Over the past couple decades, "globalization" in the United States has meant the rise of the Finance, Insurance, and Real Estate (FIRE) sector. Meanwhile, many other parts of the American economy have been hollowed out. Manufacturing jobs have been slashed in part due to automation but also due to a global trade system in which various international players are afforded many opportunities to subsidize their industries while the US undermines its own domestic manufacturing sector. The technology sector has witnessed its own share of outsourcing and offshoring, and job opportunities for US-born workers are also undercut by many companies' use of temporary worker visas (such as the H1B visa). Further undercutting domestic labor, a flood of illegal workers has placed more pressure on the wages and employment opportunities of low- and semi-skilled workers. Under these conditions, the US growth rate has substantially declined since 2000; even the high point of the business cycle during the Bush years was well below that of any cycle since World War II, and the economic policies of the Obama administration have proven disappointing by the administration's own standards. So where to go from here?
In 1791, facing a debt-burdened new nation with relatively little domestic industry, Alexander Hamilton prepared his "Report on Manufactures," which proposed a system of tariffs, subsidies, and domestic investments as a way of ensuring future economic vitality and industrial independence for the United States. The first Secretary of the Treasury's report provided in many respects the originating germ for the economic policies of the Whig and later Republican parties of the nineteenth century. Politicians like Henry Clay and Abraham Lincoln and economists like Henry Carey advocated for an "American System" that encouraged the development of a skilled population with economic opportunity and industrial development. Some variant of the "American System" drove US economic policy throughout much of the nineteenth century until the middle of the twentieth. During this period, the United States accumulated massive wealth. This wealth in turn provided the financing for many of the social programs of the twentieth century.
The "American System" has the following insight: the American economy cannot flourish over the long term with merely the financial and resource extraction sectors. Resource extraction can fuel economic growth, and a sophisticated financial system also seems necessary for a modern economy to work at peak levels. But the best gasoline and top-notch engine oil will not make a rusty jalopy into a vehicle fit for the Indy 500. Hamilton and many of his allies were favorable to banking interests but also realized that an economy based solely upon banking would eventually harm those very financial interests.
We might restate this insight and instead note that the greatest form of capital is not simple currency or resources but human capital. This human capital includes both various social institutions (such as a system of laws, cultural values, etc.) and the accumulated knowledge and talents of individuals. It depends upon the belief that one's efforts will likely lead to some fruition.
American prosperity was built upon the nurturing of human capital within the "American System." The evolving system of US laws encouraged prosperity by allowing innovators and producers to reap the rewards of success. The social safety net of private charity and government institutions helped ensure that a person born into unlucky circumstances could still enrich his or her talents. Universal education and literacy presented the young with the tools to train their minds and discover the world of learning. Investment in infrastructure---from roads to canals to railways to highways---allowed for a more efficient transfer of capital, commodities, products, and knowledge. Tariffs gave an incentive for American residents to try new manufacturing experiments. The close proximity of manufacturing helped spur on new innovations: working with day-to-day production, Americans were more likely to realize how to do things better, smarter, and faster. Moreover, the growing cost of labor encouraged further innovation in technology.
It is precisely now that we need a return to the investment in human capital. As Andy Grove, former head of Intel, has argued in recent years, top innovation often goes hand in hand with direct involvement in production. Whether the United States can over the long term remain a world leader in innovation after having exported industrial production remains to be seen. We need to defend forthrightly American interests abroad. It may no longer be enough to let foreign countries discriminate against American products and violate intellectual property laws even as the US opens itself completely to their products. (And encomiums about the virtues of "free trade" miss the point that the current trade order is nothing like free trade or the free market.) Trade policy must move beyond cheap imports uber alles.
We need an education system centered on skills and real learning---not on meaningless test scores. We need to inspire hope in our youth, creating opportunity for both those with and without college degrees. Throughout the 1980s and 1990s, many opportunities for workers with only a high school degree declined. The 2000s have witnessed the closing off of opportunities for many with college degrees. If young Americans will see no profit from developing certain skills, these skills are less likely to be cultivated. As a recent Council on Foreign Relations study has shown, almost all the increase in the number of jobs from 1990 to 2008 occurred in non-tradable jobs, which often pay lower wages than tradable jobs. So one could argue that, in some ways, the current flavor of globalization has made the US economy less competitive, as it encourages the growth of lower-paying, and often lower-skilled, jobs.
We need a sensible policy for infrastructure investment. Energy policy is a key aspect of this investment. The easy transfer of goods and people has proven especially valuable in a nation as vast as the United States, and the new ease of transporting information has unleashed the potential for considerable innovation.
I do not here intend to lay out a complete menu of policies that are necessary for the restoration of American economic growth. Yet it is important to think about the overall contours of a public policy aim. The precise policy mechanisms of the Hamiltonian "American System" might be outdated, but its basic notion is one with some merit. We must shift from privileging extraction to rewarding talent, effort, and innovation. The combination of market rewards and public investment created an economic order of profound vitality, opportunity, and prosperity. As the American economic engine continues to sputter, it is time to engage in a thoroughgoing renewal---in part, by examining the wisdom of the past.
Showing posts with label growth. Show all posts
Showing posts with label growth. Show all posts
Wednesday, May 30, 2012
Wednesday, February 1, 2012
CBO: Promise and Peril
The recently released Congressional Budget Office report on the budget for the next ten years has what might at first seem like good news for the US fiscal order. It estimates that, by 2015, the national deficit would fall to under 2% of the GDP, often hovering around 1% until 2022 (when the CBO projections stop). If one subtracts net interest payments on the national debt (which the CBO estimates would increase considerably after 2014), the US federal government would often be running surpluses that would, by 2018, reach around 1% of the federal budget.
The current federal deficit runs at around 8.7% of GDP, so a decline to 1% of GDP would be a big improvement. Moreover, the size of the federal debt relative to the national economy would begin to decline around 2013, so the United States would, in many respects, be on a firmer fiscal footing. By 2022, the debt held by the public would be only 62% of the national GDP (compared to the projected 75.1% of GDP in 2013). That 62% figure would be higher than that of any year during the 1952-2009 period, but the trend is heading in a good direction.
However, there's some bad news: that CBO projection depends upon a number of assumptions, including improved economic growth, no "doc fixes" for Medicare, a decrease in defense spending, and the expiration of the Bush tax-cuts.
On growth, the CBO has little hope for the next few years: it projects that real GDP will grow 2% in 2012 and a mere 1.1% in 2013. It does hope for a considerable increase in growth in the years after 2013, however. It assumes that real GDP will grow an annual average of 4.1% in the 2014-2017 period, settling down to a 2.5% average rate of increase between 2018 and 2022. Those growth numbers are possible, but they assume a much stronger economy than the US has had since 2000. If the economy does not reach this rate, the deficits would likely be even worse. And if the economy turns around faster and maintains a stronger rate of growth after 2017, we could see the deficit shrink even more due to increased tax revenue and less spending on various income-stabilization measures.
The CBO baseline projection assumes that defense spending will fall from 4.7% of US GDP in 2012 to 3% of the GDP in 2022. Since World War II, defense spending has never been less than 3% of the GDP. It also assumes that nondefense discretionary spending will fall from 4.3% of GDP to 2.6% of GDP. Under this standard, discretionary spending would fall to the smallest proportion of the national economy seen in decades. Will that happen? If not, add some more to the deficit.
If payment rates for Medicare do not fall at the rate they are currently scheduled, the CBO estimates that over $300 billion would be added to the federal debt over the next ten years.
The CBO baseline assumes that revenues will climb considerably after 2012; they would jump from 16.3% of GDP in 2012 to 18.4% of GDP in 2013 to 20% of GDP in 2014. They would stay above 20% of GDP until 2022. Part of this increased revenue would come from an improved economy, but part of it would also come from higher taxes. The CBO projection assumes that the Bush/Obama tax-cuts will expire at the end of 2012 and that the Alternative Minimum Tax will not be indexed to inflation after 2011. Under this scenario, personal income taxes would climb from 7.4% of GDP in 2012 to 11.5% of GDP in 2022, a historic high.
Based on these projections, extending the Bush tax-cuts would add $2.8 trillion to the national debt over the next decade. Keeping those tax-cuts and indexing the AMT to inflation would add $4.5 trillion to the debt over the next decade. Those numbers do not include the increased interest payments such an increased debt would also cause.
If CBO assumptions about increased revenue due to tax increases and certain spending cuts are not met, the seemingly rosy scenario of a declining debt burden relative to GDP does not take place. Under an alternative scenario in which these non-economic assumptions are not realized, deficit spending remains an average of over 5% of the national GDP and the debt burden would increase; publicly held debt would rise to over 90% of GDP by 2022. The CBO suggests that decreased tax revenues due to tax-cuts would be primarily responsible for this increase: the deficit caused by extending current tax policy alone would equal almost 3% of US GDP during many years.
It's possible that extending current tax policies could lead to new growth unanticipated by the CBO, though it should be noted that Bush's and Obama's tax policies have led to slower growth that the CBO projects during the 2014-2017 period and slower growth than was seen during the Clinton and Reagan presidencies.
The CBO has some interesting information about entitlement spending. Social Security spending is currently 4.8% of the GDP, and it is estimated to climb to 5.5% of GDP by 2022; it will stay around 5% of GDP until 2019. Medicare is estimated to climb from 3.7% of GDP to 4.2% of GDP over the next decade, while Medicaid will climb from 1.8% to 2.5% of GDP. So Medicaid is estimated to be the fastest growing entitlement over the next ten years.
The assumptions made here by the CBO suggest a radically different federal government than we're used to, one that taxes more and one that spends more on various mandatory domestic programs and less on defense and discretionary programs.
Increased growth with an improved employment picture may be one way of keeping some discretionary and military spending while also not having a much heavier tax burden. Growth seen during the Reagan or Clinton (or Carter or Nixon or Johnson) years could spur enough increased revenue (combined with some tax reform) to allow the government to continue to meet its obligations and not indulge in radical deficit spending. Some entitlement reform (especially regarding medical spending) might help bend the curve of government expenditures down. The CBO assumes that domestic discretionary spending will decrease as a percentage of GDP, and a rigorous approach to cutting waste and appropriately focusing federal energies would help ensure that necessary and advantageous discretionary spending will be kept.
This CBO report suggests that the US fiscal situation is not necessarily at DEFCON 1, but it also implies that the stagnation of the past few years is untenable for the nation's long-term fiscal future. Growth and reform will be necessary components of fiscal sanity. As they gear up for the 2012 campaign, Republicans would be wise to attend to these crucial details.
(Crossposted at the Huffington Post)
The current federal deficit runs at around 8.7% of GDP, so a decline to 1% of GDP would be a big improvement. Moreover, the size of the federal debt relative to the national economy would begin to decline around 2013, so the United States would, in many respects, be on a firmer fiscal footing. By 2022, the debt held by the public would be only 62% of the national GDP (compared to the projected 75.1% of GDP in 2013). That 62% figure would be higher than that of any year during the 1952-2009 period, but the trend is heading in a good direction.
However, there's some bad news: that CBO projection depends upon a number of assumptions, including improved economic growth, no "doc fixes" for Medicare, a decrease in defense spending, and the expiration of the Bush tax-cuts.
On growth, the CBO has little hope for the next few years: it projects that real GDP will grow 2% in 2012 and a mere 1.1% in 2013. It does hope for a considerable increase in growth in the years after 2013, however. It assumes that real GDP will grow an annual average of 4.1% in the 2014-2017 period, settling down to a 2.5% average rate of increase between 2018 and 2022. Those growth numbers are possible, but they assume a much stronger economy than the US has had since 2000. If the economy does not reach this rate, the deficits would likely be even worse. And if the economy turns around faster and maintains a stronger rate of growth after 2017, we could see the deficit shrink even more due to increased tax revenue and less spending on various income-stabilization measures.
The CBO baseline projection assumes that defense spending will fall from 4.7% of US GDP in 2012 to 3% of the GDP in 2022. Since World War II, defense spending has never been less than 3% of the GDP. It also assumes that nondefense discretionary spending will fall from 4.3% of GDP to 2.6% of GDP. Under this standard, discretionary spending would fall to the smallest proportion of the national economy seen in decades. Will that happen? If not, add some more to the deficit.
If payment rates for Medicare do not fall at the rate they are currently scheduled, the CBO estimates that over $300 billion would be added to the federal debt over the next ten years.
The CBO baseline assumes that revenues will climb considerably after 2012; they would jump from 16.3% of GDP in 2012 to 18.4% of GDP in 2013 to 20% of GDP in 2014. They would stay above 20% of GDP until 2022. Part of this increased revenue would come from an improved economy, but part of it would also come from higher taxes. The CBO projection assumes that the Bush/Obama tax-cuts will expire at the end of 2012 and that the Alternative Minimum Tax will not be indexed to inflation after 2011. Under this scenario, personal income taxes would climb from 7.4% of GDP in 2012 to 11.5% of GDP in 2022, a historic high.
Based on these projections, extending the Bush tax-cuts would add $2.8 trillion to the national debt over the next decade. Keeping those tax-cuts and indexing the AMT to inflation would add $4.5 trillion to the debt over the next decade. Those numbers do not include the increased interest payments such an increased debt would also cause.
If CBO assumptions about increased revenue due to tax increases and certain spending cuts are not met, the seemingly rosy scenario of a declining debt burden relative to GDP does not take place. Under an alternative scenario in which these non-economic assumptions are not realized, deficit spending remains an average of over 5% of the national GDP and the debt burden would increase; publicly held debt would rise to over 90% of GDP by 2022. The CBO suggests that decreased tax revenues due to tax-cuts would be primarily responsible for this increase: the deficit caused by extending current tax policy alone would equal almost 3% of US GDP during many years.
It's possible that extending current tax policies could lead to new growth unanticipated by the CBO, though it should be noted that Bush's and Obama's tax policies have led to slower growth that the CBO projects during the 2014-2017 period and slower growth than was seen during the Clinton and Reagan presidencies.
The CBO has some interesting information about entitlement spending. Social Security spending is currently 4.8% of the GDP, and it is estimated to climb to 5.5% of GDP by 2022; it will stay around 5% of GDP until 2019. Medicare is estimated to climb from 3.7% of GDP to 4.2% of GDP over the next decade, while Medicaid will climb from 1.8% to 2.5% of GDP. So Medicaid is estimated to be the fastest growing entitlement over the next ten years.
The assumptions made here by the CBO suggest a radically different federal government than we're used to, one that taxes more and one that spends more on various mandatory domestic programs and less on defense and discretionary programs.
Increased growth with an improved employment picture may be one way of keeping some discretionary and military spending while also not having a much heavier tax burden. Growth seen during the Reagan or Clinton (or Carter or Nixon or Johnson) years could spur enough increased revenue (combined with some tax reform) to allow the government to continue to meet its obligations and not indulge in radical deficit spending. Some entitlement reform (especially regarding medical spending) might help bend the curve of government expenditures down. The CBO assumes that domestic discretionary spending will decrease as a percentage of GDP, and a rigorous approach to cutting waste and appropriately focusing federal energies would help ensure that necessary and advantageous discretionary spending will be kept.
This CBO report suggests that the US fiscal situation is not necessarily at DEFCON 1, but it also implies that the stagnation of the past few years is untenable for the nation's long-term fiscal future. Growth and reform will be necessary components of fiscal sanity. As they gear up for the 2012 campaign, Republicans would be wise to attend to these crucial details.
(Crossposted at the Huffington Post)
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