On October 1, I asked whether the TARP program was likely to turn the U.S. into England (blog entry). Now that we’re four months deeper into the recession, what do folks think? An economist asked me recently whether I saw the U.S. as likely to collapse like it did in the 1930s or recover? And if the economy were to recover, what did I think would spur the recovery? My reply was that maybe the most likely scenario was a long gradual downward slide, sort of like England in the post-World War II period.
We’ve got a system where those who have political power can continue to tap into rich veins of wealth even if what they’re doing is not sustainably boosting GDP. Wall Street executives, government at all levels, public employee union members, union members in some private companies, and similarly situated folks can avoid nearly all of the pain of the downturn while non-union workers at private companies get destroyed. That is a lot like what happened in various European countries. They’d have very high unemployment and economic stagnation, but workers who already had jobs were taken care of. If we give all of our money to the economic winners of the last few decades, what will be left for building new industries and jobs for young people?
And if the U.S. does turn into the U.K., how can a young person adapt? I talked with a kid who is about to graduate from Olin College of Engineering, perhaps the nation’s best undergraduate engineering program. He had two job offers, both from government contractors. What about his friends? One of them did get offered a job recently by some sort of financial services company. It is in the Netherlands and the kid will be moving there in June (whereupon he will cease to pay U.S. local, state, and federal taxes, unless he gets a big raise in which case some of his income will be subject to federal income tax).
[Loosely related New York Times article: Mancur Olson’s seminal work, The Rise and Decline of Nations, published in 1982, helped explain how stable, affluent societies tend to get in trouble. The book turns out to be a surprisingly useful guide to the current crisis. In Olson’s telling, successful countries give rise to interest groups that accumulate more and more influence over time. Eventually, the groups become powerful enough to win government favors, in the form of new laws or friendly regulators. These favors allow the groups to benefit at the expense of everyone else; not only do they end up with a larger piece of the economy’s pie, but they do so in a way that keeps the pie from growing as much as it otherwise would. Trade barriers and tariffs are the classic example. They help the domestic manufacturer of a product at the expense of millions of consumers, who must pay high prices and choose from a limited selection of goods. His primary case study was Great Britain in the decades after World War II. As an economic and military giant for more than two centuries, it had accumulated one of history’s great collections of interest groups — miners, financial traders and farmers, among others. These interest groups had so shackled Great Britain’s economy by the 1970s that its high unemployment and slow growth came to be known as “British disease.”]
Actually the UK turned into the US by putting all its eggs in the financial services basket, and that’s why its GDP is expected to contract by 3% this year.
US citizens are still required to pay taxes in the US, even when they pay taxes locally. That’s part of the reason why it’s so expensive for US corporations to send US expats to oversee their foreign operations (the usual cost estimate for a US expat executive is $1 million).
Fazal: U.S. citizens can exclude the first $87,600 of foreign earned income if they live and work overseas and may also exclude some living expenses. See http://www.irs.gov/publications/p54/ch04.html ; I have high hopes for this recent college graduate, but I doubt that his starting salary is much higher than $87,600. An American who goes overseas and earns the truly huge dollars will have to pay some federal income tax, as I noted in my original posting, but he skips out on social security taxes, state sales tax, local sales tax, excise tax, property tax, state income tax, car registration fees, and a lot of other taxes that our various levels of government rely upon to pay worker salaries and retirement benefits.
The sad part is turning into a European country without the quality of life benefits like long paid vacations, national health care, heavily subsidized day care, significantly less expensive undergraduate universities for non-elites, etc.
If I’m going to effectively work for the government from January until August (due to taxes), I might as well get the summer off, too.
Why doesn’t the US government take a bottom up approach to this problem and put large amounts of money into the pockets of small businesses and startups? It bothers me that all the money is going to the executives of big corporations and I don’t think a lot of that money is going to end up in the hands of the worker bees at the bottom.
I’m in the process of working my tail of on a web startup and I can promise you any free handouts that came my way would go a lot further than if they were used to buy a new corporate jet or $1600 gold-plated waste basket.
Do you think the lobbyists in DC are helping draft this new bailout bill? Where’s the people that are going to take a sensible approach to bringing back our economy? “Spending” our way out of this mess doesn’t seem to be the answer…
In Olson’s telling, successful countries give rise to interest groups that accumulate more and more influence over time. Eventually, the groups become powerful enough to win government favors, in the form of new laws or friendly regulators. These favors allow the groups to benefit at the expense of everyone else; not only do they end up with a larger piece of the economy’s pie, but they do so in a way that keeps the pie from growing as much as it otherwise would.
Although it’s a book dealing with a much earlier time, Geoffrey Parker’s Success is Never Final: Empire, War and Faith in Early Modern Europe (link goes to my post on the subject) strikes similar themes about how the traits that tend to fuel the rise of the nations eventually shift into different traits that undermine the very attributes that made nations successful in the first place. The premise is more interesting than some of the essays within, but I still think it worth reading.
The poor kid will still have to pay Dutch taxes which start at 33.6% and scale up to a max of 52% after the first ~$30000/yr. I think he gets deductions for being a non-resident so it might work out to the same as he would pay in the USA in taxes.
I always thought the foreign exemption was to prevent double taxation. It also has the side effect of bringing foreign money into our economy. For example, I live and work in Australia for an Australian company and I am still paying a mortgage in the USA. Also, you can’t find consumer goods cheaper than you can find them in the US. Whenever I go home, I bring suitcases full of crap bought in the USA back to Australia.
Reading this entry reminds of the situation facing Japan (where I am right now) where the special interests have such a stranglehold and the average citizen is so apathetic that they are often unable to notice that they are sliding slowly backwards.
Ryan: The exemption was not put in place to prevent double taxation. It was always possible to take a credit for foreign taxes paid. Even the IRS knows that you can’t squeeze blood from a stone (i.e., if a guy has already paid 40% of his income in tax to France, for example, there isn’t that much left for the U.S. to take). The exemption was put in place to encourage international companies to hire Americans on an equal basis with citizens of other nationalities, e.g., in places such as Saudi Arabia where there is no income tax.
The kid will pay taxes in the Netherlands, of course, but he will get a lot of services in return (see David Wihl’s comment above). More to my point, he will be leaving the rest of us to pay for our ineffective schools, automaker bailouts, Wall Street’s taxpayer-funded bonuses, public employee pensions promised back in the 1970s, Long Island Railroad pension and disability (see http://www.nytimes.com/2008/09/21/nyregion/21lirr.html ), etc.
Lately, I’ve found myself re-watching the old Milton Friedman series, “Free to Choose.” It’s a pity he’s not around to offer some advise and wisdom in times like these.
I think we’re headed for a future that resembles Europe. High cost, omnipotent government; low productivity. The problem with this sort of economy is that it relies on the good will of others in order for it to function. Think of where European countries would be today if they paid more than a token percentage of their defense budgets.
I’m pretty worried about the long-term future, because the housing outlook is so bleak.
I’m not sure what a decent rate of return for a mortgage is (and it depends on inflation), but let’s just say it’s 9%, what I paid to my house in about 1995.
With the collusion between the fed and wall street, we’ve seen rates on a continual decline and a continual relaxing of lending rules, all to keep the mortgage industry poppin’. That made housing scarce, and pushed the prices up to an unnatural level.
Now that we’ve burst the bubble, nobody knows what houses are really worth, but my guess is that the news is not good. Way too much inventory coupled with the fact that most of the appreciation was illusory means that prices are likely to keep heading down.
The only thing propping them up right now is the continued available of low interest rates. I just locked in 5.125 percent for 15 years (no points) on a refi, but I think that anybody who writes that loan right now is an absolute moron.
What I find more than a bit annoying is that nobody is talking about the overall effect on the consumer of higher house prices across the board, and how much of that increase was managed by wall street for their own benefit.
> Olin College of Engineering, perhaps the nation’s best undergraduate
> engineering program
From the Wikipedia description I am inclined to agree. I got an MIT engineering degree in EECS in 2003/4 and I wish I had been forced to take more project-based courses.
But one disadvantage this school has is the absence of a long, well-established alumni network. I certainly benefit from this network for my school. Also, wouldn’t Olin have difficulty attracting the best faculty if it doesn’t offer tenure? Phil, you yourself have taught at MIT and now Harvard…
Murali: This is really off-topic, but I’ll answer your question. I hadn’t realized until you mentioned it that Olin didn’t grant tenure. Some of the very best teachers that I know work at Olin, so it hasn’t hurt them so far. If they didn’t have any trouble recruiting great faculty in 2000, I can’t imagine why they’d have trouble in 2009. “Best” for Olin is not the same as “best” for MIT. MIT wants someone who can obtain research funding; Olin wants someone who can teach and inspire undergraduates. Thus Olin really need not compete with other engineering schools, virtually all of which are indifferent to whether or not someone can teach undergrads.
Matt Henderson wrote:
“Lately, I’ve found myself re-watching the old Milton Friedman series, “Free to Choose.” It’s a pity he’s not around to offer some advise and wisdom in times like these.”
No, it’s a mercy: the passage of the monstrous “stimulus” bill (most of which is post-2009 spending) would surely have killed him.