating a super-sized but lean and mean Department would be an important first step that will give us a chance of coming up with approaches commensurate to the size of the problem itself.

And the problem is real. With billions of people today contributing to the advancement of knowledge every day, our already fast world will continue to speed up. Skills and knowledge acquired in high and school and college will be far more likely to become obsolete in one’s lifetime in the 21st century, and we need ways to make continuous learning more than a slogan. Additionally, with nations across the world rising and growing modern companies, global competition for our businesses and workers is likely to get more far more intense. The time when America stood like a conquering giant above the economies of the world is long in the past, and a new age of competition and progress is with us. Our government must help its own institutions become as fast and innovative as the global economy itself, and to do far more to effectively support good, deserving Americans who work hard and play by the rules and expect more from all of us.

Perhaps this project is the Kennedy Moonshot of our time, something we know we have to do but are not quite sure how to get there. Creating a new Department with a new mission and lots of capacity and focus is a good way to start. Perhaps it is old Washington think — a reorganization! — but am open to better ideas on how we can get this done in the years ahead. Whatever you think let the debate begin. The good people of the United States deserve more from all of us in Washington as they look to compete and prosper in a far more challenging 21st century global economy.

How to Raise Incomes and Delay the Next Recession

Last October, mulling over the economic environment the next President would face, I sent Hillary Clinton memos on how she should provide some stimulus to sustain the current expansion and raise incomes by boosting business investment and productivity. Alas, she did not become President; but that didn’t change our current economic challenges. To be sure, President Trump’s manifold troubles may preclude Congress from doing anything meaningful until after the 2018 elections. But if that’s not the case, here’s some advice for both sides.

The White House, above all, should appreciate the stakes: Without some form of serious stimulus, the U.S. economy almost certainly will slip into recession well before 2020. From Trump’s recent statements about “priming the pump,” he already understands that the eight-year-old expansion needs a boost. The GOP plan for sweeping tax cuts won’t work here, even if it could pass Congress. To begin, it devotes most of its resources to high-income people and shareholders, who will just save most of their tax savings. More important, the plan would vastly expand federal deficits on a permanent basis. If that happens, the Federal Reserve almost certainly will hike interest rates considerably higher and faster than they now contemplate, and those rate hikes would likely end the expansion.

Washington needs to prime the pump in a way that directly supports employment over the next two years and carries no long-term costs for the deficit. As it happens, Trump and Democrats already support a reasonable way to do just that – enact a large, two-year increase in public investments in infrastructure. But the plan will attract Democratic support only if Trump gives up the idea of using tax breaks to leverage private investment in new infrastructure projects. Democrats won’t (and shouldn’t) go along, because that approach tilts the program towards infrastructure projects in high-income areas that can generate strong profits for its investors.

I assume that the President’s economic advisors also have briefed him on the recent, serious slowdown in business investment and productivity growth. Unless Trump addresses those problems as well, most Americans will make little income progress. The challenge here is to focus on changes that will boost business investment in way that strengthen productivity, and do it without raising deficits on a permanent basis.

One approach that congressional Republicans and some Democrats could support entails allowing businesses to “expense” their investments in equipment – that is, deduct the entire cost in the year they purchase the equipment. This change focuses on equipment investments, because they have the greatest impact on growth and productivity. The catch is that this approach still costs the Treasury many tens of billions of dollars per-year, especially if it covers both corporations and privately-held businesses (like the Trump Organization), as it should.

Trump could draw some support for the plan from congressional Democrats by insisting that Wall Street pay for it. First, he could deliver on his campaign promise to end the notorious “carried interest” loophole that lets the managers of private equity, venture capital and hedge funds use the capital gains tax rate to shelter most of their income from their funds. Fund managers certainly can afford to pay the regular income tax like the rest of us: In 2016, the top 25 hedge fund managers altogether earned $11 billion or an average of $440 million each.

To pay for the rest of equipment expensing, Trump should support the call by many Democrats for a small tax on financial transactions – three one-hundredths of one percent of the value of all stock, bond and derivative purchases should do it. (Stock and bond IPOs and currency transactions would be exempt.) Wall Street will howl in protest – music to most Americans’ ears – but the economics are sound. On the plus side, the tax would reduce market volatility by discouraging short-term speculation and ending most high-frequency computer trading. Moreover, today’s short-term speculators and high-frequency traders will have to invest those resources in more productive ways. The negative is that the tax would raise transaction costs and thus dampen investment on the margins. But since the tax would finance a serious reduction in the cost of business investments in equipment, the overall impact on the markets will be positive.

This plan is far from the dream agenda of either party. A Hillary Clinton presidency would have included many other measures to boost productivity and incomes, from access to tuition-free college for young people and greater access to bank loans for new businesses, to broad retraining opportunities for adults and a path to citizenship to expand job opportunities for immigrants. For their part, congressional Republicans still believe in their trinity of huge tax cuts, drastic deregulation, and deep cutbacks in Medicare, Medicaid and Obamacare benefits. But the economics of stimulating an aging expansion and restoring business investment are non-partisan, and both parties should have an interest in reviving income progress for most Americans.

For President Trump, this plan has three simple parts consistent with his positions: Increase public infrastructure investments, lower the cost of business investments, and make Wall Street pay more of its fair share. If he can cut this deal, nearly everybody will win – but if he can’t, no one will lose more than he will.

This post was originally published on Dr. Shapiro's blog.

The Case for Optimism

This essay was originally published on the website Medium.

So, imagine if you lived in America at a time when:

  • Incomes of everyday people are at an all-time high, have been rising for at least four years now and saw their largest annual increase in recorded US history just a year ago.
  • The unemployment rate is 4.3%, about at what economists consider “full employment.” This rate is historically low — over the past 70 years (821 months), the rate has only been lower in 130 of those months or just 16% of this 70 year stretch. A reminder that the unemployment rate never dipped below 5.3% during the entire Reagan Presidency.
  • More people have health insurance and access to quality than any time in American history. A recently implemented health care law has materially improved the lives of tens of millions Americans in a very short period of time.
  • The US stock market is at an all-time high, and 33% percent higher than any sustained high in US history and between 5 and 10 times higher than where it has been most of last 50 years. So really high.
  • The high school graduation rate is the highest ever recorded.
  • Violent crime rates are half of what they were a generation ago, and cities across the US are blossoming, seeing growth, investment and people once again living “downtown.”
  • Teenage pregnancy rates are plummeting, and now are at all-time low.
  • There has not been a foreign fighter terror attack on US soil in 16 years, few American troops are dying overseas and the US faces no true existential threat from a foreign power.
  • Due to smart policies and years of investment, the flow of undocumented immigrants into the US has dramatically slowed, seeing no net increase for a decade now.
  • The US is taking control of its energy future, seeing a sharp decrease in foreign oil imports and sharp, even historic, increases in the production of renewable energy.

Would that America sound like a good America to you? I think so. And of course this list describes the America of today, early June, 2017. America is not without its problems, of course. Despite our economic success, we are still leaving too many behind. Growing levels of inequality are corrosive to the social fabric and bad for the economy too. We have too much public and private debt. Tribalism, racial strife and social coherence remain daunting challenges. Mass incarceration too. The opioid epidemic is tragic, and needs far more attention and action. Too few people vote in America, and our civic life needs renewal on many fronts…..

But it is the premise of this essay that while America has very real challenges, somehow the positive side of the nation’s balance sheet — and there is a lot there — has been recklessly ignored in our national discourse. It is my contention that contrary to the claims of our President, America hasn’t lost its greatness, and that by many historical measures there has never been a better time in all of America history to be alive. Certainly better than the Great Depression, or when we held millions of slaves in cruel bondage, or when kids worked and didn’t go to school, or before there was a minimum wage or a social safety net, or when little black kids and little white kids couldn’t drink from the same water fountain, or when hundreds of thousands were dying in Vietnam, or a Cold War could lead to nuclear annihilation at any moment? Or when sky high interest rates prevented us from buying homes, or women couldn’t vote or work or pursue their dreams, or when OPEC decided to punish America, forcing us to wait in lines for hours just to buy gas? Or especially, my Republican friends, when Ronald Reagan was President and the unemployment rate never dipped below 5.3?

Which brings us to Trump. So much of what he is doing flows from the argument that America isn’t managing this new age of globalization well but being defeated by it. It is the rationale behind stripping health care from tens of millions, dismantling common sense environmental regulations, and getting out of the Paris climate deal and TPP; behind his harsh new immigration enforcement and criminal justice policies; behind his dancing with dictators and distancing himself from democracies. And of course, the data above suggests that this argument — the entire rationale for Trump’s Presidency — just isn’t true. Not even close. Things are far better than he says, or perhaps, understands.

Our new President is the first in our history to be under investigation for treason while in office. Whether he has in fact betrayed our nation to a hostile foreign power (and I think he did) will be determined soon. But to me the greater betrayal of this remarkable nation and its hundreds of millions of decent, hardworking people is the President’s denigration of our collective accomplishments over the past generation. Despite the many headwinds of the modern world America has made true, substantial progress. We are a better and more prosperous nation than we were a generation ago. Our companies lead the world in just about every possible sector, and the innovation and creativity in our private sector remains the envy of the world. Our military has no near peer, and remains the greatest fighting force ever assembled. We are taking control of our energy future, and making great strides against climate change. We are working through our unique challenges with race and tribalism, and while Trump is an obvious setback we just saw a man of color lead our nation successfully for the first time in history. Millions of new Americans are starting businesses, building families and making their mark. Our universities are the best in the world, and our public schools are getting better. I could go on and on and on.

But the bottom line is by selling us short Trump betrays both the greatness of our country and the goodness of the American people every day of his Presidency.

And this is the key. To defeat Trumpism we must be optimists, patriots, pragmatists now. To defeat the man, we must defeat his fallacious arguments about America and what we have become. While he talks down America, we must talk it up. We should be proud stewards of a great nation, but steely-eyed and resolute about tackling the real challenges that remain. In many ways, even in these nasty early days of Trump, I have never been more proud of my country, more in touch with what it means to be an American. For it remains the greatest country on Earth, the inspiration for so many — and it will reclaim that role in the days after Trump if we can together not just defeat the man, but defeat the dark pessimism his brand of politics has unleashed into America and the rest of the world.

Can we do it? In the words of another who came before, there is no doubt in my mind that “Yes, we can.”

 

Release: No budget passed, no budget introduced in 1st 100 days

“As Congress struggles to pass a budget originally proposed in early 2016, it is reasonable to ask if President Trump is ever going to submit a budget for FY 2018 that is supposed to be implemented in just five months. So far the President and his team have released pieces and outlines of a budget but no budget itself. Crafting, passing and implementing a budget is perhaps the most elemental responsibility of governing. There are legitimate reasons to be alarmed at Trump’s extraordinary failure to get last year’s budget (7 months into a 12 month fiscal year) passed and his first budget introduced into Congress.

These failures are among the most significant failures of his first 100 days.”

-Simon Rosenberg, NDN
 

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