Sustaining Large Economic Growth is Key for the US

A couple of weekends ago it was cold. I didn’t go outside, which means I had time to invest in some longer format reading. The piece that grabbed my attention was called The Big Fix by David Leonhardt in the NY Times Weekend Magazine. David Leonhardt also contributes to the NY Times Economix blog. “The Big Fix “is a review of President Obama’s intentions with the Stimulus legislation. There were several stats, postulates, and facts that I enjoyed so much I pulled them out for comment:

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But while Washington has been preoccupied with stimulus and
bailouts, another, equally important issue has received far less
attention — and the resolution of it is far more uncertain. What will
happen once the paddles have been applied and the economy’s heart
starts beating again? How should the new American economy be remade?
Above all, how fast will it grow?

That last question may sound
abstract, even technical, compared with the current crisis. Yet the
consequences of a country’s growth rate are not abstract at all. Slow
growth makes almost all problems worse. Fast growth helps solve them.
As Paul Romer, an economist at Stanford University, has said, the choices that determine a country’s growth rate “dwarf all other economic-policy concerns.”

This is an underlining issue that isn’t getting enough attention from the media. The US has to grow significantly to recoup the demands this economic crisis has produced. Growth, as generated through productivity gains and efficiencies, can allow for higher income levels and thus higher tax intake (to pay off the debt). This is without increasing the tax percentage.
Over the last 10 years the US productivity levels have been good but the pay out hasn’t been distributed evenly. The upper income brackets have absorbed it. One reason for this is the threat of off shoring of work that the middle class has performed historically.
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Well before the housing bubble burst, the big productivity gains brought about by the 1990s technology boom seemed to be petering out,
which suggests that the Internet may not be able to fuel decades of
economic growth in the way that the industrial inventions of the early
20th century did. Annual economic growth in the current decade, even
excluding the dismal contributions that 2008 and 2009 will make to the
average, has been the slowest of any decade since the 1930s.

I like this part and I associate it with this illustration from Paul Krugman:

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In the early 1980s, an economist named Mancur Olson developed a theory
that could fairly be called the academic version of Rahm’s Doctrine.
Olson, a University of Maryland
professor who died in 1998, is one of those academics little known to
the public but famous among his peers. His seminal work, “The Rise and
Decline of Nations,” published in 1982, helped explain how stable,
affluent societies tend to get in trouble. The book turns out to be a
surprisingly useful guide to the current crisis.

I just wanted to bring attention to this work. In it is the idea of Special Interest Groups and the power they come to yield, especially at the detriment of others.

Speaking of special interests, here are some stats:

  • 8 Major League ballparks have financial-services names as a tie in
  • More students at Princeton enrolled in Finance than any of their traditional engineering programs
  • In the 1970s and 1980s financial-services companies accounted for 15% of corporate profits in the US
    • Only 18 months ago the financial-services share of corporate profits rose to 27%

——————————-

“In a crisis, there is an opportunity to rearrange things, because the status quo is blown up,” Frank Levy, an M.I.T.
economist and an Olson admirer, told me recently. If a country slowly
glides down toward irrelevance, he said, the constituency for reform
won’t take shape. Olson’s insight was that the defeated countries of
World War II didn’t rise in spite of crisis. They rose because of it.

Starting with a clean slate provides so many options. The US was once known as the country that didn’t hold anything sacred. It would build something up and tear it down to build something else. But at some point that stopped happening. I’ve blamed the financial tool called Cost/Benefit analysis in other posts. It obscures the real advantages of starting over because the costs don’t consider opportunity lost well enough. To change fundamental problems a clean slate is essential.

But England responded to their dire standing in the world by electing Margaret Thatcher. She took dramatic steps to right the ship.

In the 30 years since her election, England has grown faster than Germany or Japan.

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a trip from Boston to Washington, on the fastest train in this country,
takes six-and-a-half hours. A trip from Paris to Marseilles, roughly
the same distance, takes three hours — a result of the French
government’s commitment to infrastructure.

I just love that stat. It takes more than twice as long in the US, the place where only the strong survive.
——————————-

Spending by the private sector hasn’t changed much over time. It was
equal to 17 percent of G.D.P. 50 years ago, and it is about 17 percent
now. But spending by the government — federal, state and local — has
changed. It has dropped from about 7 percent of G.D.P. in the 1950s to
about 4 percent now.

In this same time Consumer spending rose to 70% from 67%. That doesn’t leave much wiggle room. But to comment on the 4% of government, maybe I just have revisionist history, but those times seemed to have many public works projects. Building dams, bridges, roads, canals, power grids, schools, and airports were common happenings. Now you get some road repairs, asbestos removal from schools and that is about it. No one wants their taxes to go up, so rationalizing these improvements is increasingly difficult. And the appetite for hearing about how the future will benefit seems to have dimmed.
——————————-

Later, the Defense Department developed the Internet, which spawned AOL, Google
and the rest. The late ’90s Internet boom was the only sustained period
in the last 35 years when the economy grew at 4 percent a year. It was
also the only time in the past 35 years when the incomes of the poor
and the middle class rose at a healthy pace. Growth doesn’t ensure
rising living standards for everyone, but it sure helps.

The illustration above shows the middle class gains with a little dip on the right hand side. I also think the internet impact is understated in this paper. Although the economy is currently in a funk, the internet is still evolving and can still generate growth companies and industries. Maybe if more people were graduating with software engineering degrees in the US…
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Green jobs are seen as a growth avenue by the President, but he faces some criticism for the cost, especially as related to the cap and trade idea of carbon.

Various analyses of Obama’s cap-and-trade plan, including one by Stavins,
suggest that after it is fully implemented, it would cost less than 1
percent of gross domestic product a year, or about $100 billion in
today’s terms. That cost is entirely manageable. But it’s still a cost.

I’ve already said it, but why do start up costs, which every past, present, and future installation incurs, outweigh endevearors that have such great potential… oh yeah, special interest groups. They don’t want to lose their cash cow.
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These stats are truly revealing. Especially when you think about what gets mentioned and what doesn’t.

Surprisingly, the debt that the federal government has already
accumulated doesn’t present much of a problem. It is equal to about $6
trillion, or 40 percent of G.D.P., a level that is slightly lower than
the average of the past six decades. The bailout, the stimulus and the
rest of the deficits over the next two years will probably add about 15
percent of G.D.P. to the debt. That will take debt to almost 60
percent, which is above its long-term average but well below the levels
of the 1950s. But the unfinanced parts of Medicare,
the spending that the government has promised over and above the taxes
it will collect in the coming decades requires another decimal place.
They are equal to more than 200 percent of current G.D.P.

So healthcare is vital and it isn’t being ignored. Peter Orszag has increased his healthcare analyst staff to 50 in the Congressional Budget Office. The reason:

Surprisingly, the debt that the federal government has already
accumulated doesn’t present much of a problem. It is equal to about $6
trillion, or 40 percent of G.D.P., a level that is slightly lower than
the average of the past six decades. The bailout, the stimulus and the
rest of the deficits over the next two years will probably add about 15
percent of G.D.P. to the debt. That will take debt to almost 60
percent, which is above its long-term average but well below the levels
of the 1950s. But the unfinanced parts of Medicare,
the spending that the government has promised over and above the taxes
it will collect in the coming decades requires another decimal place.
They are equal to more than 200 percent of current G.D.P.

It is important to figure out what processes work better for the patient, the doctor, and the system as whole. To do this it is good to compare results and practices.

Seltzer told me that big-spending doctors typically explain their
treatment by insisting they have sicker patients than their colleagues.
In response he has made charts breaking down the costs of care into
thin diagnostic categories, like “respiratory-system diagnosis with
ventilator support, severity: 4,” in order to compare doctors who were
treating the same ailment. The charts make the point clearly. Doctors
who spent more — on extra tests or high-tech treatments, for instance —
didn’t get better results than their more conservative colleagues. In
many cases, patients of the aggressive doctors stay sicker longer and
die sooner because of the risks that come with invasive care.

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Earlier in this post I mentioned the threat of off shoring jobs as a reason for income inequality. The reason the threat is real is mainly because India and countries like it (not China) concentrated very heavily on education after it broke with countries like England. It stayed with it even when the financial returns weren’t there. Well, their investment is now paying off. And their timing couldn’t be more perfect. Here is why:

Not only did mass education increase the size of the nation’s economic pie; it also evened out the distribution. The spread of high schools — by 1940, half of teenagers were getting a diploma
— meant that graduates were no longer an elite group. In economic
terms, their supply had increased, which meant that the wage premium
that came with a diploma was now spread among a larger group of
workers.Sure enough, inequality fell rapidly in the middle decades of the 20th century. (view illustration above again)
But then the great education boom petered out, starting in the late 1960s.
Between the early 1950s and early ’80s, the share of young adults
receiving a bachelor’s degree jumped to 24 percent, from 7 percent. In
the 30 years since, the share has only risen to 32 percent. (for 30 years it rose 17% then the subsequent 30 saw an increase of 8%)
For the first time on record, young men in the last couple of decades haven’t been much more educated than their fathers were.
The last 30 years, when educational gains slowed markedly, have been years of slower growth and rising inequality.
In recent decades, as the educational attainment of men has stagnated,
so have their wages. The median male worker is roughly as educated as
he was 30 years ago and makes roughly the same in hourly pay. The
median female worker is far more educated than she was 30 years ago and
makes 30 percent more than she did then.

Different programs have come in to change this trend with varying degrees of success. One the article highlighted is called Promise in West Virginia. The idea is to provide scholarships to State Univeristies to students who attained certain high school grades and test scores. This program improved on other inefficient ones because it required the  students to complete their college education in 4 years. It has since implemented a condition to require 4 year time frames in order to receive the funding

Judith Scott-Clayton, a young economist who analyzed the program, concluded
that it had raised the on-time graduation rate by almost 7 percentage
points in a state where many colleges have a graduation rate below 50
percent.

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I like this segment as the finish.

The American economy didn’t simply grow rapidly in the late 1940s,
1950s and 1960s. It grew rapidly and gave an increasing share of its
bounty to the vast middle class. Middle-class incomes soared during
those years, while income growth at the very top of the ladder, which
had been so great in the 1920s, slowed down.

About benleeson
My name is Ben Leeson. I currently work for a large financial company in IT. I went to school at Marist College in Poughkeepsie, NY. I graduated with a B.S. in Business Administration concentrating in HR. Professor William Brown taught me and I enjoyed his classes; even acquiring an appreciation for just about all things HR. I didn’t pursue a job in that field after college but I’ve kept up with it. This blog will further my fascination with all things HR. I hope to grow my knowledge of the area through thoughtful writings and spirited feedback. I will attempt to have a fairly routine style so anyone reading can come to expect certain segments. Please excuse my incorrect grammar and occasional misspelling.

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