Archive

Archive for the ‘Economic Growth’ Category

The Business Cycle and the 2016 Election

November 9, 2016 Leave a comment

The 2016 election is now over, thankfully, and so it might be a good time to provide some perspective on the electoral outcome. It seems safe to say that voter dissatisfaction motivated much of what happened yesterday and the state of the economy is one part of this voter discontent. In this post, I thought I would provide some data on the business cycle history of the U.S. which I believe was clearly part of the explanation for the election. Along the way, I will give a primer if you will on business cycle measurement. Read more…

Economists Running for Office

August 31, 2016 Leave a comment

I have tried to stick to economics on this blog, meaning that I do not get involved in expressing political opinions for any reason. But I learned something today that I felt should be passed on to my readers.  And that is that two economists, Lawrence Kotlikoff and Edward Leamer, are running for President and Vice President of the U.S. Their web site is kotlikoff2016.com.

These are two established and highly competent economists but, let me be clear. I am not expressing my endorsement of them. I am merely passing on the information to those who might be interested.

Given the turmoil that we are seeing in this election season, it is quite interesting to see two economists feel that they should get on the ballot. It really is true that the U.S. economy has extremely serious problems that are not being addressed by either of the two mainstream candidates running for President. I will be interested to see just how far these two economists get to the jobs they seek.

Serious Policymaking

June 24, 2016 Leave a comment

Much of the political behavior we see is theater or, even worse, buffoonery.  I simply tune it out because it is almost always a waste of time to observe the latest actions or comments by politicians. There is a notable exception to this unfortunate reality and that is the policy proposals recently generated by Speaker Paul Ryan and others in the House of Representatives.

This program is called “A Better Way” and the proposals cover many issues that need to be addressed. The documents that were prepared are too broad to be completely discussed here but I urge readers to read the documents for themselves because they are worth reading and considering. Here let me just mention their proposals about taxes, called A BetterWay-Tax-Snapshot.

The tax code is a disgrace. It is riddled with carve-outs for favored groups, complicated by political attempts at central planning or social engineering (e.g., we need more people in houses so we give a write-off for mortgage interest), and is full of vagaries that invite abuse by the IRS. I have stated elsewhere that when a tax code is clear regarding what is taxable, there is little room for bureaucrats to grind an axe against individuals or organizations they dislike. One aspect of the Ryan-proposed tax overhaul is a vast simplification of the tax code which I heartily endorse. But there are other aspects of the proposal that have merit.

The press has reported on several so-called “tax inversions” where companies merge in order to cut their tax bills. The response by many politicians has been typical. The politicians create the incentives that cause the mergers to occur, then the politicians complain about the actions they induced. Now it has been reported that a complex set of new regulations are being prepared by the U.S. Treasury designed to stop these mergers. So this provides yet another example of complexity added to an already-complex tax code providing employment for lawyers and accountants. The Ryan proposal reduces the corporate tax rate which reduces the incentives for these mergers to occur. Firms should merge because it increase their efficiency which raises the wealth of the stockholders, not because of tax policies that may actually reduce economic efficiency.

Finally, the proposal cuts personal marginal income tax rates while eliminating many deductions used by taxpayers to cut their tax bills. The marginal tax rate (MTR) is the additional tax incurred when an additional unit of pre-tax income is earned. These tax rates are a crucial part of the incentives faced by the public and there is comprehensive evidence that a lower MTR raises labor supply which will increase economic activity. This should move in the direction of reversing the low labor force participation rates we have seen and increase real GDP or economic growth.

There might be elements of this proposal or the others that have been offered in A Better Way with which I and others might quibble but these are thoughtful proposals that would correct many of the problems faced by the U.S. I hope that these documents will be read and pondered by all serious voters troubled by the state of the U.S.

Dismal Economic Growth Continues

The political primaries seem to reflect the dissatisfaction that many voters feel about the state of the U.S. Some of this discontent is likely to be related to the condition of the economy. As I have stated in earlier posts (read them here and here), economic growth is low by long-run U.S. standards and should be the top economic issue considered by the voters in making their voting decisions in the next presidential election.

The last recession ended in June 2009 (go to the web site for the National Bureau of Economic Research for business cycle dates).  Below is a table listing annual growth rates for real output (GDP) since the last recession ended.

Quarter Growth Rate
2009:3 1.3
2009:4 3.9
2010:1 1.7
2010:2 3.9
2010:3 2.7
2010:4 2.5
2011:1 -1.5
2011:2 2.9
2011:3 0.8
2011:4 4.6
2012:1 2.7
2012:2 1.9
2012:3 0.5
2012:4 0.1
2013:1 1.9
2013:2 1.1
2013:3 3.0
2013:4 3.8
2014:1 -0.9
2014:2 4.6
2014:3 4.3
2014:4 2.1
2015:1 0.6
2015:2 3.9
2015:3 2.0
2015:4 1.4
2016:1 0.5

The data in the table is drawn directly from the Bureau of Economic Analysis, the federal agency responsible for producing the National Income and Product Accounts.

The average growth rate in this table is 2.1 percent. Over the century ending at the beginning of the last recession, real output grew at 3 percent per year. The difference between 2.1 and 3 percent is enormous over long periods of time. Thus there will be enormous losses of real income in store for U.S. residents if the dismal growth rate in the table continues.

Unfortunately, I have not heard a great deal in the press about this unfolding disaster (because a disaster is exactly what it is). But no economic issue is even close in importance to the question of how we can reverse this decline in economic growth.

Bias in Economics Textbooks [Updated]

April 25, 2016 Leave a comment

I recently saw a local newspaper article discussing the selection of economics textbooks to be used in teaching economics to high school students in my local school district. A school board member expressed some concerns that a text might be chosen that could reflect the political or other biases of the text authors. As an economist, I (unsurprisingly) endorse teaching economics to high school students but I am well aware that many economists express opinions about economic policy and other economics issues that do not reflect solid economic analysis. Rather their statements reflect their political or other biases.  And so I decided to pursue an example of possible bias recently discussed in a journal devoted to economic analysis.

Richard Vedder is Emeritus Professor of Economics at Ohio University and he recently wrote an article in the Winter 2016 issue of the Cato Journal on the state of academic economics. One matter that he discusses there is the accuracy or possible bias of economics texts and he provides what to me is a stunning example of misinformation in an economics text. I checked Professor Vedder’s example and it is indeed entirely accurate.

In Principles of Economics, 12th Edition (1985), written by the late Paul A. Samuelson and William D. Nordhaus, there is a discussion of the Soviet Union. Consider the following statement (Samuelson and Nordhaus, p. 775) about economic growth in the Soviet Union.

…there can be no doubt that the Soviet planning system has been a powerful engine for economic growth.

The Soviet Union collapsed in 1991 just six years after this statement was published! Does it seem reasonable to you, dear reader, that a country that is a growth engine of such magnitude would break apart a short time later? How can we explain this astonishing statement? How could these economists be wrong? Read more…

The Importance of Economic Growth

October 28, 2015 3 comments

The decline in economic growth in the United States is the most serious economic problem facing the country (see my previous post here on this subject) and it should be the top economic priority for the voters in the presidential election which is approaching. To see why, the following example is instructive.

Consider two economies. One grows at two percent per year (the slow-growth economy) and one grows at three percent per year (the fast-growth economy). Their growth rates “only” differ by 1 percent but this difference turns out to be very large when viewed over many years. The table below illustrates the relative sizes of each economy.  In the table, the entries are the extent to which the three-percent economy exceeds the two-percent economy in size over several time periods.

5 Years: 5.0%

10 Years: 10.25%

25 Years: 27.6%

50 Years: 62.87%

100 Years: 165.28%

So after five years, the fast-growth economy is 5% larger in size than the slow-growth economy.  After ten years, the difference is over ten percent, and at the end of a century, the fast-growing economy is over one and one half times as large as the slow-growing economy.  And remember – GDP is a measure of the size of aggregate incomes in the economy so what we are really seeing is how much lower incomes will be when the growth rate of an economy falls by one percent.  Simply put, the differences are staggering in size over long periods of time. The high-growth value of 3 percent was not chosen arbitrarily. This is the growth rate of the U.S. over the hundred-year period ending at the onset of the last U.S. recession.

The next election for President of the United States is a crucial one for the future welfare of U.S. residents. If nothing is done to restore economic growth to its historical average of three percent, there will be huge income losses in store for U.S. citizens.

Categories: Economic Growth

Greece

February 20, 2015 Leave a comment

Greece has a newly-elected government which campaigned on the promise that, if elected, it would renegotiate the bailout terms that previously were imposed upon the Greek economy by a previous government and its financial bailout partners. The reason for the desire to renegotiate terms is that Greece has been in recession with high unemployment and declining output for some time and the terms of the bailout require higher taxes and reduced spending, among other things, as a requirement for loans to keep the government from defaulting on its debt.  This drama seems to me to offer a number of lessons for the U.S. and other countries running persistent government deficits.

The Fallacy of Composition

Economists know that what is true for an individual in an economy is not necessarily true in the aggregate economy.  This fact is known as the Fallacy of Composition.  So if Greek politicians promise transfer payments to some Greek citizens, this does not imply that those politicians can promise such payments to all citizens.  Once you add up all the promises, one needs to ask how this will be financed and in many countries, such as the U.S., the answer is borrowing to keep these promises. Each individual wants what he or she has been promised but, if a government is unable to borrow, then what is true at the individual level cannot be true in the aggregate. Greece cannot keep all of the promises that it has made because it will not be able to continuously borrow to do so.

Greece and the EU

Greece is a member of the EU and so it cannot print money to cover its deficits if it is unable to borrow.  The reason is that Greece does not control the EU Central Bank.  If it did control its own money stock, it would undoubtedly be in the throes of a hyperinflation because it would be printing money to finance its deficits. Since it cannot print money, it sought loans to keep the party going but reduced spending and higher taxes were the price it paid for its bailout. The recession resulting from these terms are what has prompted the desire to renege on its previous agreement.

Ultimately, structural reforms are needed to promote economic growth, much like those discussed previously in this blog in connection with Italy which has problems similar to Greece (see Why Italy Declines). These reforms are so-called supply-side policies that remove regulatory and other impediments that reduce economic growth. These reforms appear not to be part of the bailout requirements but these reforms are the only way that the Greeks can achieve real economic progress.

Economics One

A blog by John B. Taylor

The Grumpy Economist

One economist's views on economic policy.

The WordPress.com Blog

The latest news on WordPress.com and the WordPress community.

%d bloggers like this: