The dismal scientists at Gallup came up with “No Recovery: An Analysis of Long-Term U.S. Productivity Decline.” Here are some excerpts:
Conventional wisdom — as reported in many major newspapers and media — tells us the U.S. economy is “recovering.” Well-meaning economists, academics and government officials use the term “recovery” when discussing the economy, implying that growth is getting stronger.
The study finds there is no recovery. Since 2007, U.S. GDP per capita growth has been 1%.
Think of our country as a company, America Inc., which has more than 100 million full-time employees, with about $18 trillion in sales and $20 trillion of debt. The most serious problem facing it is no growth. In addition, America Inc. has three soaring expenses threatening to bankrupt the company and its shareholder-citizens: healthcare, housing and education.
As this report notes, in 1980, these three sectors accounted for 25% of total national spending — today, they account for more than 36%. They also account for most of the total measured inflation over this period. And without inflation in these sectors, real annual productivity — defined as GDP per capita growth — would have been an estimated 3.9% instead of 1.7%.
Why does it matter if we’re spending all of our money on pimped-out houses, gold-plated health care, and Club Med-style universities? Isn’t that what rich people would do? The economists say no, it is just that we are inefficient and stupid:
- “The U.S. population’s health has stagnated or even declined on several measures since 1980, especially for the working-age population.”
- In 1980, the rent-to-income ratio for the median family was 19%; by 2014, it swelled to 28%. The costs of owning have also increased. … the evidence largely suggests that the quality of housing has at least slowed in growth if not deteriorated, even as prices have increased. People are now living in smaller homes that are older and located farther away from their places of employment. Government statisticians take into account quality when calculating housing inflation, and their data show a price increase of 250% from 1980 to 2015. [“Percentage of Young Americans Living With Parents Rises to 75-Year High” (WSJ, Dec 21, 2016) suggests that these data are correct.]
- The U.S. education system has failed to instill any measurable gains in the cognitive performance of children and young adults for decades, as U.S. students and adults struggle with poor rates of literacy and numeracy despite high spending growth.
Why don’t Americans want to leave a secure government or big company job to start something new? The economists blame the decline in entrepreneurial activity on health care inflation: “There is always an element of risk in creating a new business, but the rising costs of healthcare magnify that risk. In previous decades, an employed worker could quit his or her job and pay for healthcare expenses out-of-pocket if necessary. Now, out-of-pocket expenses for the non-insured are extremely high, so an employed worker who quits to start a business likely gives up a valuable healthcare plan and may have to impose those costs on his or her own fledgling business at a time when revenue is dangerously low.” How steep is the decline? “The number of new firms with at least one worker per capita has fallen by about half since the late 1970s.” (Unlike journalists and politicians, these folks at least seem to adjust for population size appropriately throughout this report.)
A chart on page 84 shows that the U.S. legal landscape for employers changed enormously during the early 1980s. Employment at will was thrown out in favor of “implied contract” such that it became expensive to get rid of an unwanted or no-longer-affordable employee.
Although it is not central to the report’s arguments, page 85 contains a seemingly false statement: “Sugar is also heavily subsidized in the United States.” I thought that it was the opposite. We have sugar import quotas to keep prices high in the U.S., no?
We are crazy inefficient: “It costs the average U.S. physician $83,000 per year to process claims or otherwise interact with healthcare payers.” These are pre-tax dollars, presumably, but it is still a huge number, exceeding what a young primary care doc would have to pay in child support after a one-night sexual encounter in Massachusetts.
The economists say that teacher pay is low but don’t explain how this squares with the hundreds of applicants for every open position and the low quit rate of teachers.
Out of 100 pages just 2 are devoted to suggestions for how to get out of this stagnation. The purported suggestions are in fact mostly “well, we tried all of this stuff before and it didn’t work.” The idea of lower tax rates is dismissed on the ground that it has already been tried. They don’t grapple with the greater-than-90-percent rates faced by some of America’s potentially most productive workers. Singapore has a top tax rate of just over 20 percent and no estate tax. So the older highly productive worker in Singapore looking to improve his or her children’s wealth would have a vastly greater incentive to work than a similarly situated American. Ireland certainly has prospered after cutting tax rates (higher per-capita GDP than the U.S. or the U.K.; this from a country that was formerly notable for its poverty).
Readers: What do you think of the doom and gloom in this report? Would it really be that hard to get Americans to put down their Xbox controllers, stub out their legal marijuana, turn off the football game, and get to work?
“Would it really be that hard to get Americans to put down their Xbox controllers, stub out their legal marijuana, turn off the football game, and get to work?”
You can pry my weed and my xbox controller from my cold, fat hands. I don’t not pay taxes so I have to work like some kind of savage. Really, the concept of work is so outdated, isn’t that why we invented China?
Far be it from me to say anything positive about Obamacare, but hasn’t it addressed the health insurance for founders issue? Just sign up and pay.
It looks like sugar producers in the United States receive both government subsidies as well as protection from imports of foreign sugar. See https://www.bloomberg.com/view/articles/2013-03-13/that-sickening-sugar-subsidy
I could not find any indication that policy has changed since 2013.
By sugar they probably mean HFCS and the subsidized corn from which it’s made. If Brazilian sugar were available without the special tariffs HFCS probably wouldn’t make sense.
There’s a lot there doesn’t make sense.
The study finds there is no recovery. Since 2007, U.S. GDP per capita growth has been 1%.
That one percent may be disappointing, but it’s a positive number, which represents a recovery.
There is always an element of risk in creating a new business, but the rising costs of healthcare magnify that risk
The solution to this problem is well known. We can just extend our Medicare system to cover every American.
It costs the average U.S. physician $83,000 per year to process claims or otherwise interact with healthcare payers
The medical claim costs are much lower in Canada, which is one of the major reasons that Canadians spend much less per capita on health care. This has been understood for a long time. I read articles about in the New England Journal of Medicine in 1989.
It’s not true that cutting taxes hasn’t been tried. There were some significant federal tax cuts implemented around 15 years ago. They didn’t help much.
Also, Ireland and Singapore are small island nations which aren’t comparable to the USA. Ireland in particular benefits from the presence of a fairly small number of American software and pharmaceutical companies. In other words, Irish prosperity depends on industries that have relied heavily on American corporate welfare. If we could somehow force those companies to relocate their facilities back to the states as partial compensation for the taxpayer-funded largesse that they’ve benefited from, we’d certainly be above Ireland on that CIA chart.
It’s also worth noting that Ireland probably spends very little on its military. That’s one Irish policy worth considering.
Regarding house prices, America is currently near the peak of another speculative bubble. Both house prices and rents are now falling in many metropolitan areas.
Should someone give up their xbox and weed days, what would they do? Spend lots of money on an education for a job that is already done better by someone in asia for a lower cost education? Or sit around, blaming some outside force for everything using the political boogeyman du jour? Or attempt to get a $15/hr minimum wage job when they can only produce $8/hr?
A smart single person who realizes the liabilities of marriage and family law and the liabilities of healthcare alone is likely to be too demotivated to help grow the economy much by coming up with anything beyond a phone app or giving healthcare patients massive bills.
@Eric, @Phil
It looks like the author may have used “subsidy” as shorthand for both the USDA loan program for sugar processors (not growers as it isn’t as easily stored until refined) and the tariffs.
https://www.ers.usda.gov/topics/crops/sugar-sweeteners/policy.aspx
There doesn’t appear to be a direct subsidy, but the USDA loan can be repaid with sugar if the price drops below a certain threshold.
To prevent the sugar from causing more loan defaults in the future the USDA’s Commodity Credit Corporation (CCC) can transfer ownership to ethanol producers in lieu of them growing more (or buying commodities of sugar) for that season. CCC sugar can not be used for human consumption.
This of course doesn’t take into account HFCS, which is subsidized mainly through corn as a crop as @Bobbybobbob pointed out earlier. https://www.ers.usda.gov/topics/crops/corn/policy/
Conflating the effects of structural problems with the effects of the great recession (still lingering) strikes me as unhelpful.
Isn’t the budget deficit a bit high to be considering tax cuts?
Neal: a tax rate cut may not be a tax receipt cut… Right now the tax RATE for a U.S. company’s overseas earning is the highest in the world, but the receipts are essentially $0 because multinationals avoid the tax (Apple being the poster child for this behavior). Ireland cut its corporate tax rate to the lowest in the EU (until Estonia came in with a rate of 0 percent?), but RECEIPTS grew as they took growth from the high-tax-rate jurisdictions. For example, pharma companies that used to pay corporate taxes in the U.S. now pay them in Ireland following corporate inversions.
I did not understand from the posting that you meant corporate taxes.
Any engineer will tell you that a system relying on infinite exponential growth is bound to fail, yet politicians and economists tell us that this time it will be different.
Neal: It would also be true of personal tax rates. Elimination of the estate tax, for example, might result in rich people either (1) continuing to work, or (2) refraining from dumping money into non-profits to avoid estate taxes. So a cut of the rate (to zero) could result in higher overall tax receipts.
The cost of quitting your job used to be 0, because most people had no health problems. Perhaps besides the 2% penalty for not buying insurance, human health is declining like human intelligence & now it’s guaranteed that you’ll have $100,000 in medical bills the moment you stop paying Kaiser.
philt: I didn’t understand you wanted to tune tax rates to increase revenue. I understood that you were proposing to lower tax rates in order to reduce the fraction of GDP collected by government as taxes.
Neal: You can do both if you have a successful country. As long as you don’t bulk up on government, with economic growth you could have more cash coming into the treasury and also have that cash be a lower percentage of GDP.
philg: Of course you can do both IF you have a “successful” country. The question is will cutting tax rates transform the U.S. economy described in the Gallup analysis to a “successful” economy. We have had extended periods of higher growth when tax rates were as high or higher than the current rates. That suggests that tax rates are not the only factor inhibiting growth and therefore cutting tax rates will not necessarily lead to higher growth.
Neal: “We have had extended periods of higher growth when tax rates were as high or higher than the current rates.” What periods are you talking about? Periods in which there was no Internet, no container shipping, no market economy in China, no EU? If so, I’m not sure what the applicability would be to the 21st century environment in which the U.S. has to compete for investment.
Indeed, we’re having so much trouble competing for investment that its pushed the PE ratio on the S&P 500 all the way down to 25.
The economists say that teacher pay is low
Compared to what?
… but don’t explain how this squares with the hundreds of applicants for every open position and the low quit rate of teachers.
There’s not much else that these teachers and teacher applicants could do that would pay as well or have as good benefits as teaching.
Oh, but teachers work a lot of extra hours off the clock “grading papers.”
>> Oh, but teachers work a lot of extra hours off the clock “grading papers.”
And the pencils are getting really expensive…
The amount of money we pour into our education is just a sign of being clueless, and we do exactly same for all other problems: just throw money onto the problem until it cannot be seen anymore.
The problem seems to be with motivation (as well as the culture). Why study at all if you can post your math homework question on Quora and let a thousand foreign nerds solve it for free? Why would they do it? Some do it for fun, some for peers’ approval, some to advertise their tutor skills. And we are entitled to be the world’s CEOs.
Let’s outsource everything that is not our core competency (the latter being that we tend to have more US-denominated cash)
An interesting question that Neal raised is, how do we know if lowering corporate taxes is a right thing to do?
There seems to be a global fiscal arbitrage, so we might have to do it against our wishes. But with P/Es historically high, what do we care, at least in the short term?
It is true that global companies such as Apple have billions of dollars in their offshore accounts and it’s better to get some of that in taxes rather than nothing. But in the spirit of the populist Trump-speak, do they enjoy the US legal and government/political protection, or would they be willing to relocate their headquarters to Qatar overnight? If, just for the sake of discussion, Trump is willing to twist the arm of Ford (or South Korea FWIW), why not Apple or Google? (Hello, Mr Page! How’s your business in China been lately? Oh so sorry to hear about your Beijing office, and the censorship, but have you ever thought of Chengdu as a better location? Yes, of course you can still have the MTV office, but we might ask for your help in underwriting the Obamacare replacement. Sure, moving to Ireland may be a smart thing to do; by the way, remember that tax back-payment you owe to the EU for the privacy violations? you know the EU sovereignty is our core value, so why won’t you just pay? )
It is true that there numerous examples of other nations benefiting from cutting their corporate taxes. Those countries are all much smaller than the US, and they seem to be in a different phase of their development cycle. So why is their experience relevant?
>The economists say that teacher pay is low
>but don’t explain how this squares with the
>hundreds of applicants for every open position
If the actual quality of the applicants is lower than the desired quality of the applicants that would square a statement that teacher pay is low with an observation of hundreds of applicants for every open position. I am not asserting that this is the case, only that it is one possible explanation for the apparent contradiction noted in the posting.
Anon: You raise some good points about how it is easier to attract new corporations if you’re a small country that doesn’t already have a lot of big companies. But I don’t think the risks of Ireland are as great as you imply. My understanding is that companies got in trouble for paying 0% via offshore trusts, not for paying the headline 12.5% Irish corporate tax rate. Also, remember that physical and monetary assets will benefit from the “legal and government/political protection” you mention where those assets are located. Even if the HQ is in Ireland, if the assets are mostly in the UK, the US, China, etc., the Irish legal environment may not be relevant.
philg: I believe that the State Department would put in some effort, often behind closed doors, to protect interests of US companies abroad. Hence there is some value in being a US-based company, and the administration can use that as a leverage in negotiating corporate tax rates.
If that is not the case I, as a contrarian, don’t see how the low corporate rate would entice the multinational to repatriate their profits. What would be the point? They can repatriate just enough funds to purchase bonds tax-free, which they have been doing for a while.
Reasons to keep funds abroad: (1) the US is not a growth market, Asia is, most capital investments should be done locally; (2) any increase in the US demand would be cyclical and not overwhelmingly strong and can be met by ramping up output in Asia: not only is it cheaper, but logistically easier; (3) if your tax is already at 0%, how much better can it get?
To paraphrase Nick Carr, the West does not matter.