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What Hillary’s Campaign Missed

November 15, 2016

Last week’s election should be dubbed the revenge of the neglected. The outcome would have been different if Hillary’s strategists had taken to heart James Carville’s famous quip in 1992, “It’s the economy, stupid.” I remember it well, because I pulled together Bill Clinton’s economic program for the 1992 campaign. Of course, today’s economic problems are different from those of a quarter-century ago. But the political manifestation is virtually the same – tens of millions of Americans justifiably dissatisfied with their economic conditions and prospects.

As regular readers of this blog know, I’ve spent several years tracking what’s happened to the incomes of Americans of different ages, races and ethnicities, educational levels and gender, as they grew older. The Brookings Institution published the first results in 2015 covering the period 1980 to 2012. I sent that report to Hillary and Bill Clinton and as many of those who worked for them as I knew. The results refuted the left’s claims that incomes of average Americans have stagnated for two generations – across every category, median household incomes rose at healthy rates, year after year, through the presidencies of both Bill Clinton and Ronald Reagan.

But the results also showed tectonic income changes from 2001 to 2012 as this steady income progress ended. Hillary was particularly struck by the study’s darkest finding: The median income of households headed by people without college degrees — which covers nearly two-thirds of all U.S. households – fell as their household heads aged from 2001 to 2012.  This unprecedented development, of tens of millions of families losing income as they aged from their thirties to their forties, or from their forties to their fifties, held across race, ethnicity and gender, and for all age groups except millennials.

For example, the real median income of households headed by high school graduates ages 35-to- 39 in 2001 fell from $54,862 in 2001 to $49,800 in 2012. (All income data here are in 2012 dollars.) So, these Gen Xers earned $5,062 less at ages 46-to- 50 in 2012 than they did when they were 35-to- 39 years old in 2001. Their counterparts a decade earlier – households headed by high school graduates ages 35-to- 39 in 1991 – saw their real median incomes rise from $51,645 in 1991 to $63,614 in 2000, for gains of nearly $12,000 (about 20 percent) as they aged from their later-thirties to their later-forties.

Baby boomer households headed by high school graduates who were 45-to- 49 years old in 2001 suffered even larger income losses than the Gen Xers: From 2001 to 2012, their real median income slumped from $63,534 to $51,002, falling $12,532 or some 20 percent as they aged from their later-forties to their later-fifties.

Households headed by college graduates didn’t lose income as they aged over the following 11 years, but only barely so. The median income of those households headed by people ages 35-to- 39 in 2001 inched up from $97,470 in 2001 to $100,771 in 2007, and then fell back to $98,845 in 2012, when they were 45-to- 49 years old. Compare that to the 1990s, when households headed by college graduates ages 35-to- 39 in 1991 saw their median income rise from $81,742 in 1991 to $106,454 in 2000, gains of $24,712 or about 30 percent I calculated that about half of all working-age households lost substantial ground as they aged through that decade, and another quarter of Americans treaded water. This was an economic turn the United States has never seen before. It gave meaning to Donald Trump and Bernie Sanders’ claims that the economy is rigged, and it bred the broad anger that ignited their campaigns.

Hillary’s campaign didn’t ignore these developments. But her strategists, intent on reprising President’s Obama winning coalition, focused instead on the special problems of young, minority, and female voters. The campaign offered the Hispanic community a new path to citizenship for undocumented workers, and promised pay equity for women. It called for larger Earned Income Tax Credit checks for working-poor families, and debt relief for recent college graduates. All of these initiatives have merit. But none of them directly addressed or even acknowledged the structural forces squeezing out income gains for much of the country.

Hillary pressed me to explain the long income slump. I told her the truth: These income problems did not bubble up from the trade deals of the 1990s and the offshoring of manufacturing jobs, which happened mainly in the 1970s and 1980s. The fault lay mainly in forces much harder to demonize, namely technological advances and the way globalization and the Internet affect how companies price their goods and services.

Americans love the entertainment and social networks fostered by information technologies and the Internet. But these technologies also restructured the operations of virtually every office, factory and storefront. As that happened, anyone without the skills and confidence to work effectively in an IT-dense workplace saw his or her “labor value” erode and wages fall. College graduates avoided the worst of the income slump, because virtually everyone who earned a bachelor’s degree in the last 15 years is IT literate.

The other major culprits for the recent income squeeze are the Internet and, yes, globalization. Again, manufacturing job losses are not the heart of it. Rather, the Internet and globalization both intensify pricing competition, and businesses facing those strong competitive pressures often find themselves unable to pass along any rising costs in higher prices. So, as energy and employer healthcare costs rose sharply, especially from 2000 to 2008, many U.S. companies were forced to cut other costs. The data show that those cuts started with jobs and wages.

All of these downward forces took hold throughout the 2002-2007 expansion, and the financial crisis and deep recession that followed only amplified them.

The data also show that conditions shifted again in 2013, when energy prices collapsed, Obamacare started to slow employer healthcare premium increases and, with wages and salaries depressed, hiring became an attractive proposition again for companies. The latest data show that incomes have been rising since 2013 across virtually every group. For my friend Hillary, it was too little, too late: A few years of modest income progress have not offset a decade of painful losses.

But Trump’s success as president will depend on sustaining those income gains for four more years. As I’ve said here before, the economy needs a good dose of stimulus, and Trump’s deficit-defying tax cuts should jump-start growth in late-2017 and 2018. But his tax plans are so excessive economically, they could set the Federal Reserve on a course of multiple interest rate increases that slow growth by 2019. Beyond that, the economic challenge that Hillary also would have faced is that income progress ultimately requires healthy productivity gains, but productivity growth have slowed dramatically for few years now. If Trump and the GOP Congress fail to nudge up productivity, they could face their own populist revolt in 2020.



Halloween Special: How Hillary Can Handle Scary Interest Rate Hikes

October 31, 2016

Looking past this weekend’s kerfuffle over Huma Abedin’s emails, Hillary Clinton’s success in her first term as President will depend in large part on whether the incomes of most Americans keep rising. As readers of this blog know, my studies tracking people’s incomes, year to year as they aged, found that the median household incomes of millennials, Gen Xers and boomers all grew at healthy rates in 2013, 2014 and 2015. Moreover, this income progress reached across gender, race and ethnicity, and educational levels. That’s why consumer confidence and President Obama’s approval ratings are now so high.

The catch is that for most households, these gains came after a decade of income losses from 2001 to 2012. Hillary’s first challenge is to avoid a recession that could overwhelm most people’s recent gains — and her opportunity is to provide four more years of income progress that could well make most Americans optimistic again.

The challenge could start between Hillary’s election and inauguration, in December when the Federal Reserve’s Open Market Committee (FOMC) next votes on raising short-term interest rates. At the FOMC’s last meeting in September, its members voted seven to three not to raise those rates; but most Fed watchers expect the Committee to reverse this stance in December. Based on the Fed’s history, that decision will be followed by a long succession of additional interest rate hikes over the next three years. If that happens, growth and income gains could stall or worse as the costs for businesses to invest, and for consumers to buy a home, a car or a major appliance, all rise.

Traditionally, the Fed raises interest rates when the economy threatens to overheat and pump up inflation. But this time, there is little evidence of such a scenario. Inflation has risen at an annual rate of less than two percent for 51 consecutive months, and growth this year has been modest.  Moreover, based on long-term interest rates, U.S. and global investors expect low weak inflation to persist for years.

The only evidence that inflation hawks can cite is the recent strength of job creation. From January 2013 to September 2016, U.S. businesses added an average of 204,000 net new jobs per month. That’s nearly the pace last seen under Bill Clinton, when business created an average of 219,000 net new jobs per month from January 1993 to December 2000. Worrying about inflation may make sense once we reach full employment, since when that happens, competition for workers pushes up wages that are passed on in higher prices.

But the United States is not at full employment today, or close to it. Large numbers of people continue to work part time and not by choice, and labor force participation by prime age Americans remains abnormally low.

 The Fed’s only real argument for raising interest rates is strategic — higher rates create the room for the Fed to cut them in the next downturn. But even with 2.9 percent growth in the third quarter, the economy has expanded at a rate of less than two percent this year, and fixed investment has declined four quarters in a row. In this economic environment, a succession of rising interest rates over the next two years could trigger that downturn. And as the Bank of England has noted, if an economy begins to decline while short-term rates remain near zero, central bankers can still use quantitative easing to stimulate demand.

 It’s worth noting that near-zero interest rates carry risks of their own. With yields on government bonds so low, large investors have shifted to riskier investments with higher yields. That’s why commercial real estate is rising, why there’s a bubble in art markets, why prices for agricultural land and junk bonds are historically high, and why the price-to-earnings ratio for U.S. stocks is now 30 percent above its historical average.

These risky investments could pose a threat to the economy and people’s incomes, if a substantial jump in interest rates triggers a large decline in the U.S. stock, real estate and junk bond markets. Moreover, much like the run-up to the 2008-2009 crisis, the big financial institutions may not have paid enough attention to the risks in their high-yield investments. To be safe, Hillary should call on the Treasury and the Fed to audit those institutions through a new round of “stress tests,” and then ensure that any major institution with a shaky portfolio takes steps quickly to reduce its exposure.

If, as now expected, the Fed goes ahead and raises interest rates, the economic fate of most Americans will rest in the new President’s hands. Hillary’s best response will lie in fiscal policy.  Her first budget should call for more spending on infrastructure, new grants to the states to begin their transition to free tuition at public institutions, bigger Obamacare subsidies to offset the fast-rising premiums expected in 2017, and expanded support for research and development. On the tax side, new incentives for business plant and equipment also are in order. Hillary should cast all of these measures as an investment agenda for long-term growth, and not wave the red flag of “stimulus” in the faces of congressional Republicans.

Her first budget also should include measures to directly support income progress by working people, including the increase in the minimum wage, pay equity guarantees, and the expansion of the earned income tax credit. Finally, she can pay for all of these measures, as promised, by ending carried interest, closing corporate loopholes, and raising taxes on wealthy households.  She can also ensure that these tax changes don’t slow a fragile economy by phasing them in starting a year or two down the road.

The Federal Reserve is a very powerful force in the American economy. But so is the President — and a determined President Hillary Clinton can protect the incomes of Americans even if the Fed prematurely raises interest rates.



Obama’s Expansion Is Finally Paying Off 

October 13, 2016

There’s no debate that the tough economic times of the last decade have helped frame the 2016 elections. In fact, many Americans are so accustomed to seeing the world through their experience of tough times, that it’s hard to recognize when conditions have changed.

Yet, here’s one sign that times are different: American businesses have created almost 9.2 million net new jobs since January 2013, recalling the job creation rates of the 1980s and 1990s. More important, our analysis of the latest Census Bureau data shows that over the three year period from 2013 through 2015, the incomes of most American households grew again, and at rates that matched or exceeded the average for the 1980s and 1990s.

Last month, the Census Bureau reported that the aggregate median income for all U.S. households grew 5.2 percent in 2015, the first such increase since 2007. But as regular readers of this blog know, we apply a statistical approach that digs much deeper into the data. This approach allows us to capture the income experience of typical households of various kinds, by tracking their incomes as they age.

To see if and when economic conditions did truly change, we started by tracking the income path of millennial households, headed by people ages 25 to 29 in 2009, from 2009 to 2015.  Over those same years, we also tracked the income path of Generation X households, headed by those ages 35 to 39 in 2009; and the income path of late boomer households headed by those ages 45 to 49 in 2009.

This analysis found, as expected, that times were tough for most Americans from 2009 through 2012. For example, the median income of the Gen X households was flat over those years, and the late boomer households absorbed income losses averaging 1.1 percent per year.  The only households with rising incomes from 2009 to 2012 were the millennials, and their gains were a fraction of those achieved by households of comparable ages in the 1980s and 1990s. (Table 1, below)

Our analysis also showed that most people’s income paths shifted starting in 2013. Compared to the preceding three years, the income gains by the Gen X households went from zero to 2.9 percent per year; and the late boomer households, whose median income fell 1.1 percent per year from 2009 to 2012, saw gains of 1.4 percent per year from 2013 through 2015. Finally, the median income of the millennial households jumped from 2.7 percent per year to 4.6 percent per year. Also, it’s worth noting that the largest income gains for all three age cohorts came in 2015.

Table 1.  Average Annual Household Income Gains by Age Cohort,
As They Aged from 2009 to 2015

chart1

This analysis also shows that most Americans, finally, are better off than when President Obama took office. The median income of millennial households, in 2015 dollars, rose from $50,875 in 2009 to $63,010 in 2015, as they aged from 25 to 29 years-old, to 30 to 35. Similarly, the median income of Generation X household who were 35 to 39 in 2009 grew from $66,287 in 2009 to $72,028 in 2015. Even the late boomers who were 45 to 49 in 2009 managed small gains, edging up from $70,706 in 2009 to $71,300 in 2015.

We can also compare this record with other recent presidents, using my analysis published by the Brookings Institution last year. In that report, I tracked the income progress by comparable age cohorts during the presidencies of Ronald Reagan, George H.W. Bush, Bill Clinton, and George W. Bush — that is, gains in median income by households headed by people ages 25 to 29, 35 to 39, and 45 to 49 in the first year of each of those president’s terms. Since no president should be held responsible for the economy’s performance in his first year in office, we tracked the income gains of each age cohort from year two of each presidency through year one of his successor’s term.

Using this framework, it’s clear that most American households made more income progress under Obama than households of comparable ages under George W. Bush or his father, George H.W. Bush. (See Table 2, below.)  Moreover, the income gains of 2013 through 2015, like the job growth of the same years, suggest that the U.S. economy is still capable of producing a robust expansion, at least for a few years. The data show, in Table 2 below, that incomes grew at a faster annual rate over the last three years than they did on average over the eight years of Reagan’s presidency for all three age cohorts, and faster than they did on average over the eight years of Clinton’s presidency for two of the three age cohorts.

Table 2.  Average Annual Median Income Gains by Households Headed by People Ages 25 to 29, 35 to 39 and 45 to 49 as They Age through Each Presidency

chart2

 Of course, it’s not truly a fair comparison politically, since Clinton and Reagan delivered strong income gains over their entire terms, while Obama has done so for only three years. But especially after the meager income progress of the 2002–2007 expansion, the data show that the U.S. economy can still deliver robust income growth for almost everyone.

So, the challenge facing the next president is to sustain this recent income progress, in large part by reversing our recent record of faltering productivity.



On Economic Growth, Hillary Delivers and Trump Pretends

September 26, 2016

To prepare for tonight’s debate, I decided to think through Donald Trump’s promise to deliver 4% annual economic growth. First off, if this is Trump’s goal, then his program is as much a fraud as his foundation or university. If anything, his proposals would slow our already modest growth. To be sure, no one has a silver bullet to raise the economy’s underlying growth rate. But that doesn’t mean we’re helpless, and Hillary Clinton’s program will almost certainly raise that growth rate.

Four percent growth is not unprecedented. Under JFK and LBJ, the economy grew an average of 5.2% per year; and Bill Clinton produced 3.8 % average growth over eight years, including five years of 4% growth or more. But they were exceptions: Ronald Reagan and Jimmy Carter each managed 3.4% average annual growth; George H. W. Bush and Barack Obama each achieved 2% annual growth, and George W. Bush eked out just 1.6% annual growth. Moreover, the Federal Reserve forecasts that the U.S. economy will continue to grow an average of 2% annually for the next decade. This forecast and the record under Obama and Bush II all suggest that strong headwinds are hampering America’s economic growth.

By the arithmetic, economic growth measures how much more goods and services the economy has produced in one year, compared to the preceding year. That tells us that two key factors for higher growth are how many more people have jobs producing goods and services, and how productive, on average, everyone is producing those goods and services. By the arithmetic, strong growth rests substantially on increasing the number of people with jobs and the productivity of the entire workforce.

One reason for the disappointing growth of the last 15 years is that the number of net new workers each year slowed sharply. For that, blame the decline in U.S. fertility rates that began 20 years ago, rising rates of retirement by aging baby boomers, the slowdown in immigration sparked by the Great Recession, and steady erosion in the labor participation rate (LPR). All told, the Bureau of Labor Statistics reports that the U.S. workforce is now growing .5% per year, down from 1.25% per year under Bill Clinton.

So, which candidate has proposed anything that would expand the number of Americans working? Both agree on spending more on infrastructure, but that will have modest effects on long-term growth. Beyond that, one striking feature of Trump’s immigration, healthcare and other proposals is their secondary effect of shrinking the number of people working in the U.S. economy.

 To begin, Trump’s signature pledge to deport 8 to 11 million immigrants would reduce the workforce directly, for those caught and deported; and indirectly, by forcing millions to take cover outside the mainstream economy. Similarly, his promise to repeal Obamacare would increase the time that millions of Americans have to spend out of work for health reasons.

Nor should anyone believe that his $4.4 trillion to $5.7 trillion in tax cuts will somehow induce more people to work — that particular supply-side hokum is refuted by the rising labor participation rate (LPR) after Bill Clinton raised taxes, and the falling LPR after Bush II cut taxes.

By happy contrast, much of Hillary Clinton’s program would have secondary effects that increase the number of people in the labor force and working. Her path to legalization for immigrants will allow an additional eight million adult immigrants to participate fully and openly across the economy. Her plans to broadly expand access to child care and provide universal pre-K education would enable millions of parents to reenter the workforce or move from part-time to full-time jobs.

Moving along, her pledge to achieve universal healthcare coverage, once fulfilled, will lessen the number of people forced to stay home or even give up their jobs for health reasons. Her commitment to pay equity, once met, will encourage more women to enter the workforce or to increase their hours at work, as should her pledge to expand employment for 53 million American adults with disabilities. Finally, Hillary’s plans for expanding access to higher education will raise the labor participation rate, because that rate tends to rise with education.

The arithmetic of growth also depends on how fast productivity increases – and progress in productivity, which grew 2.8% per year in the later 1990s, has collapsed: From 2011 to 2015, productivity increased just 6% per year; and over the first half of this year, productivity actually fell at a rate of .6% per-year.

Three factors are mainly responsible. First, business investment in equipment and other technologies has slumped. In addition, the gap between the skills many workers have and the skills they need has widened. Finally, it appears that the development and use of new technologies, processes, and ways of organizing and running businesses — in a word, innovation — has slowed.

Here, too, Trump offers nothing.  His huge tax cuts would balloon federal deficits, and so raise the cost for business borrowing to invest in new equipment and technologies. Trump also offers nothing to help workers improve their skills, and nothing to stimulate innovation and the broad use of new technologies.

By contrast again, Hillary’s agenda would actively promote progress in productivity. Her plans for tuition-free access to higher education will expand the skills of millions of young people, and her blueprint to reduce budget deficits will ensure that federal borrowing does not raise the cost for business borrowing to invest. Hillary also supports innovation by calling for expanded federal investments in basic R&D and promoting more public-private collaborations to commercialize that R&D. And since innovations often come from young enterprises, her program to expand bank lending for such companies is also well suited to promote innovation.

On economic growth, as on many other issues that will shape America over the next decade, Hillary delivers while Trump blusters.

 

 



The Trump and Clinton Foundations Are Character Tests that Hillary Clinton Passes and Donald Trump Fails 

September 14, 2016

Donald Trump’s charge that Hillary Clinton used her office as Secretary of State to service donors of the Clinton Foundation exemplifies a regular Trump tactic: Preemptively charge your opponent with what you know you’ve done.

So, fully aware that his own family foundation is a shoe-string operation that breached IRS regulations, or worse; Trump and his surrogates charged for months that the Clinton Foundation’s funding and works are proof of corruption. No disinterested party found any such proof.

Instead, a review of the dimensions and operations of the two foundations suggest that the Clintons built a serious and effective philanthropic enterprise while Trump’s foundation is a sham.

To start, the creation and funding of a private foundation can provide a measure of its founder’s generosity, because virtually all family foundations involve substantial gifts from their founders. Public records do show that the Clintons have contributed $5 million to $10 million, or roughly five to ten percent of their personal assets, since establishing their foundation 15 years ago.

According to a far-reaching  new investigation by David Fahrenthold of The Washington Post, Trump also contributed some $5.5 million to his foundation from 1987 to 2008. What does this say about their relative generosity? Trump says he’s worth $10 billion, so he has contributed .00055 percent of his personal assets — that’s 55 one-thousandths of one percent — to the Trump Foundation.

By contrast, the Clintons have contributed roughly five to ten percent of their personal assets to the Clinton Foundation. So, the Clintons have been 90 times more generous than Trump in funding their respective family foundations.

The Clintons’ charitable ambitions also are orders of magnitude greater than Trump’s. In 2013, the Trump Foundation provided grants totaling $913,000 for good works, while the Clinton Foundation spent $196 million on its good works. Do the math: The Clinton Foundation spent 215 times as much as the Trump Foundation on charitable works. This huge difference has import beyond their respective founders’ benevolent aspirations, because private foundations are major sources of public goods and welfare.

In 2008, a colleague and I published the first broad analysis of the benefits generated by private foundations, and found that each dollar in grants and support by those foundations produced welfare benefits valued at $8.58. On this basis, the Clinton Foundation grants and operations in 2013 helped generate benefits totaling nearly $1.7 billion, compared to $7.8 million in benefits generated by the Trump Foundation.

Another meaningful measure of a foundation’s value is the nature of its activities. The Clinton Foundation is known best for its Health Access initiative,  which, according to the World Health Organization and others, has dramatically cut the cost of HIV and anti-malarial treatments for tens of millions of sufferers in low- and middle-income countries.

The Clinton Foundation also sponsors programs to reduce the risks of climate change, including partnerships with businesses to retrofit their building for green energy; a joint initiative with the Scottish Hunter Foundation to target the roots of poverty in Africa; an alliance with the American Heart Association and the Robert Woods Johnson Foundation to reduce childhood obesity; disaster relief efforts following the 2004 Indian Ocean earthquake, Hurricane Katrina in 2005, and the 2010 earthquake in Haiti; and a partnership with the Bill and Melinda Gates Foundation to collect and compile information from around the world on the status of women. The head of the independent watchdog group Charity Watch, Daniel Borochoff, recently called the Clinton Foundation “one of America’s great humanitarian charities.”

The Trump Foundation reports no joint initiatives with other charitable organizations and few good works of any kind.  Instead, Trump’s foundation appears to be mainly a personal platform for its founder.

Fahrenthold’s investigation  found repeated instances of Trump soliciting funds from other foundations, a common charitable fundraising tactic. But Trump then used the funds donated to the Trump Foundation to make a donation in the name of the Trump Foundation, without adding any funds or operations of its own. In fact, all Trump Foundation grants since 2008 have been funded by others, because Trump himself has contributed nothing to his own foundation for the plast eight years.

Trump also appears to use his novel approach to philanthropy for his own personal profit: He solicited a $150,000 donation from the Charles Evans Foundation to benefit the Palm Beach Police Foundation, packaged it as a $150,000 grant from the Trump Foundation, arranged for the police foundation to receive the grant at a gala held at his Mar-A-Lago Club in Palm Beach, and then charged the police foundation $276,463 to rent Mar-A-Lago for the event.

Similarly, after Trump offered to personally donate $500,000 to charities highlighted on his “Celebrity Apprentice” television show, NBC/Universal which airs the program, donated $500,000 to the Trump Foundation to cover Trump’s “personal” pledges. Trump also appears to violate federal regulation of foundation by using foundation funds for personal benefit: The Trump Foundation paid $20,000 for a six-foot portrait of Trump that now hangs at one of his gold resorts; after Melania Trump bid on and won the painting at a charity auction held, of course, at Mar-A-Lago.

There is also the much-reported case of Trump’s foundation contributing $25,000 to the campaign of Florida Attorney General Pamela Bondi while Bondi’s office was investigating consumer complaints about Trump University.  Shortly there]after, A.G. Bondi declined to join other state attorneys general in a suit against the now-defunct Trump University.  Beyond the Trump Foundation’s direct breach of IRS regulations, for which it paid a nominal fine, the conduct fairly smacks of the pay-for-play corruption that Trump charges his opponent has committed.

Finally, Fahrenthold found five cases where the Trump Foundation claims it made donations, totaling $51,000, which the purported beneficiaries say they never received. The subjects of this trick included a veterans’ charity in Vermont, a pro-life nonprofit in Kansas, a Latino AIDs charity in New York, a children’s medical center in Omaha, and an umbrella organization for small charities in Los Angeles.

In the end, the questions raised about the Trump and Clinton foundations go to the character of Hillary Clinton and Donald Trump. Hillary and Bill Clinton have built an esteemed charitable foundation that has improved and saved the lives of millions of people around the world. Donald Trump has created a con, inveigling others to finance him play-acting as a philanthropist, and turning a profit for himself in the bargain.



The Economic Outlook for the Election and Beyond, and How Who Wins Could Change It

September 7, 2016

With nine weeks to go, the economic conditions for the election are set — modest growth, low inflation, and continuing job gains. A few Wall Street forecasters rate the odds of a 2016 recession at one-in-three; but unless a major shock wrenches the economy off its present course, bet with Janet Yellen and Ben Bernanke on the economic expansion continuing into next year.

The tougher question is what economic conditions will confront the new president and the rest of us in 2017 and 2018? Since the fourth quarter of 2015, the economy has grown at an annual rate of less than one percent, and business investment has declined at a three percent annual pace.

Consumer spending and home sales could lift growth and investment next year, if the healthy income growth of the last three years continues. But much of those income gains come from the unusually strong job growth of those years; and with unemployment now below five percent, job creation almost certainly will moderate soon.

If jobs gains lessen next year, healthy income gains will depend on a turnaround in the economy’s disappointing productivity record. A modern economy cannot stay strong indefinitely without strong productivity growth to fuel incomes, demand, profits, and investment. Its recent record explains our slow growth: Productivity gains averaged just .6 percent per year from 2011 to 2015, and even those small gains turned negative in the first half of 2016.

This represents a major change: Productivity increased at an average rate of 2.8 percent per year through Bill Clinton’s second term and remained strong at 2.6 percent per year from 2001 to the financial collapse in 2008. Moreover, it recovered quickly in 2009 and 2010, reaching 3.2 percent per year. Unless productivity recovers again in 2017, wages and incomes could stall and the economy could stagnate in the next President’s first or second year in office.

Yet, the economic debate this year has mainly focused on overall growth rather than productivity. Most economists — Ben Bernanke, Paul Krugman, Larry Summers and Kenneth Rogoff, among others — pin the slowdown in GDP growth on higher savings and the associated weaker spending. So, most economists have called for renewed fiscal stimulus here and for much of the world. They’re right; but the outlook for incomes and investment would be more encouraging if the fiscal stimulus focuses on recent meager, or even negative, productivity gains — and their impact on growth.

Americans are in luck — assuming the pollsters are right that Hillary Rodham Clinton will vanquish Donald Trump. While Clinton has not offered an explicit program to boost productivity, her economic and social policy proposals include the three essential elements of such a program. First, improve overall market conditions for all industries; second, promote innovation through the development and broad use of new technologies, materials, and ways of doing business; and third, give workers access to the skills they need to operate effectively in a more innovative economy.

The big play to improve the efficiency of all U.S. industries and businesses is Clinton’s commitment to expand public investments in infrastructure by $275 billion over five years. Unsurprisingly for Hillary, her program covers every conceivable form of infrastructure. There are new investments not only for roads, bridges, public transit, rail freight, airports, seaports, waterways, dams, and wastewater systems.

Her proposals also cover 21st century infrastructure networks, including a smart electric grid, advanced oil and gas pipeline systems, and universal access to 5G broadband and Next Generation wireless. Since virtually every enterprise and employee depends on these systems every day, her proposals should enable most firms and workers to carry out their business more efficiently.

As stimulus, these infrastructure improvements amount to $55 billion per year, or just three-tenths of one percent of GDP. Fortunately, Clinton’s program includes other measures that also should bolster productivity. To promote innovation, she pledges to scale up federal investments in basic research and development through the NSF, the NIH, the Energy Department and DARPA, across areas from high performance computing and green energy, to machine learning and genomics.

Always a pragmatist, Clinton also has plans to promote the commercialization of advances in R&D through grants for private accelerators and reforms to expand access to capital by the young businesses that play a prominent role in innovation.

Finally, Clinton has a serious program to help Americans upgrade their skills. Computer science training would be available for all high school students, and foreign-born students who complete a U.S. masters or Ph.D. degree in a STEM field would automatically receive green cards to stay and work in the United States.

However, the cornerstone is tuition-free access to public colleges and universities for all young people from families earning $125,000 or less, and tuition-free access to community colleges for anyone. To complete her productivity agenda, Clinton should expand her community college program and give all working adults the real ability to improve their skills, through no-cost access to two training courses per year at community colleges.

From the other side, Trump offers virtually nothing. He says that he, too, would increase federal spending on infrastructure. But his tax promises would balloon federal deficits by upwards of $700 billion per year, leaving no room to upgrade infrastructure, much less promote basic R&D or expand access to higher education and worker training.

His massive deficits also would crowd out business investments in new technologies and new enterprises. Trump’s program, in short, would virtually guarantee that the American economy stagnates, or worse.



Sorry, Donald – The Incomes of Minority Households Grow More under Democrats than under Republicans

August 29, 2016

Donald Trump says that Democrats have failed American minorities, so let’s test his claim by the most basic economic criteria: What happened to the incomes of African Americans and Hispanics under Democratic and Republican administrations over the last 35 years? The data do not lie. The incomes of minority households — and in most cases the incomes of white households, too — grow faster under Democratic administrations than under GOP ones.

Under the last five presidents, African-American and Hispanic households made greater income gains under Bill Clinton than under Ronald Reagan, and more progress under Barack Obama than under George W. Bush despite the financial collapse and deep recession that began under W. Minority incomes also grew much faster under Obama and Clinton — and Reagan — than during George H.W. Bush’s single term.

These conclusions are not based simply on aggregate median income figures for each race and ethnicity. Instead, we use Census Bureau data to plot the real income paths of white and minority households headed by people ages 25 to 29 and ages 35 to 39, as they age through each administration. In this way, we capture the actual income experience of these households. Finally, we start our analysis of each president’s record in year two of his term, because the economic conditions in a president’s first year in office are largely set by the policies of his predecessor. Here are the results.

chart4

We can see, first, that income growth by young African American households, headed by people ages 25 to 29 averaged a remarkable 7.3% per year as they aged under Clinton, compared to 3.8% under Reagan. The incomes of comparable households also grew, on average, 2.9% per year under Obama (2010-2014), compared to growth of 1.8% per year under Bush 2, and income declines averaging 2.5% per year under Bush 1.

Somewhat older African-American households, headed by people ages 35 to 39 at the beginning of each administration, had income gains averaging 4.2% per year under Clinton, compared to 3.3% per year under Reagan. Comparable households saw incomes growth averaging .9% per year under Obama, compared to income declines of .7% per year under Bush 2 and of 2.6% per year under Bush 1.

The same general pattern holds for Hispanics. Young Hispanic households achieved income gains averaging 4.2% per year under Clinton, compared to 1.6% per year under Reagan. Under Obama, the incomes of comparable households grew an average of 1.3% per year under Obama, compared to .7% per year under Bush 1 and zero gains under Bush 2.

Further, the incomes of somewhat older Hispanic households rose at an average rate of 3.1% per year under Clinton, compared to 2.2% per year under Reagan. Comparable households registered income gains averaging 1.5% per year under Obama, compared to 0.3% under Bush 2 and income declines of 1.1% per year under Bush 1.

The pattern of income progress by white households is similar, but not quite the same. Households headed by young whites made more income progress under Clinton, with gains averaging 5.2% per year, than under Reagan when their gains averaged 4% per year. But the income growth of somewhat older white households under Clinton, averaging 2.9% per year, was matched by the gains of comparable households under Reagan.

Young white households also have fared better during Obama’s time in office, with income growth averaging 3.3% per year, than during the administrations of Bush 2 when their gains averaged 2.3% per year or his father, Bush 1 at 2.6% per year. And while the income progress of somewhat older white households under Obama, averaging 0.4% per year, is greater than the 0.1% per year gains by comparable households under Bush 2, Bush 1 outpaced both of them with gains by comparable households averaging 1.5% per year.

The stronger income progress under Democrats by minorities in particular reflects a number of forces and factors, but job creation is paramount. Job growth was much stronger under Clinton and Obama — and Reagan — than under either Bush administration; and minorities benefit most when the jobless rate falls sharply, especially when the economy nears full employment.

Given this record, it is unsurprising that only small percentages of African Americans and Hispanic Americans have favored recent GOP presidential candidates. Trump’s racially and ethnically charged rhetoric will likely drive his support from minorities to record low levels. But the difference in their support for Trump, as compared to Romney or McCain, will likely be pretty modest. In the final analysis, minority Americans usually vote their economic interest, much like most of the rest of the country; and the record of the last 35 years tells them that they will be better off under a Democratic administration than a Republican one.



What You Earn Does Not Depend on Whether You Attend a For-Profit University or a Traditional, Not-for-Profit Institution

August 24, 2016

Young people respond to incentives like everyone else; and years of evidence showing that most well-paying jobs go to those with post-secondary degrees have been followed by rising numbers of young people attending college. The National Center for Education Statistics (NCES) reports that from 1995 to 2015, the share of Americans ages 25 to 29 with an associate’s degree jumped from 33 percent to nearly 46 percent, and the share with a bachelor’s degree rose from 25 percent to nearly 36 percent.

In recent years, a new debate has emerged over what type of higher education leads to a well-paid career. In particular, a number of commentators have claimed that a degree from a for-profit college or university produces much smaller income benefits than a degree from a traditional, public or private non-profit institution. To test this claim, I analyzed the first systematic data available on the incomes of young graduates based on where they earned their degrees.

Over the last decade, five states — Arkansas, Colorado, Florida, Texas and Virginia — have tracked the first-year incomes of graduates by their major fields of study, using state unemployment insurance records. Those data covered a total of 273 traditional, public and private not-for-profit colleges and universities. A leading for-profit institution, Kaplan University, agreed to provide comparable data on their graduates using the Department of Labor Wage Record Interchange System, and asked me to investigate.

In a new study released this week, I found not only that the graduates of the for-profit institution achieved much larger income gains than comparable young people without a degree. I also found that Kaplan University graduates with an associate’s or bachelor’s degree earned incomes generally comparable to the graduates from the 273 traditional, public and private non-profit institutions in those five states.

The data show, first, that a Kaplan University degree produced substantial income benefits. Six years after finishing an associate’s degree, Kaplan graduates earned an average of 82 percent more they did before entering Kaplan ($15,290 to $27,890), while their counterparts who did not pursue any degree are estimated to have earned barely 4 percent more ($15,290 to $15,964). Similarly, six years after earning a bachelor’s degree, Kaplan University graduates earned an average of 38 percent more than they did before starting ($30,358 to $41,947), compared to the estimated 4 percent gains of their counterparts with only a high school diploma ($30,358 to $31,698). (The difference in the earnings premiums for the two degrees is largely based on the low prior earnings of those who went on to earn an associate’s degree.) Indeed, the estimated gains are actually likely to be conservative, since the analysis excluded those programs in which the students’ median income before entering Kaplan University was less than a full-time minimum wage.

The first-year earnings of new graduates provide perhaps the clearest evidence of how employers view and value the institutions that their new employees attended. So, I compared the first-year earnings of the graduates of the traditional public and private institutions in the five states, by their major field of study, and the first year earnings of Kaplan University graduates in the same major fields. These data tell us that from an employer’s vantage, Kaplan University bachelor’s and associate’s degree graduates look and perform much like other graduates.

• In the first year following their graduation, young people with a Kaplan University bachelor’s degree, on average, earned more than their counterparts in the same major fields from traditional public and private institutions in three of the five states — Arkansas, Florida, and Virginia — and less than their counterparts from traditional institutions in Colorado and Texas.

• Kaplan University associate’s degree graduates had higher median first-year earnings than their counterparts from traditional institutions in the same major fields in two of the five states — Arkansas and Virginia — and lower median earnings than their counterparts from traditional institutions in Colorado, Florida and Texas.

• The data also show, however, that the average first-year earnings of Kaplan University master’s degree graduates were less than the average of their counterparts from traditional institutions in all five states.

The finding that Kaplan University bachelor’s and associate’s degree graduates do generally as well economically as graduates in the same fields from traditional colleges and universities is particularly striking, because the data provided by four of the five states tended to overstate their graduates’ average or median earnings. The data from Kaplan University and Texas covered all graduates with any earnings; but Arkansas, Colorado, Florida and Virginia provided data only on graduates who earned at least the equivalent of a full-time, year-round, minimum wage. In effect, four of the five states excluded graduates who worked only part-time or part of the year in their first year after graduating. Even so, the Kaplan University graduates, on average, out-performed the graduates of traditional institutions in three of those four states at the bachelor’s degree level, and in two of the four states at the associate’s degree level.

These results are heartening as Americans try to address issues of inequality, because minority and poor students comprise a substantially larger share of the student bodies of Kaplan University and other for-profit institutions, compared to traditional not-for-profit colleges and universities. NCES data show that in 2014, African-American, Hispanic and other minority students comprised 50.2 percent of all full-time students at degree-granting for-profit colleges and universities, compared to 28.3 percent of the full-time students at private not-for-profit institutions and 37.5 percent at public institutions. For-profit colleges and universities clearly provide disproportionate access to higher education for minority students.

This analysis carries certain caveats. It draws on income data for graduates from one major for-profit university and 273 traditional not-for-profit institutions in five states. The economic results of attending a for-profit institution certainly vary substantially across those institutions, as do the results of attending a traditional college or university. However, the data clearly show that the graduates of one leading for-profit institution derive economic value from their education and degrees generally comparable to the value derived by graduates from attending traditional, not-for-profit public and private institutions across five states.



Get Ready for Cyberattacks across Many Critical Networks

July 13, 2016

In a recent interview, I said that America’s adversaries “may not do us the kindness of attacking only a single infrastructure sector” in future cyberattacks. Let me take you through this dark scenario. Until now, electric utilities, telecom companies, financial institutions and other vital sectors of our economy have each focused on strengthening their own cybersecurity. These efforts are important, but not nearly sufficient.

In a recent study for Homeland Security Secretary Jeh Johnson, conducted by the Homeland Security Advisory Council (HSAC), which I co-chaired, my colleagues and I concluded that our adversaries might well use cyberwarfare to attack multiple infrastructure sectors at the same time. This prospect vastly complicates those industries’ separate efforts to restore electricity, telecommunications, financial transactions and other vital services when the United States faces cyberattacks on the systems on which our economy and national security depend.

Moreover, these critical infrastructure systems are extraordinarily interdependent. If a cyber-adversary takes down our power grid, our electric utility companies will rely on telecommunications systems to restore power — but those telecom systems rely on electricity to function. Similarly, the country’s key financial services companies rely on both the electric grid and telecom services to sustain the economy. Our recent HSAC report found that in a simultaneous strike on all three sectors, the government’s current response plans would fall far short.

The HSAC report offered a series of proposals to begin to address this serious shortfall. We urged Secretary Johnson to revamp the National Cyber Incident Response Plan (NCIRP), so the government can respond more effectively to private-sector requests for assistance in fighting our cyber-enemies. We also called for deeper engagement with governors in efforts to coordinate the restoration of services when several critical infrastructure system are attacked. The first principle in planning for such a scenario is to strengthen planning and coordination between private-sector infrastructure companies and all levels of our government.

These are very challenging tasks, but failing to take them on could leave America vulnerable to a potential nightmare scenario.



The Vast Economic Costs of Trump’s Plan to Bar Muslims from the United States

June 21, 2016

Donald Trump’s mindset and style virtually compel him to attack anyone who might be a threat or enemy, and he recruits supporters by going after groups he casts as their enemies or threats. His darkest suspicions and contempt are reserved for Muslims. He presents his solution, barring people from Muslim-majority countries from entering the United States, as a low-cost way to fight terrorism. But Trump’s plan would not only trample religious tolerance and a half-century of foreign policies to improve our relations with the world’s 56 Islamic nations; it also would impose enormous costs on the American economy.

Our analysis shows that immigrants and visitors from Islamic countries contributed $334 billion to America’s GDP in 2014 — all of it at risk under Trump’s approach.

Here’s how we estimate those costs. First, more than seven million current U.S. citizens or residents came here from Muslim-majority countries or are married to, or the children of, those immigrants. Based on America’s current per capita GDP, those households contributed more than $189 billion to the economy in 2015. In addition, Trump’s policy would end tourism from Islamic countries. At a minimum, some 3.2 million tourists from majority-Muslim nations visited the United States in 2015 and contributed an additional $145 billion to our GDP.

Let’s deconstruct those costs. First, Census Bureau data compiled by the Migration Policy Institute tell us that, in 2014, 3,013,309 current U.S. citizens or residents were immigrants from the world’s major Islamic countries, including 2,835,510 adults. The total number is higher, since Census data specify the country of origin for U.S. immigrants from the 21 larger majority-Muslin countries but not 35 smaller Islamic nations, including Libya, Somalia and Tunisia. Here, we’ll stick with the official data of more than 2.8 million current adult U.S. citizens and residents from Islamic nations.

Trump’s attacks on Muslims extend not only to those immigrants, but also everyone connected to them by marriage or blood who also reside here. ]According to the Center for Immigration Studies, the average family or household size of immigrants from the Middle East, sub-Saharan Africa and South Asia is 3.12. Let’s assume that half of those immigrants marry or live with other immigrants from Muslim countries, and the other half marry or live with native-born Americans or immigrants from other countries. On that basis, the 2,835,510 adult immigrants from Islamic countries would include 1,417,755 married to or living with each other, forming 708,878 households, and another 1,417,755 households with spouses or partners who are not immigrants from Muslim countries.

Altogether, they constitute 2,126,633 households headed by Islamic immigrants (708,878 + 1,417,755). Some of those households consist of one person, others of single parents with children, and still others with two adults with or without children. On average, we know that these households have 3.12 members; and on that basis, the 2,126,633 households with immigrants from majority-Muslim countries have 2,381,828 children living in the United States.
All told, therefore, we estimate that the households of current adult U.S. residents or citizens from majority-Muslim countries consist of some 6,635,093 people: 2,835,510 adult immigrants, 1,417,755 spouses or partners who are not from Islamic countries, and 2,381,828 children.

The simplest gauge of their economic impact is per capita GDP, which was $28,555 in 2015. That tells us that current U.S. residents or citizens from Muslim-majority countries and their immediate families or households were responsible for $189,431,905,200 of U.S. GDP in 2015.

Trump’s ban on people from Islamic nations entering the United States also would end tourism from those countries. The Bureau of Economic Analysis (BEA) collects data on foreign tourists entering the United States by their continent of origin and how much they spend here as tourists. The BEA does not break down these numbers by country, so we’ll focus on tourists from the Middle East and Asia, which includes three of the four countries with the world’s largest Muslim-majority populations (Indonesia, Pakistan and Bangladesh).

BEA reports that 1,225,500 tourists came to the United States from the Middle East in 2014. The BEA also tells us that 9,697,312 tourists came from Asia; and across Asia. Muslims account for 32.2 percent of the continent’s population. Once again, we’ll be conservative and assume that just 20 percent of Asian tourists who visited the United States came from Islamic countries, or 1,939,462 tourists from Asian majority-Muslim nations.

These two geographic groups add up to 3,165,962 tourists visiting the United States from Islamic countries, or 9.2 percent of all tourists who came here in 2014. This understates the actual number and percentage, because this accounting does not include tourists from large Islamic countries outside the Middle East and Asia, including Egypt and Nigeria in Africa, and Turkey in Europe. All three of these countries are among the world’s eight largest Islamic nations, and together their Islamic populations exceed those of Indonesia or Pakistan.

The BEA also tells us that tourists visiting the United States consumed $913.1 billion in goods and services here. Taking account of the impact of those purchases on U.S. employment and incomes, BEA concluded that tourists visiting the United States in 2014 were responsible for $1,576 billion of U.S. GDP.

Based on our understated estimate that tourism from majority-Muslim countries accounted for 9.2 percent of all tourists visiting the United States in 2014, and BEA’s accounting of the impact of their spending on U.S. GDP, Trump’s plan would cost the U.S. economy another $146 billion per-year from foregone tourism.

All told, if Trump’s plan had been in place and precluded both the immigration of more than 2.8 million adults from Islamic nations who are current U.S. citizens or residents and normal tourism from those majority-Muslim nations, it would have cost the American economy more than $334 billion in 2014 ($189,431,905,200 + $144,707,232,000 = $334,139,137,200).

Donald Trump would put every American’s money where his own mouth is. The United State currently has 133,957,180 households and a total population of 321,442,019 persons. Excluding households headed by immigrants from Islamic countries, America consists today of 131,830,547 households and 314.806,926 people. So, if Trump’s plan had been in place and stopped immigration and tourism from Islamic nations, it would cost Americans an average of $1,061 per-person and $2,535 for every non-Muslim household.