Category: Political economy

University Industry Specialization

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There has long been a divide between liberal arts colleges, research universities and institutes of technology.  The gap between traditional four-year colleges/universities and commercial or technical schools generally remains. 

In a fifty year period of growing enrolments, our major public universities have become larger and more complex.  They have added colleges and majors.  They have increasingly focused on winning research dollars.  They have learned to compete for students.  They have nearly all adopted the same brand strategy focused on “academic excellence”.   The college ratings game essentially focuses on the ranking of entering student SAT scores.   To succeed, universities have improved their facilities, increased financial aid packages and developed programs that attract high SAT students.

State universities secure alumni and corporate funding so that they can compete with other highly rated schools.  State universities that were once positioned as teachers colleges, normal schools, agricultural and technical or urban universities all compete for the same academic rankings, investing in research labs, notable faculty and sports teams.  Some clever universities specialize in a few niche colleges like insurance, architecture, entrepreneurship or media.  They use brand excellence in a professional school or two as a substitute for higher rankings in the more prestigious arts and sciences.

Given the business world’s strong preference for industry specialization and experience, a more satisfying strategy for their students might be to specialize in a single broad industry.   Charter and magnet schools do this at the secondary school level.  Community/technical colleges often merge industry and professional skills into technical programs.  A few older colleges like agriculture still produce ag communications, ag business and ag engineering majors.

A university could adopt a broad industry like medicine, distribution, trade, communications, government/NFP, manufacturing, agriculture or financial services.  Professional and associate/technical degrees could be offered.   In addition, degrees in support fields like business, marketing, communications, finance, IT, engineering and science could be offered.  Courses could be developed to provide an industry overview, highlight industry firms, describe international opportunities and teach industry terminology. 

If state universities want to contribute to state level economic development, they could make an immediate and lasting impact by specializing by industry.

Framing Politics With a Ruler

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Peggy Noonan’s suggestion to use a 36 inch ruler to gauge right versus left in politics does help to explain the opposing views of tea partiers, Republicans and Democrats.  Noonan describes 0 inches as pure right and 36 inches as pure left (opposite of what you might expect).  She bemoans her perception that modern-day politicians negotiate between the 25 and 30 inch mark on the far left end of the ruler.  She asserts that tea partiers will try to move back to the 5 inch mark.

In politics, he who sets the framework usually wins the game.  Using American history since the agricultural 1770’s, urbanizing 1860’s, industrial 1920’s or depression 1930’s as a base, a case can be made that post-war politics and economics has been debated on the left end of the ruler, with a mixed economy government share of GDP at 20% and government spending/taxing share of GDP at 25-30%.  These shares of the economy double those of laissez-faire capitalism, the roaring twenties or the depression.  Noonan takes this long-run historical view of how the yardstick should be labeled.

Noonan is right in pointing out that politicians of both parties in a democratic system inherently seek to spend more money.  The rise in government spending in the Bush presidency after the unusual decline in government spending in the Clinton presidency (with Republican congress) is a modern reminder.  Tea partiers are right to have gut level concerns that government spending will continue to climb unchecked.  The trend in 2000-2008 was up.  Extraordinary banking and industry bail-out funds were piled on top of the stimulus spending for the Great Recession.  Health care and social security spending increases are expected in the next two decades.  Whether the various spending increases are justified or not, the trend is clearly up, without any clear countervailing force in Washington.

Those on the left might agree with the challenge to be faced, but they use a different scale to gauge left versus right, object to the accusation that they have driven up government spending, hold the Republicans responsible for inciting anger in the tea partiers and offer different long-run solutions.

If the scale is set between 100% individual, 0% government pure libertarianism versus 0% individual, 100% government pure socialism, the Democrats argue that the post-war game has all been played on the right (0-18 inch) side of the ruler.  Government share of GDP is 20%.  Government spending and taxes share of GDP is 30-35%, including all transfers.  This did not increase between 1960 and 2008.  The US tax burden at 27% of GDP is only 75% of the 36% average level for 30 developed countries.  Only Mexico, Turkey, Korea and Japan spend less than the US.  Total government spending in western European democracies is 40-55%.  Government spending did increase with the Vietnam War and Great Society policies, but was reduced by the Reagan revolution.  Government spending fell from 37.2% of GDP in 1992 to 32.6% in 2000. 

Democrats argue that their fiscal discipline was demonstrated in 1992 to 2000 when they balanced the federal budget and reduced the deficit, employing the “pay as you go” policy to force spending cuts to offset spending increases.  They point to Bush led Medicaid and defense spending increases as the cause of increased government by 2008.  They see the Bush tax cuts as redistribution to the wealthy and don’t see the overall tax-cut initiated economic growth claimed to increase net tax revenues.

Democrats argue that they have not purposely increased the long-run share of government in the economy.  They claim that the one-time investments/guarantees for the banking/auto industries were necessary for the whole economy, addressed issues that had grown for decades, will be partially recaptured and do not require continued funding.  Similarly, they pursued a moderate one-time Keynesian fiscal stimulus in response to a deep recession, just as was done by other governments of all parties in all countries for the last 60 years.  The stimulus spending lies between the 4.7% of GDP boost in 1982 and the 2.3% growth in 1992. Democrats argue that these actions are necessary and moderate and would have been undertaken by a responsible Republican successor to the Bush administration.

Democrats argue they are unfairly characterized as “big spenders” by the Republicans.  This simple accusation has stirred a populist response from “regular Americans”.  While Democrats have historically focused populist rage on big business and big banking, the Republicans and tea partiers have effectively used big government, Washington, elites, foreign countries and religions as targets, tying them to the Democratic Party.  Democrats argue that the monetarist, supply side, tax cut economic policies of the Republican Party since Reagan have been adopted for their populist simplicity and political effectiveness alone, further polarizing economic policy making.

Finally, Democrats have adopted part of the Republican play book in fundamentally looking to the private sector to drive the future economic growth required to support even the historic level of government spending.  The stimulus spending was partially focused on future industrial growth and infrastructure.  The banks and auto firms are returning to pure private ownership.  Small business lending and investment tax credits have become a focus.  Health care reform maintained private providers and insurers as the core of the system.  The costs of the war in Iran have been reduced.  A bipartisan group has been appointed to work on the Medicare/social security future.  Steps are being taken to promote exports.  A reduced public sector role for the mortgage industry has been proposed.  Obama and many Democrats have continued the pro-business approach used by Clinton.

On the other hand, Republicans can fairly point to steps taken by the Democrats that indicate a continued desire to “tax and spend”.  The stimulus bill benefited state government, construction and other Democratic interests disproportionately.  Health care reform achieved growth in government commitments without structural cost solutions.  Labor unions were given special treatment in the auto bail-out.  Fannie Mae and Freddie Mac’s roles were not touched in the banking reform.  The financial consumer protection agency smacks of unlimited and uninformed regulation.  The proposed increase in taxes for high earners is significant and is not coupled with structural spending reforms.  A second mini-stimulus has been approved and unemployment benefits have been extended to record lengths.

The current economic situation has raised the stakes for politics.  We should expect to see ongoing attempts to define the ruler and place the participants at marks that favor one group or another in the public eye.

Book Reviews

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I’m very busy in my new role with Tripp-Lite in Chicago.  I have published many book reviews on Amazon.com in the last 2 months, including:

Pontoon, Garrison Keillor

Pere Goriot, Balzac

The Limits to Power, Bacevich

The City, Kotkin

Hitchhikers Guide to Universe, Adams

Ragtime, Doctorow

Siddhartha, Hesse

What’s the Matter with Kansas?, Frank

The American, James

No Ordinary Time, Goodwin

Prize Winner of Defiance, Ohio, Ryan

Enjoy!

Better Management, Less Demand for Labor

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The Bush administration experienced a weak jobs recovery from 2002-2007 and the Obama administration is facing even stronger headwinds in 2009-2010.  Are there structural factors that are more important than the widely discussed business cycle and macroeconomic policy factors?

On the labor supply side, the growth of internet based job applications processes has greatly improved the effective supply of high quality candidates for all positions.  This increases the expectation of firms of finding great fit candidates.  On the other hand, until recently workers had inflexible wage expectations due to worker experience, pride, assets and family income alternatives.  The decline in family housing and investment assets together with the greater experience of long-term unemployment has recently increased the willingness of potential employees to be flexible in seeking work.  Human resources departments remain reluctant to greatly reduce hiring wages in fear of turnover, legal and internal equity challenges. 

Extended unemployment benefits reduce the incentive to find work for some individuals, but this has a relatively minor labor supply impact.

Much greater structural changes have been experienced on the demand side of the equation.   Perhaps most important has been the ongoing growth in labor productivity, which has reduced the effective demand for incremental employment.   Increased staff flexibility in working long hours has also reduced the demand for peak-time or just in case workers

Firms have become more aggressive and experienced in downsizing employee groups as dictated by business conditions, thereby reducing the demand for labor.  This could eventually result in greater future employment demand, since the expected future cost of maintaining partially productive staff is reduced.  It appears that this cost reduction has been offset by a greater awareness that hiring an employee is a long-term investment decision.  Firms that have been trying to rework the employment bargain from one of life-time loyalty to one of “fair dealing” remain very reluctant to plan for future downsizing, so they have set higher new staff addition thresholds, subject to the sensitivity analysis once reserved for major capital investments.

Firms have also become more aware of the all-in cost of hiring.  Health care benefits costs per employee have increased significantly, especially as a percent to wages for hourly and entry-level jobs.   Internet application processes have increased hiring costs for many firms.  The level of firm-specific training required for break-even in many jobs has increased.  With better models of hiring, firms are less willing to hire “good enough” candidates who do not fully meet all functional, industry, character and culture needs, resulting in positions which remain open for longer periods.   Overextended managers have less incentive to add permanent positions.  Firms are also less likely to invest in entry-level professional staff positions due to the higher turnover and lack of investment returns.

Labor force reductions have escalated in the last decade.  Downsizings are conducted when indicated, even in times of plenty.  Marginally productive or engaged staff members are moved up or out sooner.  Employees in obsolete functions see their jobs eliminated.  Protected functions or industries are quite rare today.   In a labor intensive business world, firms are more aggressive in pairing staff.

Productivity improvement projects have become less labor investment intensive.  Much improvement comes from getting more value out of the existing resources.  The declining role of physical capital creates fewer tag along positions.   Firms have learned to manage peak seasons and major projects with less incremental staffing.    Information technology investments had stimulated some new forms of project and analytical staff needs in the last 30 years, but that demand is flat today.  Firms have adopted standard process and project management templates that reduce the demand for new positions to accompany IT investments.

Firms are now fully aware of the use of contractors, part-time staff, consultants, outsourcing and imports to fill most functions.  The need to hold partially employed staff is greatly reduced.  Many processes have been re-engineered specifically to allow outsourced resources to be used to accommodate peak demands.  

Finally, overall business investment has been weak in the post Y2K period.  Firms have learned to manage inventories much better.  They have installed significantly higher project hurdle rates based upon their experience with project failures.   The lower market cost of capital has been a very minor factor outside of industries like real estate and banking.   Through productivity improvements, the effective capital stock has increased without as much new investment.  Sensitivity to the risks of change has caused firms to reduce the number of minor investment projects.

Business investment has been especially weak in the last 3 years, with firms freezing capital expenditures until the overall economic climate is resolved.  This includes fiscal, monetary, trade, tax and regulation policies.  The credit crunch has reduced hiring by small firms.

In general, firms have become much more effective in managing their capital, inventory, technology, brand and labor resources.  Many of these changes in the last decade have reduced the demand for labor.  Some of these changes may have a long-term impact on the minimum or natural unemployment rate, while others will cycle through business profits to business investment to increased labor force demand in the long-run.

High ROI Suburbs

tomkapostasy2 Comments

Many of America’s highest income, politically conservative suburbs have successful pursued high amenity public service strategies.  How is this high spending approach economically and politically justified?

http://en.wikipedia.org/wiki/Tiebout_model

In 1956, economist Charles Tiebout developed a model of competing suburban governments providing different levels and combinations of services to match the varied preferences of groups.  Subsequent research on suburbs and private real estate communities has confirmed that individuals prefer to choose amenity/payment bundles which match their values.

http://www.springerlink.com/content/r1v378785j2588j8/

Why would members of this usually tax and government-averse high income group willingly choose to live in a high amenity suburb?

The sociological observation that individuals prefer to belong to groups of like individuals is a partial explanation.  Exclusive communities are more homogeneous.

Brand name communities also provide some luxury goods type value from their exclusive status as high income, wealth and service communities.

High income, wealth, tax and service communities screen out criminal elements and benefit from low service costs to security services, delivering a safe environment.

High service communities provide signaling benefits in a world of imperfect information.  Transferred corporate executives rely upon education and amenity cues in choosing a residence.  Universities rely upon the reputation of school districts in selecting among applicants. 

Most importantly, a high service strategy delivers a great financial return on investment – especially for the initial group of residents.  High service communities proactively pursue strategies to minimize the cost to existing residents.

They invest in all service dimensions to ensure that the community is recognized as “a” or “the” leader in the metropolitan area and region.  Schools, roads, utilities, zoning, parks, transportation, libraries and cultural institutions achieve recognition.

They increase the tax base through annexation, selective density increases and attracting commercial firms.

They pursue “good government” initiatives, outsourcing services, consolidating services, utilizing volunteers and boards, leveraging regional, state and federal funds, employing specialized consulting firms and retaining highly qualified staff that benefit from the community’s growth and financial stability.

They invest in economic development, using Tax Increment Financing districts, user fees, economic development incentives, balanced zoning and negotiation to take advantage of the economic value of their attractive locations.  Retail, office, distribution, services, logistics and light manufacturing firms are welcome in the right zoned areas.

High service communities make capital investments to provide future economic returns.  Schools, parks, roads, libraries, utilities, cultural services, transportation and recreation assets are created through donations, local and regional government actions.

Suburbs compete with other metropolitan suburbs for residents and with other regional centers for commercial investments.  The right investments provide an atmosphere with low taxes, high services and a high quality of life. 

A Midwestern suburb of 75,000 has invested almost $1 billion in the last 20 years in its schools, roads, utilities, library, parks, infrastructure, cultural institutions and economic development incentives.  In essence, each of the existing 25,000 households has made a $40,000 bet on the future.  There has been some political and journalistic opposition.  A typical residence is valued at $250,000.  There are another 3,000 commercial firms with $250,000 property investments, making the total property value $7 billion. 

The community has annexed the unincorporated areas, increased density, attracted new businesses and continued its build-out towards a 120,000 population.  The number and value of commercial enterprises is expected to grow from .75B to $4B in 20 years.  Through zoning measures, growth and increased demand for a singular resource, the average residence will be valued at $400,000, with the existing residences appreciating from $250,000 to $325,000.  The built out residential market value will be $16B, for a total property value of $20B.

The original 25,000 households will gain a real $75,000 on their housing values.  Because of the community’s economic and population growth, their capital investment will be reduced to less than $20,000.  The early residents will clearly benefit from this high service and investment strategy.  The new residents will benefit from the investments and have the opportunity to “vote with their feet” in determining if the services delivered are worth the property values and taxes required.

High income families demand high quality services and are willing to pay for them.  They also require their municipal governments to take all possible steps to increase the cost effectiveness of these services.

Indiana 2050

tomkapostasy4 Comments

It will take some time for the official 2010 Indiana census to be complete.  The 2009 estimates and 1950-2000 census data can be used today to create a reasonably accurate picture of Indiana in 2050, 40 years from now.

Indiana grew by 24% from 1970 to 2009 and is likely to grow by 25% from 2009 to 2050.  The population will increase from 5.2 to 6.4 to 8.0 million residents.

In 1970, Indiana had only 4 counties with populations of 200,000 or more: Marion (Indy) at 794,000, Lake (Gary) with 546,000, Allen (Ft. Wayne) with 280,000 and St. Joseph (South Bend) with 245,000.  These four counties contained 1.9M people, or 36% of the 1970 population.  They grew to 2.0M in 2009 and an estimated 2.2M in 2050. 

By 2009, there were 6 counties above 200,000 populations, with Elkhart and Hamilton counties joining the list.  By 2050, it is likely that 10 counties will be above the 200,000 mark, adding Porter, Hendricks, Johnson and Tippecanoe counties to the list.

Between 2009 and 2050, Indiana is expected to grow by 1.6M people, or 25%.  Ten of the 92 counties will experience two-thirds of the growth across the next four decades.  Based on recent trends, Hamilton County will add 300,000 residents.  Suburban Hendricks and Johnson counties will grow by 100,000 residents (89%).  Marion and Allen counties will add 80,000 residents at 10-20% growth.  Tippecanoe, Hancock, Elkhart, Porter and Boone counties will each grow by 60-80,000 residents.

Five Indianapolis area counties will experience 70% or higher growth.  Hancock, Hamilton and Boone Counties will grow by 100%, with Johnson and Hendricks Counties close behind.  The nine counties in the Indianapolis area grew by 46%, from 1.25M to 1.8M people, in the last 40 years and are expected to grow by a further 43% in the next four decades, reaching a population of 2.6M.  This 790,000 person growth accounts for half of the state’s total growth from 2009 to 2050.  The Indianapolis area will grow from 28% to 33% of the total state population.

Eleven counties will change population ranks by three or more places.  Boone and Hancock Counties will climb 9-10 places.  Shelby, Clark and Hendricks Counties will rise 3-4 places.  Delaware, Wayne, Henry, Grant and Vanderburgh Counties will decline by 3-4 places.  Howard County may drop 7 places.

Indiana’s population will continue its 0.5% annual growth rate and reach 8 million by 2050.  Growth will be highly concentrated in a small number of urban counties.  The top ten counties, each with 200,000 or more people, will account for 50% of the state population.  The next 11 counties, each with 100,000 or more people, will account for another 19% of the state population.  These 21 counties will capture 80% of all growth,

averaging increases of 60,000 people.  The remaining 71 counties will experience growth of 4,000 people each on average.

       Pop   Pop   Est   2009-50     2009   2050   Chg 
SMSA County City  1970   2009   2050   Growth  Pct  Rank   Rank   Rank 
                     
Vincennes Knox Vincennes       42       38         38           –   0%       37 37       –  
Terre Haute Vigo Terre Haute      115     106       106           –   0%       17 19       (2)
South Bend Elkhart Goshen      127     201       273           72 36%        6 6       –  
South Bend Kosciusko Kosciusko       48       76       104           28 37%       19 20       (1)
South Bend LaPorte LaPorte      105     111       120             9 8%       15 16       (1)
South Bend Marshall Plymouth       35       47         59           12 26%       31 31       –  
South Bend St. Joseph South Bend      245     268       289           21 8%        5 5       –  
Richmond Henry Newcastle       53       48         48           –   0%       30 34       (4)
Richmond Wayne Richmond       79       68         68           –   0%       25 29       (4)
Muncie Delaware Muncie      129     115       115           –   0%       14 17       (3)
Louisville Clark Jeffersonville       76     108       148           40 37%       16 13        3
Louisville Floyd New Albany       56       74         94           20 27%       21 23       (2)
Lafayette Tippecanoe Lafayette      109     168       248           80 48%        8 8       –  
Kokomo Cass Logansport       40       39         39           –   0%       36 36       –  
Kokomo Grant Marion       84       69         69           –   0%       23 27       (4)
Kokomo Howard Kokomo       83       83         83           –   0%       18 25       (7)
Indianapolis Boone Lebanon       31       56       114           58 104%       27 18        9
Indianapolis Hamilton Noblesville       55     279       579         300 108%        4 2        2
Indianapolis Hancock Greenfield       35       68       144           76 112%       24 14      10
Indianapolis Hendricks Danville       54     141       261         120 85%       11 7        4
Indianapolis Johnson Franklin       61     142       242         100 70%       10 9        1
Indianapolis Madison Anderson      139     131       141           10 8%       13 15       (2)
Indianapolis Marion Indianapolis      794     891       971           80 9%        1 1       –  
Indianapolis Morgan Martinsville       44       71       101           30 42%       22 21        1
Indianapolis Shelby Shelbyville       38       45         61           16 36%       33 30        3
Ft. Wayne Allen Ft Wayne      280     354       434           80 23%        3 4       (1)
Ft. Wayne De Kalb Auburn       31       42         54           12 29%       34 32        2
Ft. Wayne Noble Albion       31       48         68           20 42%       29 28        1
Evansville Vanderburgh Evansville      169     175       189           14 8%        7 11       (4)
Evansville Warrick Booneville       28       59         84           25 42%       26 24        2
Columbus Bartholomew Columbus       57       76         96           20 26%       20 22       (2)
Columbus Jackson Brownstown       33       42         45             3 8%       35 35       –  
Cincinnati Dearborn Lawrenceburg       29       51         71           20 39%       28 26        2
Chicago Lake Gary      546     494       534           40 8%        2 3       (1)
Chicago Porter Valparaiso       87     164       232           68 41%        9 10       (1)
Bloomington Lawrence Bedford       38       46         50             4 8%       32 33       (1)
Bloomington Monroe Bloomington       85     131       171           40 31%       12 12       –  
  Subtotal 37 counties   4,091  5,125    6,543      1,418 12%      
                     
  All Others 55 counties   1,104  1,298    1,459         161 12%      
  (Pct of State)   21.3% 20.2% 18.2% 10.2%        
                     
  Indiana     5,195  6,423    8,002      1,579 25%      
        24% 25%          
                     
Indianapolis       1,251  1,824    2,614         790 43%      
(Pct of State)     24.1% 28.4% 32.7% 50.0%        

Labor and Tax Law Changes to Create Jobs

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The U.S. labor market remains mired in a post WWII land of large employer paternalism that is unsuited to the needs of global competition.  Major changes to labor laws should be made to lower the full costs of hiring employees.  At the same time, major changes to unemployment insurance should be made to provide a meaningful safety net, without reducing the incentives for the unemployed to actively seek re-employment, even at lower wages when needed.

In return for a variety of actions to reduce the unit cost of labor by more than 20%, employers should be required to fund one-half of an unemployment insurance fund that provides meaningful benefits.  Employees would fund the other half through payroll deductions.  Unemployed workers would receive an initial payment of one-half of six months’ worth of wages.  Additional 50% payments would be made at the beginning of third and fourth quarters of unemployment.  This lump-sum approach maintains the incentive to actively seek new employment, while providing a true safety net in a world where 6 month bouts of unemployment are recurring career experiences at all levels.

The federal government could lower the transaction costs of employment by maintaining a national ID card system that qualifies individuals for employment and removes the hiring cost and risk to employers.  The federal government could certify 3-5 firms to operate a standardized resume/profile system that records and certifies the basic education and employment history for individuals in one place. 

Employees would be more attractive to employers if they invested more in their professional skills.  A continuing education tax credit would improve candidate skills and remove the need for employers to offer most internal training and educational benefits.

Employers would hire more individuals if the terms of employment were more flexible.  Labor laws could more clearly allow “paid time off” banks to be used in place of overtime compensation.  The trigger for required overtime premiums could be raised from 40 to 48 hours for the first 10 weeks of annual overtime.  Seasonal positions could be exempted from employer unemployment compensation responsibility.  A new employment category could be created to clearly allow 100% incentive based sales positions.  The IRS rules defining employees and contractors could be simplified to reduce administrative costs and risks.

Federal labor laws and regulations could be simplified to reduce administrative costs and limits could be placed on potential liabilities.  The equal employment opportunity, family medical leave, disability and other employee “rights” acts incentivize employers to take extreme defensive steps and avoid hiring in order to avoid potential liabilities.

The federal government could incentivize the creation of new positions directly by paying half of the first six-months of wages.  The rules for unpaid internships could be clarified, allowing students to work up to 700 hours per year within win-win educational programs which lead to employment.  The labor laws could be clarified to allow “no fault” dismissals within 180 days.

In a globally competitive environment, labor laws need to benefit employers and employees.  Steps can be taken to reduce the total cost of employment and protect employed and unemployed workers.  The cost to employers and society through taxes is modest.

In addition to macroeconomic steps to improve the economy and administrative steps to provide meaningful unemployment compensation benefits and lower employment costs and risks, the federal government could change tax policies to significantly reduce the incremental costs of employing workers.

The federal government could incentive continuing education through tax credits.  Unemployment compensation insurance could be shared by employers and employees.  Family medical leave benefits could be funded by the federal government as is done in other developed nations.

Tax changes could be made to incentivize individuals to invest in their own life and disability insurance plans.  Tax credits could be used to promote individual charitable contributions and reduce the need for corporate gifts and matching programs.  The dollar and percentage limits for tax –deferred retirement plan contributions could be raised, increasing the value of compensation.  The rules for qualified plans could be modified to allow a greater share of “highly compensated” employee pay to be made on a pre-tax basis.

Finally, the two biggest fringe benefits – social security and health benefits – could be migrated to government and employee funded programs over a decade, releasing employers from this responsibility.  Social security can be funded from federal income tax revenues or simply made employee deduction.  Health care insurance programs could lose their tax-deductible status.  If no better option is found, employer contributions to consumer choice (HAS/HRA) plans could retain their tax-deductible status.

Allowing American employers to focus on creating jobs, operating their firms and making money will unleash incentives to increase productivity, competitiveness and our standard of living.  Finding the political will to fund desired public services will not be easy, but the total benefits justify the short-term challenges.

Creating a Jobs Boom

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Creating a “jobs boom” is within the power of the government if the legislators and president are ready to create confidence in the government and economy, incentivize job creation and business investments, make a long-term commitment to transportation/energy and stimulate the government and not-for-profit sector.

Confidence in the Future.

1 Start the process to set a constitution maximum marginal tax rate at 50% of income.

2. Start the process to set a constitutional maximum spending limit for all government budgets at 30% of GDP.

3. Drastically simplify the federal tax for incomes below $200,000, maintaining the current level of progresseness and number of tiers.

4. Eliminate the corporate income tax, replacing lost revenues with personal income tax rate increases at higher incomes.

5. Complete a health care cost reduction bill, based upon cross-state insurance competition and limits on lawsuits.

Direct Job Incentives.

6. Move the full benefits social security retirement and medicare age up 2 years for 2010-2011.

7. Allow direct tax expensing of all capital investments for 2010-2012.

8. Provide firms with 50% tax credits for hiring college graduates in minimum wage, full-time internships.

9. Provide a $10,000 tax credit to firms for hiring engineers and IT professionals in project positions.

10. Sign the country to country free trade agreements that are ready.

Investment Incentives

11. Increase the life of patents and trademarks by 5 years. 

12. Allow direct tax expensing of all capital investments for 2010-2012.  

13. Cancel 25% of federal regulations within 90 days and 50% within 6 months.

14. Improve the value of tax loss carryforward benefits from business losses.

15. Fund the property acquisition in 10 cities to stimulate blighted area development.

Long-term Transportation/Energy Direction

16. Make a 3 year commitment to continue the stimulus level of funding.

17. Loosen the energy regulations for offshore drilling and nuclear power.

18. Select one national highway project, such as I-69, and commit to 7 year completion.

19. Make a 10 year finding commitment to the high-speed rail network.

20. Create a carbon tax scheme for the next 2 decades with a 10% per year transition to full effectiveness.

Government and Not-for-Profit Effectiveness

21. Loan states the money to start independent board governed rainy day funds.

22. Privatize Fannie Mae and Freddie Mac quickly.

23. Privatize large state and federal agencies: post office, licenses, air traffic control, and community colleges.

24. Allow first $10,000 of charitable donations as 50% tax credits.

25. Tighten inheritance tax limits, but allow doubled charitable deductions.

Any ten of these easily understood policy changes would jump start the economy, benefiting everyone.

Economic(s) Progress?

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Adam Smith started a conversation in 1776 about the economic and moral benefits of the “invisible hand” in the marketplace – making society better off, in spite of there being no coordinated plan.  Karl Marx argued that the unstoppable workings of history would inevitably lead to a socialist utopia.  In 1976, the sociologist Daniel Bell wrote of the “Cultural Contradictions of Capitalism”, whereby the underlying Protestant Work Ethic is corroded because of the hedonistic consumerism in a capitalist society.  Marx was wrong.  Bell was wrong about the end of capitalism, even if his critique of an aimless society still stings.  Where do we stand today on Smith’s breakthrough claims regarding the moral and economic superiority of the “free market”?

Support for the most simplified view of markets being truly perfect reached its peak following the Reagan/Thatcher years when the totalitarian communist alternative collapsed and the Atlantic version of a mixed economy demonstrated significant ongoing advantages compared with the Nordic version with greater state involvement.  Events of the last two decades – rise of China/emerging markets and fall of US/UK from the Great Recession – have undercut the plausibility of an extreme market solution being the best,  only or final answer.

It is obvious in hindsight that the business cycle has not been tamed, that financial markets are inherently unstable and subject to “animal spirits”, that markets are not perfect and that greed will continue to drive many market participants.  In spite of the positive societal benefits of financial innovations such as options, mutual funds, checkable deposits, portfolios and securitized assets, the broad financial sector seems to be an ongoing source of the greatest failures in capitalism.  The formal definition of “perfect market theory” has not reduced volatility, but it has led to a finance sector where every possible trick is used to generate “wealth”: Ponzi schemes, the carrying trade in foreign investing, borrowing short and lending long, off-balance sheet vehicles, hedge funds and extreme leverage to name a few.

A visible part of the general business sector appears to be equally enamored of finding every possible way to create financial wealth beyond “the old fashioned way, we earn it”.  Mergers and acquisitions continue because they can reduce competition, leverage overvalued stock prices and employ low-cost borrowing, even though on average they do not provide a net return to stockholders.  Corporations manage reported earnings, producing smooth growth for quarters until the next recession provides an opportunity to report losses due to extraordinary items and business conditions.  Executive pay increases as a share of revenues, as stockholders find themselves unable to solve “the agency problem”.  Corporations promote legal and public relations executives to the highest levels because the opportunities to create incremental wealth through influencing public policy are greater than investing in new products or markets.

On the other hand, it remains clear that capitalism remains a tremendous value creating mechanism for society, with productivity growth, innovation and personal incomes rising at strong rates without any long-term end in sight.  The system’s incentives do focus resources on innovation and dynamic value creation.  In spite of John Kenneth Galbraith’s old claims in “The Affluent Society”, there appears to be no limit to the demand for personal consumption at any income levels in society.  The recent work “Richistan” notes that individuals with $5M of annual income feel they would be secure if they only earned 50% more!

In a fundamental way, we’ve come back to the basic framework and issues of economics raised in the post-war period.  What is the right role for government in a mixed economy? 

We have learned some things in the last 50 years and the consensus view is more to the right than it was in 1950 or 1970.  The dynamic long-run wealth creating role of capitalism is better appreciated, including its role as a poverty and inequality reducing strategy.  Most agree that monetary policy matters, expectations about government behavior matter and “fine tuning” is only a theory.  Market competitors are the best anti-monopoly force, so regulation should be light and focus on anti-competitive actions rather than narrowly defined market shares.  Ongoing growth of real incomes in the bottom third of society can offset rising dollar inequality.  John Rawls’ philosophical justification for some income redistribution resonates for many moderates and liberals, but Robert Nozik’s emphasis on “fair rules” alone provides conservatives with a deeply felt alternative view.  Government actors are as subject to self-interest as consumers and capitalists, especially with regard to being “captured” by those they aim to regulate.  Countervailing forces such as labor unions are blunt instruments, which may not even benefit the groups they aim to support.

Many economists would like to see the public policy debates return to the post-war topics, with the two political parties sliding from left to right within the informed framework of current economic knowledge.  Capitalism provides great value as Adam Smith demonstrated.  There are inherent risks due to relying on self-interest (as Smith also noted).  There is a role for government in counterbalancing the business cycle, maintaining fair markets, managing the self-interest of government actors and ensuring public support for capitalism in spite of the unequal distribution of benefits.  The political parties exist to find a “happy medium” on these issues.

The current political climate does not readily support this possibility.  The Republican Party has become increasingly consistent, philosophical, libertarian and monetarist in its views.  Its leaders increasingly define a single economic viewpoint: minimal government, no taxes, minimal economic regulations, rules based monetarism, minimal anti-competitive policy or enforcement, zero income redistribution, etc.  While each of these views has philosophical and substantive research support, the combination of doctrinaire views leaves no room for a sliding scale in public policy, for the only preferred solution is “zero”. 

The Democratic Party has not lost its preference for “redistributing the pie” versus “growing the pie”.  It has not helped its union supporters to evolve into a German or Japanese style alternative way.  It has championed continued protection of its public sector employee supporters from accountability or competition.  It has reached the goal of universal social welfare coverage for health care.  In spite of some tactical moves to the center on economic issues (welfare reform, the means of health care reform, international trade), the Democratic Party continues to emphasize those policy areas that increase the role of the state versus the individual, rather than identifying ways to better leverage the value creating potential of markets.

It seems that it will take more than President Obama’s slogans of “hope and change” to get our political parties and politicians to focus on the potential for increased economic growth and pragmatically justified economic roles for the government.  Perhaps, we need another “political economist” to develop a breakthrough theory of the political sector as insightful and valuable as Smith’s view of the market.

2010 Elections

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The 2010 election campaign is about to begin in earnest.  The events of the last three months have certainly swung the Republicans’ way.  Even the “health reform” victory is likely to have a mostly negative impact on short-run Democratic prospects.  Opposing parties always make progress in midterm elections.  The real question is “how much?”  Eight months from the elections, I give a strong edge to the Republicans, but believe that the “Tea Party” movement may backfire on the right.

Politicians are experts at getting elected and re-elected.  They know that winners occupy enough of the middle to attract swing voters and enough of their edge to motivate the party faithful.  In the 1968 election, George Wallace highlighted the role that socially conservative and economically moderate voters could play.  Richard Nixon and Spiro Agnew capitalized on the interests of the silent and moral majority, realigning politics for two generations.  Ronald Reagan clarified the pitch and a more coherent philosophy, solidifying the right-wing strategy.  Subsequent moderate Republicans like the Bushes proclaimed the new message, adopted the tax cut strategy, courted the religious right and increased expectations of their new supporters. 

During this time the Republican Party has successfully shifted the definition of left and right on the critical economic scale, forcing Clinton and Obama to adopt economically conservative means, programs and terminology, while continuing to pursue their leftward goals.  The Republicans have also undercut the Democrats’ classic appeal to the economic interests of the working and middle classes by touting growth, entrepreneurship and economic freedom as higher ideals.  They have increased the weight of social issues and courted a populist libertarian strain in America through fringe candidates such as Ron Paul and Sara Palin.  The Republicans have mastered the tactical dimensions of politics, beating the Dem’s at fundraising, participation, communications and media influence.  Although taunted as “the party of ‘no’”, the Republicans have effectively avoided major responsibility for the weak economy, ongoing terrorist threats, the banking meltdown, immigration gridlock, increasing healthcare costs, wider income distribution and the coming retirement cliff.  Now that Obama has a year under his belt, they are effectively painting him with responsibility for these and other situations.

The Democrats have responded to this shift in the playing field by sending three southerners to the White House (Johnson, Carter and Clinton) positioned as moderates.  The Democrats have maintained their hold on a growing minority and shrinking union base.  They have improved their posturing skills and election tactics, especially in social media.  They have adopted some centrist programs and begun to fight for key terms such as “accountability” and “economic progress”.  The Democrats have taken care of their base through laws and funding.  President Obama has provided a message of bipartisanship, hope and change which deflects attention from controversial specific programs.  He and his colleagues have not hesitated to blame George Bush and the Republicans for a variety of “messes” and dodged their responsibility. 

It is no surprise that a weak economy (it’s the economy stupid) would catch up with Obama, especially given his pursuit of so many distracting goals.  However, the impact of “Tea Party” is something of a surprise.  Sara Palin was clearly chosen as a VP candidate by John McCain to appeal to part of the party faithful.  Her candidacy, the stirrings of Ron Paul, the unfulfilled promises to social conservatives by the Bushes and the demonization of national Democratic leaders and programs for two decades have crystallized into a true populist backlash against the evils of “big government” and its mostly Democratic supporters.

Will the “Tea Party” help or harm the Republicans?  In the short-run, it has clearly scared moderate Democrats, especially those in conservative districts.  On the other hand, it has also scared moderate Republicans, including John McCain.  In some cases, the more conservative primary winners will be defeated due to their extreme positions.

I think that there is an even greater risk that the Republican Party has unintentionally moved so far right in its rhetoric, positions, legislation and new affiliation with the “Tea Party” that it will lose touch with classic moderates and swing voters.  In 1968, Hubert Humphrey wanted nothing more than growth of New Deal and Great Society programs.  He was not seeking a social revolution or a counterculture.  However, the activists painted a picture of revolution that frightened most of the country to embrace the solid posture of twice-defeated Richard Nixon as the safest choice in an emotional time.

If the “Tea Party” continues to gain publicity and become affiliated with the Republican Party, the same kind of social distancing may take place in 2010 or 2012.  By belief or by framing, the ”Tea Party” appears to hold extremist views on the economy (radical self-sufficiency), the role of government (none, including popular entitlement programs), banking (gold standard), religion (one fundamentalist, end of times, withdrawal from society) and security (gun rights and military adventurism).  The “true believer” statements are passionate, direct and uncompromising.  They may provide the Democrats with an “extremist” straw man to replace the current “banker” straw man.

We certainly live in interesting times.