Monday, June 27, 2011

Limits of Tax Cuts

Harry Graver looks at some state-by-state unemployment numbers and finds that low taxes are not the only factor for economic growth:
For example, Nevada, leading the nation in unemployment, has the fourth best tax environment, according to the Tax Foundation. Of the states without an income tax (nine in total), six have lower unemployment than the national average (Alaska, New Hampshire, South Dakota, Texas, Wyoming), two are roughly keeping the national average (Tennessee and Washington) and two are above (Florida and Nevada). Of the seven states with a flat income tax, three are at the national average, three are below, and one (Michigan) is above.
As Graver rightly notes, economic growth depends upon a vast range of factors---including human capital, natural resources, infrastructure, and regulatory policies. Pro-growth tax policies can be helpful but they are not sufficient for economic growth.

Tuesday, June 21, 2011

Diminished Expectations

Many political analysts are focusing on the consequences of the poor economy for Barack Obama's re-election chances. High unemployment rates and an economy limping along (with a few spurts from massive deficit spending) are hardly propitious circumstances.

Yet these troubles have much deeper roots. According to government calculations, we have been mired in an anomalously extended period of poor economic growth since 2001. Many writers have focused on stagnating middle-class incomes, but looking at GDP numbers tells a similarly disappointing story. Since 2000, GDP growth has lagged well below historical averages. Based on Bret Swanson's calculations, GDP growth from 2001 to 2010 averaged only 1.6%; GDP growth averaged 3.5% from 1947 to 2000. No decade since the 1930s has shown worse average economic growth.

The fact that the economy suffered a huge setback in 2008 and 2009 might skew the averages for the 2000s down, but not by that much. Even before the most recent recession, economic growth still lagged far behind historical precedent. The boom times of the 2000s would be seen as hum-drum in earlier decades.

Here's an overall view of the growth of the American economy since 1930, with numbers drawn from the federal Bureau of Economic Analysis:

Now, to close up on the past three decades:

During the Bush years, 2004 was the only year when GDP growth exceeded the average growth rate of 1947 to 2000, and that was only by a fraction of a percent (3.6% vs. the average 3.5%). With 3.1% growth, 2005 was the only other year where economic growth exceeded 3%.

By way of contrast, there were only 2 years during the Clinton presidency when growth was less than 3% (2.9% in 1993 and 2.5% in 1995). After 1982, Reagan's presidency never witnessed any economic growth rate less than 3%. One-termer George HW Bush had as many years when the economy grew over 3% as his two-term son.

Perhaps an even starker piece of economic spin: until 2000, almost every president since Franklin D. Roosevelt saw multiple years when the economy grew faster than 4% (Bush 41 being the only exception). We have not witnessed that kind of growth in almost twelve years.

Under an extended era of the lowest top marginal tax rates since 1932 (with the exception of the brief period between 1988 and 1992),* we have also seen the most protracted period of economic stagnation since the Great Depression. Whatever the other implications of this fact, it does suggest that tax cuts alone will not be enough to restore the health of the American economy. Tax cuts could be part of a plan for economic renewal, but not the plan itself.

Nor is cutting spending an easy panacea. Federal spending as a percentage of GDP was higher during the Reagan administration than it was during the quiet stagnation of 2001-2007. Again, spending cuts may be part of the solution for our economic travails (government spending as a percentage of GDP was lower in the 1950s and 1960s), but they are not the solution itself.

The implications of this diminished growth are significant for the national body politic. The modern American state, as understood by presidents from Roosevelt to Reagan, is based on the marriage of strong economic growth and generous social insurance. Social Security, Medicare, unemployment insurance, and so forth are the privileges of a wealthy society, and, properly calibrated, they can contribute to this wealth. The ability of the United States to project martial force across the globe and to take a prominent role in the community of nations is also predicated upon national wealth.

Our national finances especially show the strain of this slow growth. At least half of our current deficit is due in some way to the poor economy, and economic stagnation imperils many of our leading social insurance programs. Moreover, many deficit reduction plans on both the left and the right assume economic growth that well outpaces that of the past decade: if growth doesn't improve, we'll need an army of chainsaws to begin to approach fiscal sustainability.

If the next twenty years see the same kind of anemic economic growth as the past ten, any reforms to "save" Social Security and Medicare will have a huge portion of pain. Those programs will become shadows of themselves, as the American economy is crippled with stagnation. A strengthened economy, on the other hand, would likely make the reforms of these programs much less painful. For example, while the trustees of Social Security estimate that the retirement program will exhaust its trust fund some time around 2030 under (comparatively) slow growth expectations; if average GDP growth reaches close to 2.9% per year, Social Security trustees estimate that the program's trust fund will be in the black for the foreseeable future. Reforms might need to be made eventually (especially for Medicare), but increased growth would provide a cushion for them.

This current turmoil provides an opportunity. Societies can gain new vitality by recognizing the limitations of the current status quo and by adapting to changes in the broader political-economic environment. Some might suggest that the United States must or should accept diminished growth. But it seems to me that, after all the storms this nation has weathered, there is no reason to give up on the American project's hope for popular enrichment. After all, Americans in the late 1970s faced an economic paradigm that had outlived its usefulness and an increasingly fractured geopolitical order. But, as Jim Manzi has explored, Ronald Reagan, working with Democrats and fellow Republicans, was able to forge a new consensus that helped lead to a renewed nation. We can cope with our troubles, if we have the imagination to challenge old assumptions and the daring to take new paths.

The Democratic stimulus has failed to meet expectations, and even a return to the conditions and policies of 2001-2007 would be a surrendering of the tradition of American economic growth. There is both an opportunity and need for Republican and conservative leaders to rethink contemporary orthodoxies. Reaganomics, extended past its time, becomes a zombie: rather being a set of policies of vital engagement, it degenerates into dogma and rigid ideology. The world and nation are not the same as they were in 1981. Conservative economic policy needs to recognize that fact.

*Moreover, federal revenue as a percentage of GDP was higher during much of the Reagan, Bush I, and Clinton administrations than during the period since 2000. This lowered revenue may be partly correlated with post-2000 economic stagnation.

Wednesday, June 8, 2011

Globalism, Neo-Mercantilism, and the US

Polemical assertions in a contrarian key

The American economy has entered a period of turmoil unlike any it has seen in decades. The solutions, to me at least, do not seem radically easy or clear, but the first step in finding a solution is to clarify our language in talking/thinking about the problem. If we are serious about finding ways of addressing some of the serious structural problems of the economy, we must be willing to offer a thoroughgoing analysis of the whole economic order.

The trends of "globalization" have had a huge impact on the American economy in the past twenty years. Yet I think there have been some confusions in our contemporary discussions of globalization, so here are a few* (mildly polemical) challenges to contemporary assumptions, focusing on trade and manufacturing policies.

The decline of manufacturing is not like the decline of agriculture. The shrinking manufacturing sector is often mistakenly analogized to the drastic drop in the number of Americans working in agriculture from 1870 to 1950. The current trade deficit, driven by manufactured goods, disproves that analogy. The story of the Industrial Revolution in America is not the replacement of agriculture by manufacturing but the incorporation of agriculture into a new, broader economy. Throughout industrialization, Americans still produced enough food to feed themselves and those in other nations. For the most part, we still do produce enough food to do so. The number of Americans working in agriculture has declined drastically, but, due to increases in productivity, the output has only increased. While it is true that productivity has increased in manufacturing and that automation has cut down on the number of needed factory jobs (the US still does produce a lot), such an increase in efficiency does not tell the whole story of the decline of American industry: if it did, we would still be producing huge quantities of shoes, computers, tools, and countless other items. The fact that factories are closing down while our trade deficit has skyrocketed over the past twenty years is a sign of how different the fates of manufacturing and agriculture have been.

We do not live in an era of free trade. (Or: Cheap imports do not equal free trade.) Some of those who criticize the reigning trade hegemony counterpose "fair trade" to the dominant "free trade." This criticism is mis-aimed. We may not have "fair trade," but we certainly don't have "free trade," either. The current global trade order is not free trade but actually a species of neo-mercantilism. Many developed nations have opened up their economies to an influx of goods from poorer, often autocratic, mercantilist countries. Most importantly for the case of "free trade," there is often a great disparity in openness between trading partners. These disparities are especially stark for the United States. US policymakers have in a variety of ways unilaterally opened up the American market while allowing other countries to stack the deck against US businesses and workers. We are told that this flood of imports is "free trade" when, in fact, numerous barriers are put up against American products.

Consider our relationship with the People's Republic of China, our second-largest trading partner. It would be a stretch to declare that this relationship is "free trade." The PRC manipulates its currency as a de facto tariff against US goods and piles further outright tariffs on US goods. The price of entry into the Chinese market is often, in part, a joint-venture agreement, in which a foreign company provides intellectual property and other advanced technologies while local Chinese contacts supply workers and land for factories. Mandating that businesses open up factories in a nation in order to have access to it is not exactly classical free trade.

These agreements are very often deleterious to US workers and US companies. The office-supply manufacturer Fellowes, for example, opened up a joint-venture manufacturing facility in the PRC. For a few years, this factory led to some considerable profits for Fellowes. In August 2010, this stream of profit came to a sudden end, when Fellowes's Chinese partner moved to take possession of the facility:
The dramatic moment was in early August 2010, when Zhou, under the aegis of Shinri, blocked the gates of the joint venture facility with security guards and trucks, preventing people from going in and goods going out, effectively shutting down production. Shinri expelled and confined the managers, moved funds from the joint venture to a Shinri-controlled bank account, sent packing the 1,600 joint venture employees, and at night, drove a truck into the facility and stole Fellowes-owned injection molding tools, some of them weighing several tons.
Fellowes's former partner now has taken possession of millions of dollars of equipment and technological know-how---all without paying a cent (or a yuan) for it. The Chinese government appears to be giving cover to what many would consider theft. Fellowes is but one of many companies that have had their investments and technologies confiscated by the politically connected of the PRC. Without a basic respect for property rights, there can be no capitalistic free trade.

Trade policy does not happen in a vacuum. In part to cope with the throes of industrialization, the United States passed various worker and consumer protections in the twentieth century: regulations for environmental protections, worker safety, wages, and other areas. When the US economy was bounded by tariffs, these regulations helped ensure that an increase in industrial production went along with an increase in the standards of society. However, in our new era of neo-mercantilist globalism, the role of these standards has become considerably more troubled for US workers.

Consider the case of environmental standards. As the decades have gone on, our environmental standards have become increasingly invasive and onerous. Government more and more regulates chemical usage, energy sources, waste disposal, land use, and other aspects of environmental production that affect industrial policy. The presumed beneficiary of these regulations is the public at large through the protection of the environment. Our laws tell companies that, if you manufacture in the USA, you must face numerous obligations and pay increased costs due to all these regulations. Our trade policies, however, tell those very same companies that, if they manufacture their products abroad, they need not worry about any US environmental or worker regulations. One might wonder how the environment is helped when US policies incentivize heavy industry leaving a country with some environmental regulations (such as the USA or many European countries) and going to a country with far fewer (such as the PRC or India).

I recognize that economic prosperity is often correlated with an increase in environmental protections, so a wealthier India may eventually introduce further environmental protections. But there seems to be an often radical disproportion between how politicians talk about environmental policies and what our trade policies actually encourage. The debate over "global warming" reveals this disproportion at the height of its absurdity. In the name of "global warming," the federal government has banned the classical incandescent lightbulb in order to cut down on carbon emissions; meanwhile, through trade policies, it has encouraged a gross increase in carbon emissions through encouraging manufacturing to move to nations with radically less efficient and more polluting forms of industrial production. "Global warming" advocates often stress that the world is at a tipping point for carbon emissions and forecast the deaths of potentially hundreds of millions of people if carbon patterns do not change right now. Many of these same advocates, however, seem to see no problem with the continued destruction of American manufacturing. A "cap-and-trade" scheme or carbon tax, without any attention to broader global industrial questions, would do little for American employment or lower carbon emissions. If environmentalism is more than NIMBYism and self-righteousness, we need to consider the effects of our current trade policies upon domestic policies.

To acknowledge (or to wonder about) the limits of neo-mercantilist globalism is not to embrace isolationism; on the contrary, this kind of critique opens up further ways of engaging with the broader community of nations. It would be foolish to turn our economic or political backs on the world, and a tariff war would very likely create more problems than it would solve. But it would equally foolish to allow our thinking to be frozen by hazy myths and knee-jerk assumptions.

The theory of free trade does have much of value to it. Under the right conditions, trade between nations does lead to a rising tide for all boats. There have also been many benefits to the current neo-mercantilist order, though some of the implicit tensions of this order have risen to the surface during the last few years of economic turmoil. Yet, living within this order, the United States must find ways to renew its competitive edge and successfully compete with mercantilist powers. It might also, with its allies, consider how best to revise this order so that it better advances the ideals of freedom and prosperity.

*UPDATE: A few points have been moved to a forthcoming discussion.

Friday, June 3, 2011


Wilson, Roosevelt, Carter, Reagan, Clinton

In the twentieth century, those were the five men who defeated a sitting president on election day in November.

One immediate fact worth noting: they were almost all two-term presidents (or, in Roosevelt's case, over two terms). Jimmy Carter is the only exception, and he has the unique distinction of defeating a sitting president (Ford) who was never elected to either the office of the presidency of the vice presidency---and even that victory was very marginal. So in some ways he's the exception that proves the rule.

All five were governors, and Reagan and Carter were the only non-sitting governors at the time of their electoral victories.

At least three of these men had pivotal presidencies. Riding the high tide of Progressivism, Woodrow Wilson expanded federal powers and charted the nation's entry into World War I and the resulting peace. Franklin Delano Roosevelt in many ways created the modern regulatory state and the imperial presidency; after recasting the federal government during the Great Depression, his administration laid the groundwork for the new global order in the aftermath of World War II. Ronald Reagan drew on simmering resentments against this modern regulatory state in order to revise it, and his foreign policies helped break a Cold War that had dominated global politics for decades. It is perhaps too close in time to evaluate the ultimate significance of Bill Clinton's presidency.

These facts would suggest that, if a Republican is victorious against Barack Obama in November 2012, he or she could have a chance at playing a historic role.

Having the presidency adds a kind of grandeur to a candidate, so a candidate who defeats a sitting president often demonstrates a kind of broad appeal to the public. Most of those men who have beaten a sitting president have powerful visions for reforming government and the capacity to accomplish at least some part of these visions. For the most part, these men were also able to articulate a compelling narrative for a way forward.

The political pendulum has swung very wildly over the past few cycles, and the dynamics of the past have, obviously, only a limited application for the dynamics of the future. But sometimes precedent can have its wisdom.

Wednesday, June 1, 2011

Romneycare: A Shield from Mediscare?

Democrats seem to have latched onto an electoral strategy for the 2012 campaign. With an economic slump the worst in many a decade, ballooning deficits, the Obamacare debacle, a foreign policy that has not exactly met campaign promises, and a restless populace, Obama and his allies have hit on a three-syllable campaign slogan: Medicare.

The Congressional special election in NY-26, a rout for Republicans in a GOP-heavy district, has only fueled Democratic speculation that they can ride Mediscare tactics to victory in 2012. (Yes, a faux-Tea Partier in the race may have influenced the results, but Republican Jane Corwin was leading in polling before Democrat Kathy Hochul went full Mediscare.)

In a striking turn of events, Mitt Romney may find Romneycare more of an electoral advantage than a headache: this legislation could insulate him from Mediscare tactics. Many other Republican candidates (such as Michele Bachmann) voted in favor of Paul Ryan's budget or have endorsed it; Tim Pawlenty has quibbled with the budget but has said he would sign it under certain conditions. While Romney has said that he is "on the same page" as Ryan, he has not endorsed Ryan's budget and has said that he will propose his own plan for Medicare reform.

The fact that, under Romney's watch, Massachusetts implemented a set of health-care policies that gives coverage to over 98% of state residents can protect him from the charge that he wants to finance more tax cuts by leaving seniors out in the cold. By not having endorsed Ryan's plan, Romney can agree with it in the spirit of market reforms without having to defend its particulars.

This combination could blunt one of the Democrats' biggest knives. Imagine the following exchange from a presidential debate in the fall of 2012:
BO: The Ryan budget, overwhelmingly backed by Congressional Republicans, would end Medicare as we know it for all those under 55, who would be left with vouchers to purchase insurance from private companies. These vouchers would only rise in value at the rate of inflation, and health-care costs have risen faster than inflation for decades. Governor Romney and the Republicans want to end our nation's decades-long commitment to care for the elderly. They would hold our seniors hostage to the whims of private insurance companies.

MR: Mr. President, while I have my differences with the Ryan budget, let's face the facts. When I was governor of Massachusetts, I crafted legislation that ensured health-care coverage for over 98% of state residents. I worked across the aisle with Republicans and Democrats to forge a compromise to expand health-care to all citizens of the Commonwealth. While this compromise was not perfect and cannot be completely adapted to the federal level, it was a step in the right direction of accountability and fairness. Rather then putting health-care under central government control, it unleashed the power of the market to expand health-care access.

Under your health-care proposal, Mr. President, over $500 billion will be cut from Medicare over the next decade. Under your plan, Mr. President, a fifteen-member panel will set price controls for Medicare. Your plan forces a one-size-fits-all mandate model on all fifty states. You're already cutting Medicare. My record shows that I have not and I will not expand health-care coverage by taking away from our seniors. I believe that market-oriented reforms can eliminate waste and cut soaring costs while also improving care.

Romneycare can give Romney cover to push for market-oriented reforms. If he is a crypto-socialist, as some of his detractors allege, he can't also be an anarcho-capitalist ready to kill off grannie. Romney can attack Obamacare's cuts to Medicare while also deflecting the charge that he is a heartless Medicare-cutter himself. Moreover, Romney can distinguish between Obamacare and his own health-care reforms: on Medicare cuts, the federal mandate, centralized government control, and other features.

As only Nixon could go to China, perhaps Romney is uniquely positioned to advance market reforms of Medicare.

(Disclaimer: the debate over entitlement reforms is quickly evolving, so the dynamic noted here might not be found even a few months from now.)

(Crossposted at FrumForum)