Tag: trade

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.

The Sky Has Stopped Falling

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Between October, 2009 and April, 2010 the US economy lost 4.8 million jobs: nearly 700,000 jobs per month.  In the last three months it has lost a TOTAL of 100,000.

How and why employment will recover faster than expected.

  1. The change from -700,000 jobs to zero is a major trend, indicating net job creation is imminent.  Obama’s budget forecast of 100,000 adds per month is conservative political positioning so that the real results will exceed expectations.  He and his party have an election to contest in November.
  2. GDP growth was 3% in the 3rd quarter and 5% in the 4th quarter, accompanied by eye-popping labor force productivity numbers above 5%.  Some hiring is required to meet existing production needs.  It has begun.
  3. Inventory replenishment will continue as it has in all other recoveries.
  4. More than half of the stimulus money remains to work through the economy. The second stimulus package is necessary political and psychological posturing and will be too late and too little to make a material difference.
  5. Construction has nowhere to go but up after 3 years of decline.  Even with ongoing foreclosures, there is pent-up demand for new housing.
  6. Consumer durable goods’ spending is ready to bounce back.  Cars, washers and televisions have limited technical and acceptable status lives.
  7. Businesses are ready to invest in capital goods, productivity improvements, IT systems, new channels, new products and exports.  Businesses have the resources to invest after lower than average spending since 2000.
  8. 5-8% growth in China and other developing countries increases demand for US exports and raises prices for US imports.
  9. Once the global recovery is underway and the extent of US monetary expansion is plain (leading to inflation), the US dollar value will fall and US exports will increase.
  10. The retirement of the Baby Boomers will lead to specific hiring in sectors of high demand: health care, financial services, housing and travel.
  11. The retirement of Baby Boomers will increase from 2.2M per year to 3.7M per year in the next 8 years, adding an average of 1M jobs per year.
  12. The US population will continue to grow at 1% per year, leading to growth in aggregate demand of 1% per year.
  13. US labor force and total factor productivity continue at high historical rates, generating the underlying added output which leads to wages, profits and rents which create the next round of aggregate demand.
  14. There are long-term positive employment trends in a majority of the US industry sectors.  The US economy has continued its transformation into an information economy.  Manufacturing employment is now less than 10% of the total.  We may have found the bottom for this sector.

 

There are certainly national and global risks in the current economic climate.  However, the US economy has shown increasing resiliency in the last 60 years, recovering from recessions in spite of a variety of headwinds.  The economy has recovered during Republican and Democratic administrations, in spite of helpful and harmful national policies.  There are many reasons to believe that the current recovery will be strong.

Where Have All the Dollars Gone?

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Economists enjoy the sense of security provided by the “National Income Accounts” where Gross Domestic Product, the value of all goods and services produced domestically, is always equal, by definition, to Consumption plus Investments plus Government plus Net Exports.  Reviewing the changes in the share of economic activity in the components of C+I+G+NX goes a long way towards explaining our current and future economic predicament.  The economy has changed dramatically since 1960. which will serve as a baseline for the post-war era.

During the bright days of Camelot, Consumption was 63%, Investment 15%, Government 21% and Net Exports +1%.  In 2008, Consumption was 70%, Investment 15%, Government 20% and Net Exports -5%.  In simplest terms, we are consuming 7% more thanks to the generosity of other exporting nations! 

Investment averages 16% of GDP: 11% business and 5% residential.  Business investment has reached peaks of 12-13% in 1978-85, 1998-2001 and 2007-08.  It experienced troughs of 9-10% in 1960-64, 1991-93, and 2003-04.  Business investment responds to tax and market opportunities, adding a pro-cyclical boost to the recovery.  Residential real estate follows its own pattern, reaching 5-6% peaks in 1962-64, 1972-73, 1977-79, and 2004-06, alternating with 3-4% troughs in 1966-67, 1975, 1981-82, 1990-93, and 2008.  The 3.3% share in 2008 is the lowest in the period, followed by an even lower share in 2009.  Residential real estate experienced an unprecedented 13 year run without a down cycle.  The over expansion in 2004-2006 means that the usual residential real estate recovery will be delayed for a few years.

Government consumption expenditures, excluding transfer payments, declined from 21% to 20% of GDP across the period.  Direct federal government, non-defense expenditures remained flat and immaterial at 2.5%.  National defense started at a high 10% in 1960 and remained at that level as late as 1968 before declining after the Vietnam conflict wound down.  The peace dividend allowed defense spending to fall to 6% for 1977-80.  Defense spending rose again in the waning years of the Cold War, reaching 7.4% in 1985-87, before sliding to as low as 3.8% from 1998-2001.  The terrorist response has triggered an increase to 5.1% of GDP by 2008.  Delivering the “Great Society” initiatives, state and local government spending grew from 9.5% in 1961-63 to 12.5% in 1974-76.  State and local government declined to 11% in 1983-85, remaining at 11.3% as late as 1998 before growing to 12.2% in 2002-03.  State and local government spending will act as a drag on the economy for at least 2 years.  Defense spending shows no clear trend.  Federal government spending on stimulus measures may be 3-5% of GDP in 2010.  The expected decline in stimulus spending will act as a drag on the economy in 2011.

Across 50 years the United States rejoined the world economy after the unusual post-war period of self-sufficiency and high global demand for U.S. goods.  Exports of services tripled from 1.3% to 3.9% of GDP in this period.  Exports of goods doubled from 4% to 8%, reaching 8.8% in 2008.  Total exports increased from 5% to 13% of GDP.  On the other hand, service imports doubled from 1.4% to 2.9%.  Goods imports increased five-fold, from 3% to 15% of GDP.  This 12% of GDP change has outpaced the growth in exports. 

A 2-3% trade deficit was experienced from 1984-88.  The competitive response reduced the deficit to an average of 1% for the next decade.  The deficit rapidly grew to 4% in 2000 and a high of 5.7% in 2005-06.  As pundits have noted, no nation has ever been able to run a 5% trade deficit for decades.  The unique situation of the US as the world’s currency and safest investment home, plus the growth of China’s economy and its willingness to finance the trade deficit has allowed this to continue.  In the long-run, the US dollar will fall relative to China’s currency and trade will rebalance.  There is no way to predict the timing of this change.  For a decade, the U.S. has consumed 5% more than it produced.  Consumption will fall.

Consumption is the 800 pound gorilla of GDP accounting.  Its rise from 63% to 70% of GDP is the counterbalance to the trade deficit.  Durable goods production held its own, maintaining 9% of GDP through 2003, before falling to 7.6% as the auto recession began in 2008.  Non-durable goods production dropped from 25% to 16% of GDP by 1995 and maintaining that level through 2008.  The 9% decline in non-durable goods production has been replaced by an increase in services from 30% to 47% of the economy. 

The service share was 30% as recently as 1969, so this 17% switch occurred in just 40 years.  The service share reached 45% in 2001 and has inched up slowly since then, reflecting the “jobless recovery” of the 2000’s.  Durable goods production will recover from its low level as autos and equipment age.  The trend in non-durable goods moving to import sources is likely to continue.  Without changes in the health care industry, this part of services is likely to keep growing: a short-term benefit for jobs and GDP.

Government budget, trade and savings deficits need to be repaid.  The retiring Baby Boomers need to be replaced in the labor force at high productivity rates.  Some form of improved health care market, incentives or rationing is required to limit the growth of this sector.  The U.S. has significant economic challenges to be faced.  The transition from Keynesian fiscal stimulus and easy money to a sustainable course is a necessary first step.  U.S. economic productivity, competitiveness and innovation have not been undermined by the Great Recession.  The business cycle provides a natural boost to recovery from inventory replenishment, capital spending and durable goods demand as we are already seeing.  Let’s hope that the president can have a real meeting of the minds with Congress and begin to address the long-term structural challenges faced by the country that go far beyond the 2010 and 2012 elections.