GDP

US must confront the new realities

Posted on by j.giglio

The 21st century has witnessed the death of the old world economic order and the birth of a new one. America remains the world’s military superpower but Brazil, Russia, India, China and others are challenging our economic pre-eminence.

The parade of 2016 presidential candidates will offer short-form solutions unconstrained by resource limitations. They will blame others and predict impending doom if they are not elected. And the political rhetoric will surely be accompanied by nostalgia for the golden economic age of the decades that followed World War II.

But America’s dominance in the decades following World War II was a function of unique circumstances. Europe lay in ruins in 1945. In the rest of the world, cities were shattered, economies devastated and people were starving. In the two years after the war, the vulnerability of countries to Soviet expansionism heightened the sense of crisis.

The postwar economy was quite successful by any standard. The American middle class enjoyed higher wages from the end of World War II until the mid-1970s. Real wages, after inflation, continually rose until 1973. But that was when the United States accounted for a disproportionate share of the global economy, nearly two-thirds of the world’s gold reserves, and the dollar was the world’s reserve currency.

Prosperity was the governing theme of the postwar era. During those years, gross domestic product grew 140 percent and real (inflation-adjusted) per capita income doubled. Living standards improved to the point where the large majority of Americans could describe themselves as middle class.

The United States made the economic recovery of Western Europe and Japan a national security priority. Two basic motives guided policy.

Primo, the United States was increasingly concerned about the ambitions of the Soviet Union that had imposed communist governments on Eastern Europe and their threat to Western democracies.

Secondo, the United States believed stable, prosperous, democratic governments would serve as ramparts against Soviet expansion and bind these countries to us.

To restore Europe’s economic infrastructure, President Harry S. Truman signed what became known as the Marshall Plan in April 1948. Over the next four years the plan delivered $13 billion to modernize industry in 16 European countries. This funding, which translates into $103 billion in today’s dollars, enabled Europe to rejuvenate its domestic markets as well as export its way to economic recovery. By contrast, Afghanistan still can’t stand on its own after receiving about $110 billion in assistance.

The Marshall Plan along with cutting American tariffs by 35 percent to accommodate and promote foreign imports, which provided Americans with cheap foreign goods, supported the development of stable democratic governments in Western Europe. It also provided markets for American goods and services, a grand example of vendor financing.

The United States also developed and helped finance a comprehensive economy recovery program for Japan. The war had devastated the country and terminated almost all of its foreign trade.

It should not be overlooked that it was with America’s help that the world became a more prosperous and competitive place, which has indeed put downward pressure on wages as footloose companies take advantage of the information technology revolution to disperse supply chains contributing to the erosion of middle-class wages in the face of low-cost competition.

If America wants to maintain its status as the world’s economic superpower, it is time to jettison the addiction to past achievements and focus on new realities: The world is experiencing dramatic technological change and we face economic competition from millions of people around the world who are happy to work for a fraction of Americans’ wages.

We must get serious about issues that are the very foundation of American exceptionalism such as combating economic inequality and declining living standards for the shrinking middle class. If we don’t, Americans will have to drastically adjust their expectations about growth and opportunity and step back from our special place in the world.

originally published: July 4, 2015

America’s debt is the real fiscal cliff

Posted on by j.giglio

Escaping wall-to-wall fiscal cliff headlines is a full-time job. The media constantly tells us we cannot sleep until we solve the crisis, which, of course, puts people to sleep.

If we go over the fiscal cliff, we lose $600 billion in spending we can’t afford and we increase taxes that should have been raised a long time ago. One reason the situation has come to this is that politicians don’t like to talk about taxes, except to use them the way a matador uses a red cape.

The fiscal cliff, while serious, is a short-term problem. The real cliff is America’s addiction to debt. The average American household’s share of the national debt is now about $137,000. This is an epic, generational tale, while the fiscal cliff is a short story.

In fiscal 2012, the federal government spent about $3.5 trillion, or about 23 percent of gross domestic product. It collected revenues of about $2.4 trillion, or 16 percent of GDP. The resulting $1.1 trillion shortfall marked the fourth year in a row the deficit exceeded $1 trillion.

The federal government borrowed about 30 cents of every dollar it spent. As the late U.S. Sen. Everett Dirksen said, “A billion here, a billion there, and pretty soon you’re talking about real money.” Today, substitute trillion.

By the end of fiscal 2012, total government debt was more than $16 trillion and growing feverishly. Our GDP, the value of goods and services produced in the United States each year, is about $15.7 trillion. The ratio of debt to GDP is a measure of our production and ability to service the debt.

The federal debt as a percentage of GDP is at the highest level since the end of World War II. It has increased from 35 percent in the 1990s to over 100 percent, which means our debt is now bigger than the entire economy.

To make matters worse, it is estimated that our total unfunded liabilities are north of $60 trillion. Medicare and Social Security alone make up 75 percent of these liabilities. In the near future Medicare, Medicaid, Social Security, and interest payments will consume all available revenue.

Needless to say, this kind of debt results in some scary interest payments. Despite the lowest interest rates in 200 years, America will spend around $220 billion on net interest on its debt in 2012, money that can’t be spent on other priorities.

If the debt problem is not addressed, annual interest payments are expected to top $1 trillion by 2020. Each point interest rates go up increases the payments by at least $150 billion per year.

If interest rates return to their historic average of about 6 percent, interest on the national debt will likely be the largest line item in the federal budget by 2020. It would slow economic growth, reduce our standard of living, displace other government priorities, require future generations to pay for current government spending and reduce our ability to respond to future crises.

In the long run, a growing federal debt is like driving with the emergency brake on, slowing an economy that already can’t get out of first gear. We will take on the economic profile of a third world country: a few rich folks at the top, scarcely any middle class and a vast peasantry.

With all their posturing, Washington political leaders have spent 90 percent of their time talking about less than 10percent of the real problem: the mounting level of debt. With all the talk about taxes on both sides, the new revenue would only address 5 percent of the problem.

We need comprehensive spending and tax reforms that are crafted to encourage economic growth. To do otherwise is sheer masochism. After all, our economy is what keeps America strong.

We must also keep in mind that leaders don’t lead without the consent of the governed. It may be, as Shakespeare’s Cassius said, that the fault lies not in the stars but in ourselves.

originally published: December 15, 2012

Invest in capital partnerships

Posted on by j.giglio

There is a simple reason for the federal government’s dismal financial outlook: its outlays are growing far faster than its revenues. Typical solutions for this problem involve some combination of slowing the rate of spending growth and increasing revenue collections.

It’s a sound strategy, but its implementation encounters major political problems. As that prolific author Anonymous said, “Watching the Republicans and Democrats argue over these issues is like watching two drunks fight over the bar bill on the Titanic.”

The problems associated with actually cutting spending and increasing revenues make major capital investments- the kind that can create new jobs, boost productivity and create tangible assets that can continue promoting economic activity long after the federal dollars have been spent- another option for solving our daunting problems.

Raising revenue usually means boosting tax rates or eliminating tax deductions, like the one for home mortgage interest. This is politically difficult to achieve, given the perception among many in Congress that voting for tax increases is tantamount to announcing your forthcoming retirement from elective politics.

Similarly, slowing spending growth probably means cutting Social Security, Medicare and Medicaid, all of which are bound to be opposed by retirees- a large and growing component of the nation’s voters.

How else can we boost gross domestic product (“GDP”) so the federal government can grow its way out of the economic crisis?

One option is to have the Federal Reserve work overtime to pump up the nation’s money supply. If this leads to a rise in prices, the same number of widgets sold tomorrow would produce more income for the widget firm and more tax revenue for the government.

Inflating the current dollar value of GDP will generate more revenue with no change in tax rates (which is why it’s been so popular throughout history among many national governments). However, raising prices will reduce the buying power of federal outlays. Total outlays will have to be increased to keep up with higher prices, leaving us right back where we started.

Increasing GDP without raising prices would progressively narrow the gap between the growth of total outlay dollars and the growth of total revenue dollars. This would be the macroeconomic equivalent of being home free. Major capital investment is a way to get there that has a proven track record.

A too-often forgotten legacy of President Roosevelt’s New Deal was massive federal capital investment in economic growth projects like rural electrification, the Tennessee Valley Authority and Boulder Dam, not to mention hundreds of commercial airports like LaGuardia and JFK in New York City, thousands of modern post offices, schools and local courthouses. Two decades later President Eisenhower, the Republican New Dealer, began building the 41,000-mile Interstate Highway System.

America has been living off these investments ever since. Their contribution to decades of job growth and increasing national prosperity has been so enormous that we’ve come to take them for granted.

Now is the time to again develop a series of major capital programs to create jobs and build a better, stronger, more prosperous nation.

Capital investment programs can generate the kind of near-term, non-inflationary economic growth needed to solve our looming financial problems without having to raise taxes or cut popular middle­ class benefit programs. They can, in fact, enable us to grow our way out of financial trouble.

But escalating federal budget deficits and skyrocketing debt, even at historically low interest rates, raise questions about government’s ability to come up with the start-up dollars. One solution is to recruit private firms as active partners to help start, fund, and run as many of these programs as possible.

If properly structured, such public-private partnerships could tap into the billions of dollars in private capital hungering for low-risk investment opportunities that offer decent rates of return. These New­ Deal style programs provide such an opportunity, greatly minimizing the need for scarce government dollars.

If the common-sense approach of cutting spending and raising revenue isn’t politically feasible, a partnership between the federal government and the private sector to embark on a program of major capital investments is the best route to growing our way out of a daunting fiscal mess.

originally published: September 29, 2012

Congress must not ignore key route to recovery

Posted on by j.giglio

Economists regard the unemployment rate as a “lagging indicator” because it tends to move well after other gauges of economic strength. But unemployment is the indicator to which normal people pay the most attention.

One could reasonably argue that it’s economists who are the real lagging indicators. We are in the midst of the biggest economic crisis since the Great Depression. It began as a recession in December 2007, but it took almost a year for economists to agree that a recession had even begun.

Today, debate has shifted from when the recession began to how to get out of it. Given the politics in Washington, it is a fair guess (actually a certainty) that enacting the long-term policies needed to grow the economy will wait until after the November elections.

But sidestepping the polarizing debate about austerity versus growth, one immediate straightforward  step Congress can take is to pass the surface transportation bill before the current extension expires June 30.

Our economist friends estimate that every billion dollars invested in transportation infrastructure yields 25,000 jobs.

Early this month, the Bureau of Labor Statistics reported that only 69,000 new non-farm jobs were created in May, about one-third the average monthly gain for the first three months of the year. Mainstream economists were expecting something on the order of 150,000 new jobs.

There is no putting a gloss on it. These numbers are miserable. We added the smallest number of workers in a year, causing the unemployment rate to tick upward to 8.2 percent from 8.1 percent in April. That makes 40 consecutive months of unemployment over 8 percent.

To make matters worse, job growth figures originally reported for March and April were lowered by 49,000 and the number of workers unable to find jobs for 27 weeks or more rose from 5.1 to 5.4 million. The broadest measure of unemployment, the number unable to find full-time work or too discouraged to look for a job, now exceeds 23 million, up from 14.5 to 14.8 percent of the workforce.

This may be the most significant measure of joblessness, since many part-time and discouraged workers experience the same negative psychological and social impacts as those who are totally unemployed.

The economic impact of so many unemployed workers exerts a severe drag on the nation. Workers and their families who must struggle to make ends meet on unemployment benefits are no longer able to participate fully in the nation’s consumer economy. Consumer spending accounts for some 70 percent of gross domestic product, and their enforced spending curtailments further reduce GDP and hold back recovery. It is an economic multiplier effect in reverse.

That’s not all. A whole generation of fresh college graduates can’t begin the careers they’d hoped for because of the moribund job market and may have to settle for jobs that are much less valuable to America’s future.

Consumer spending requires consumers to have income. This month’s survey and the revisions to recent labor reports show that hours worked are down, and wages and payroll are down and not keeping up with inflation. GDP was revised down to 1.9 percent for the first quarter.

So forget nation-building in Afghanistan, balancing the federal budget, or taming the Wolves of Wall Street. These are obviously important, but they all vie for second place to the overriding challenge of putting Americans back to work. This must be the federal government’s No. 1 priority for the foreseeable future.

The nation needs to add 250,000 jobs per month, every month, for five years to get back to the 5 percent unemployment rate we had in 2007. How are we going to achieve that? State transportation departments have been operating on short-term extensions of the last surface transportation bill since September 30, 2009. The current extension, which is the ninth, is set to expire June 30. Maintaining and improving our highway and transit systems is important. So are the thousands of jobs that will be lost if Congress does not move on a highway and transit bill.

originally published: June 15, 2012