New Year’s Gift

The Congressional compromise deficit reduction agreement is a very good end of the year present. After the prior budget impasses, government shutdowns, sequestration, and not helpful rhetoric, it is refreshing to see that an agreement has been crafted that will last two years and move us in the right direction—spending increases will decline in a more rational way, some fees will go up, and a non scorched earth fiscal discipline seems to be in place at last.

This clearly wasn’t an easy compromise to craft, especially given the current climate. And it is already evident that certain ultra conservative politicians and think tanks are vehemently opposed to this package. On the other hand, though perhaps less vocal, the far left leaning liberals are equally disenchanted. But isn’t this what compromise is all about? No side gets all that it wants; the country however wins when there is a measured response to serious issues that have major ramifications on the economy.

Our economy is strengthening. Third quarter GDP increased an annual rate of 3.6% which is a significant improvement over the second quarter increase of 2.5%. New residential sales of single family homes increase by 444,000 units which is more than a 25% increase. Unemployment for the month of November was at 7%, a rate unseen since the end of 2008. And the Dow Jones Industrial Average being close to 16,000 has helped bring comfort after years of concern about the viability of investments in the stock market. In all these areas we can and should do even better but the improvement has made a significant positive difference.

But, we should all remember that an economy can be both robust and yet still fragile. Every threat of a government shutdown, every mention of sequestration and, most importantly, every indication that common sense compromise is off the table, weakens the threads that hold the economy together and move the economy forward. Our government leaders do a tremendous disservice when they turn their backs on what needs to happen to best serve the interests of our country.

There are fundamental differences between the Democratic Party nationally and the Republican Party nationally. Those differences are a healthy part of the fabric of our society. But getting past these differences when decisions need to be made makes all the difference in helping to move an economy forward and a society forward.

All the best for the New Year.

Dutch Treat

I just returned from a family vacation week in the Netherlands spending time at the Floriade (which is the once every ten years flower show) as well as time in Amsterdam and the surrounding areas. I thoroughly enjoyed the trip. Certain observations and comparisons are inevitable and these observations may help us and our county in the years ahead.

First is the observation regarding scale. Everything seems smaller. Not the people but the cars, the homes, the stores etc. And yet it is clear that smaller works very well. The largest cars I saw during the entire week, with very rare exception, were no larger than our mid size cars and SUVs were few and far between. (Under the heading of full disclosure, I did see one Chrysler 300 and 2 Bentleys. Interesting, I thought the Chrysler stood out in a more distinctive way.) Now back to smaller cars: think about the savings in gas if we can adjust to a smaller scale. We have been slowly moving in that direction and I don’t think we are any the worse for that movement. We should continue this effort; it would be a great way to counter rising energy costs.

Housing, even in very upscale areas, also seems noticeably smaller. The square footage is much more limited and attached housing is much more prevalent, even in the suburbs. Many of the apartments and houses also came with roll down window shutters that provide extra weatherproofing and storm protection. And stores and restaurants are noticeably smaller. Now I happen to like large stores and huge malls in our country because of the selection that is available, but once again are we using our resources as efficiently as possible? I had no trouble finding anything I wanted even though the stores were often, by my definition, cramped.

Having done significant driving and also traveling on buses and public trams, I can also tell you that the infrastructure seems much better maintained. Bad roads were few and far between, though the roads were often too narrow for my comfort level. Highways had fewer lanes but Amsterdam did have traffic that rivaled downtown Manhattan. Therefore, the car was returned the day we arrived in Amsterdam. The trams in Amsterdam were clean and modern and the rail system throughout Europe is first rate. Now, infrastructure needs as we know are usually financed by government and here the Netherlands scale (tax rates) may be larger rather than smaller than that of the United States.

A comprehensive comparison of the Netherlands and the US requires more than a few observations and facts. Education, health care, a safety net, defense expenditures etc. are all part of the equation. And the reality is we want it all and we want it on the largest scale possible. We should as a people be able to do some downsizing (cars, homes etc.) on our own initiative and with miniscule impact on the quality of life. For the rest we need to confront the choices that we have been reluctant to confront. We know we can’t provide more with fewer resources. Government needs to cut back on spending, or increase taxes, or do both. Having all of the above is not an option. I look forward to the Presidential candidates giving us the necessary facts that will allow us to make these necessary decisions regarding who to vote for and what direction our country will follow.

Important Role of Government

I am today philosophically close to where I was when I was in graduate school. I am a middle of the road economist. I recognize the importance of government fiscal and monetary policy and yet government needs to make sure it doesn’t micromanage where it isn’t necessary, and government needs to make sure that the laws are constructed in the fairest way possible. I’m not sure at this moment that government—all levels of government—are doing all they can do to be fair and to not micromanage. For example, when a major presidential candidate can earn over $20 million dollars per year and not pay more than a 15% tax rate, I question the fairness of the system. I don’t fault Mitt Romney—there is no reason that he should pay more than is required. Nor should he be ashamed either of his earning power and his level of taxation. He is an American success story. I do, however, fault our federal government for creating a tax structure where the wealthiest Americans are so clearly paying a lesser percentage than millions of Americans whose earnings are a fraction of Governor Romney’s earnings. I would never suggest we impose an onerous tax rate for individuals in this bracket and perhaps we should all pay the same percentage, but no one should believe that the system that presently exists meets the fairness test. I’ve written before about defined benefit pension plans. There is no question that they are very beneficial for the recipients but there is also no question that substituting certainty for risk on the part of the pension recipients is made possible at the expense of tax payers. These are the same tax payers who, for the most part, save what they can for retirement without the ability to shelter these monies from the winds of economic uncertainty. What a nice system it is when you win if the stock market rises and you can’t lose if the stock market falls. I would never diminish the defined benefit pension plans for those who already have them. But can we really justify their continuation in the same form going forward? And to prop up these pensions, what are we now not able to do which meet important needs. Are we cutting back, for example, on our support for public K-12 education? Bad decision and bad news for the competitive future of our country. The few times in my life that I have seen momentary price controls, the end results have been serious market disruptions. In a market economy, it doesn’t really work to bypass the market. And now there is mention of government efforts to limit tuition increases. The market already is an effective brake on excessive tuition increases. If the value equation isn’t there for a particular college or university, there are multiple other universities—private as well as public, senior as well as community – to chose from. A dynamic institution striving to make greater use of full-time faculty, or greater merit-based or need-based scholarships, or smaller class size, or new majors in more costly areas, may need a larger than average tuition rate increase. Should institutions making initiatives like this be dissuaded from doing so or penalized for doing so? It makes no sense. And I do understand the high cost of education and the strains that it puts on many families. Competition from lower priced alternatives including on-line degree programs or for profit colleges and universities are better alternatives than price controls. Here is my dilemma and the dilemma for so many of us. Government is a lifeline we all need but when government undermines a level playing field, we are all hurt.

Failure

The news from the congressional supercommittee was not surprising.  No budget deal – meaning we now will have an automatic triggering of across-the-board budget reductions.  What a bad decision by our Congressional leaders, what a bad impact for our economy, and what a failure to read the will of the public.

How did we get here?  Clearly, too many lines in the sand.  A reluctance to cut spending coupled with an equally forceful reluctance to increase any tax rates.  Leadership by following a "my way or the highway philosophy."  There are without question some areas in social services, health, and defense where spending reductions should be very measured.  There are also many tax rates that should under no conditions be increased.  But there is also without question justification for some spending cuts and justifications for some tax increases (or loop-hole decreases).

But where we are now, with across-the-board adjustments the default position, is on the verge of doings greater harm to the economy.  With the triggering of across-the-board cuts, spending in areas such as health, research, some kinds of student aid, and even defense all are about to be reduced.  Who loses by doing this, other than those directly involved in these industries?  We all do given the critical nature, the future consequences, and huge impact of the industries involved.   And are we really sure that this budget reduction number even makes sense for the economy or is it another case of a guesstimate by Congress, which can now lead to another line in the sand?

Most of us know that compromise is possible if politics move to the sideline and national interest moves to the forefront.  Most of us also know that the best interests of our economy and our country require compromise.  Will our nation's leaders jeopardize our best interests by cutting without thinking or will our leaders rise to the occasion?  We don't need or want more political rhetoric.  Instead, we need thoughtful solutions to cut the deficit brought about by thoughtful elected officials.  For the current crisis, the last best time is clearly now.

Demand and Supply

The 2010 Georgetown University Center for Education and the Workforce study of “Projections of Jobs and Education Requirements Through 2018” concluded that “by 2018 we will need 22 million new college degrees- but will fall short of that number by at least 3 million postsecondary degrees, Associate or better.”  Furthermore, the report states “we will need at least 4.7 million new workers with postsecondary certificates. “ The report comes to two other conclusions, all conclusions that will not surprise the higher education community.  First, the report notes that “between 1973 and 2008, the share of jobs in the U.S. economy which required postsecondary education increased from 28 percent to 59 percent.  And second that “as the economy evolved, postsecondary education gradually became the threshold requirement for access to middle class status and earnings.”

But there is a fundamental disconnect between the increasing need for higher education credentials and the support by government of students pursuing this education.  Be it on the graduate level or on the undergraduate level, financial support for students as well as for institutions is declining.  Consequently in a lackluster economy, with many families straining to afford the education for their children, the diminished support makes it more difficult to pursue added education and less likely that this investment will be made.

Education is first and foremost an investment, an investment in the personal growth of the individual undertaking the education as well as an investment in the economy.  Our economy needs workers with sophisticated skills sets to do the increasingly more complex jobs that are available in fields such as the sciences, healthcare, business and education.  In a global economy and in a highly technological time, there are no substitutes for such workers.  As one example, if we look at health care where we are striving, rightly so, to provide a health care safety net for all our citizens, how will we be able to vastly increase the services needed by this broader base of our population without expanding the supply of educated workers?  Laws can provide accessibility but without the necessary supply, the results will not be there.

Especially in those areas that are vital to our economic growth and to the well being of our population, there needs to be a well thought out policy that provides more, not less, resources for higher education.  We should highlight the areas with the greatest need for skilled workers, and I think we already know this information for at least the next decade.   Next, we should publicize where those areas are and what the required educational attainment is for a person to succeed in those fields.  This information needs to be conveyed to students in middle and high schools and also to their families so that it can be fully considered as part of the decision making process in regard to postsecondary education. And then to further make sure the supply of skilled workers is commensurate with our needs, we need to develop specific economic incentives.  These incentives should be targeted just to increase workers in areas of need; in a time of scarce resources we need to carefully and precisely allocate those resources.  Yes, this will cost money; yes, we will need to increase our support of postsecondary education; and yes, this will impact the decision making process of these students/future workers.  But we have no choice.  To allow a fundamental disequilibrium to exist between needed skills and the number of workers with those skills is to relegate our economy to clearly falling short of its potential.  And the more we fall short of our potential, the more we face an economy unable to do all we all need done.