How to Raise Incomes and Delay the Next Recession

How to Raise Incomes and Delay the Next Recession

May 23, 2017

Last October, mulling over the economic environment the next President would face, I sent Hillary Clinton memos on how she should provide some stimulus to sustain the current expansion and raise incomes by boosting business investment and productivity. Alas, she did not become President; but that didn’t change our current economic challenges. To be sure, President Trump’s manifold troubles may preclude Congress from doing anything meaningful until after the 2018 elections. But if that’s not the case, here’s some advice for both sides.

The White House, above all, should appreciate the stakes: Without some form of serious stimulus, the U.S. economy almost certainly will slip into recession well before 2020. From Trump’s recent statements about “priming the pump,” he already understands that the eight-year-old expansion needs a boost. The GOP plan for sweeping tax cuts won’t work here, even if it could pass Congress. To begin, it devotes most of its resources to high-income people and shareholders, who will just save most of their tax savings. More important, the plan would vastly expand federal deficits on a permanent basis. If that happens, the Federal Reserve almost certainly will hike interest rates considerably higher and faster than they now contemplate, and those rate hikes would likely end the expansion.

Washington needs to prime the pump in a way that directly supports employment over the next two years and carries no long-term costs for the deficit. As it happens, Trump and Democrats already support a reasonable way to do just that – enact a large, two-year increase in public investments in infrastructure. But the plan will attract Democratic support only if Trump gives up the idea of using tax breaks to leverage private investment in new infrastructure projects. Democrats won’t (and shouldn’t) go along, because that approach tilts the program towards infrastructure projects in high-income areas that can generate strong profits for its investors.

I assume that the President’s economic advisors also have briefed him on the recent, serious slowdown in business investment and productivity growth. Unless Trump addresses those problems as well, most Americans will make little income progress. The challenge here is to focus on changes that will boost business investment in way that strengthen productivity, and do it without raising deficits on a permanent basis.

One approach that congressional Republicans and some Democrats could support entails allowing businesses to “expense” their investments in equipment – that is, deduct the entire cost in the year they purchase the equipment. This change focuses on equipment investments, because they have the greatest impact on growth and productivity. The catch is that this approach still costs the Treasury many tens of billions of dollars per-year, especially if it covers both corporations and privately-held businesses (like the Trump Organization), as it should.

Trump could draw some support for the plan from congressional Democrats by insisting that Wall Street pay for it. First, he could deliver on his campaign promise to end the notorious “carried interest” loophole that lets the managers of private equity, venture capital and hedge funds use the capital gains tax rate to shelter most of their income from their funds. Fund managers certainly can afford to pay the regular income tax like the rest of us: In 2016, the top 25 hedge fund managers altogether earned $11 billion or an average of $440 million each.

To pay for the rest of equipment expensing, Trump should support the call by many Democrats for a small tax on financial transactions – three one-hundredths of one percent of the value of all stock, bond and derivative purchases should do it. (Stock and bond IPOs and currency transactions would be exempt.) Wall Street will howl in protest – music to most Americans’ ears – but the economics are sound. On the plus side, the tax would reduce market volatility by discouraging short-term speculation and ending most high-frequency computer trading. Moreover, today’s short-term speculators and high-frequency traders will have to invest those resources in more productive ways.   The negative is that the tax would raise transaction costs and thus dampen investment on the margins. But since the tax would finance a serious reduction in the cost of business investments in equipment, the overall impact on the markets will be positive.

This plan is far from the dream agenda of either party. A Hillary Clinton presidency would have included many other measures to boost productivity and incomes, from access to tuition-free college for young people and greater access to bank loans for new businesses, to broad retraining opportunities for adults and a path to citizenship to expand job opportunities for immigrants. For their part, congressional Republicans still believe in their trinity of huge tax cuts, drastic deregulation, and deep cutbacks in Medicare, Medicaid and Obamacare benefits. But the economics of stimulating an aging expansion and restoring business investment are non-partisan, and both parties should have an interest in reviving income progress for most Americans.

For President Trump, this plan has three simple parts consistent with his positions: Increase public infrastructure investments, lower the cost of business investments, and make Wall Street pay more of its fair share. If he can cut this deal, nearly everybody will win – but if he can’t, no one will lose more than he will.



The Case for Guaranteed Access to Prescription Drugs

December 15, 2016

Everyone complains about the prices of prescription drugs. Yet, 60 percent of us use them, because they help relieve our pain, improve the quality of our lives, and extend our lifespans. The older we are, the more prescription drugs we consume — and not only because older people usually have more healthcare issues. Equally important, older Americans have guaranteed access to Medicare-backed private insurance coverage for their prescriptions through Medicare Part D plans.

My advice for Medicare “reformers” emboldened by the recent elections is to keep your hands off Part D. Here’s why: Prescription drugs can now treat millions of people for conditions that otherwise would require other costly medical procedures and services, saving taxpayers tens of billions of dollars.

Last week, the Progressive Policy Institute published a new analysis I did of the operations and finances of the Part D program. We reviewed the many, many studies that have investigated the effectiveness and costs of prescription drugs. One particularly extensive analysis found that each prescription filled or refilled by a Medicare beneficiary lowered other healthcare costs by $104 in 2000, or by $173.61 in 2014. We also know from the Kaiser Family Foundation that Americans ages 65 and older fill and refill prescriptions, on average 27.9 times per year.

Based on these findings, I estimate that the use of prescription drugs by the 23.4 million Americans people covered by Part D plans in 2014 saved the Medicare system an average of $4,844 each, or $113.5 billion altogether. Because Medicare Part D cost taxpayers $68.4 billion in 2014, this access to prescription drugs saved taxpayers $69.6 billion in 2014, on a net basis. Include as well the 14.4 million beneficiaries with drug coverage through Medicare Part C Advantage plans, and the use of prescriptions drugs by Medicare beneficiaries in 2014 produced a net savings for taxpayers of $110.2 billion. This is compelling evidence that misguided efforts to cut federal support for Part D and Part C would cost lives and drive up Medicare costs.

To learn more, go to The Value of the Part D Program for Its Beneficiaries and the Medicare System.



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.



Whatever Some Candidates Tell You, the Incomes of Most Americans Have Been Rising

April 4, 2016

After a decade when most Americans saw their incomes decline, the latest Census Bureau income data contain very good news: A majority of U.S. households racked up healthy income gains in 2013 and 2014. The facts may not fit the narratives of Donald Trump, Ted Cruz, or Bernie Sanders.  But they do help explain why President Obama’s job approval and favorability ratings have passed 50 percent.

They also show that Hispanic households made more income progress in 2013 and 2014 than any other group, which may be one reason for their growing support for Demovrats.  A third surprise: Households headed by Americans without high school diplomas racked up their first meaningful income gains since the 1990s, thanks to the large job gains in 2013 and 2014 and the Obamacare cash subsidies beginning in those years.

These findings come from using the Census data on the median incomes of American households by the age, gender, race and education of their household heads, to track their income progress as they aged from 2009 to 2012. I focused first on millennial households headed by young women and men who were 20- to 29-years-old in 2009, which makes them 27- to 36-year-old voters today.

For decades, younger households have been the group with the fastest-rising incomes, and the recent period is no exception. Despite colorful stories of millions of young people living in their parents’ basements, the data show that the household incomes of these millennials (adjusted for inflation) grew 3.6 percent per year from 2009 to 2012, and those gains accelerated to 4.5 percent per year in 2013 and 2014.

The data also show that the incomes of millennial Hispanic households grew 5.4 percent per year in 2013 and 2014, outpacing the progress of white and African American millennial households of the same ages. To be sure, not all millennials did nearly so well: The household incomes of those without high-school diplomas, which had declined an average of 1 percent per year from 2009 to 2012, rose 3.1 percent in 2013 and 2014 — while the incomes of households headed by millennials with high school diplomas or college degrees grew 5 percent per year.

Two main factors are at work here, as well as in the big gains by Hispanic households, First, businesses created almost 2.5 million net new jobs in 2013 and 3 million more in 2014, and such strong job growth disproportionately helps those at the economy’s margin. Second, Obamacare’s cash subsidies for lower-income households kicked in the same years, and Census counts government cash subsidies as a form of income.

The years 2013 and 2014 also were good for most of Generation X. My analysis here focused on households headed by people who were 35 to 39 in 2009, which means they are 42- to 46-year-old voters today. In those two years, the median income of those Gen X households rose 2.3 percent per year — a major turnaround from 2009 to 2012, when their incomes had declined 4 percent per year.

As with the millennials, Gen X households headed by Hispanics made more income progress in 2013 and 2014 than did their white or African American counterparts. And thanks once again to the robust job growth and the Obamacare cash subsidies, Gen X households headed by people without high school diplomas made substantial income progress in 2013 and 2014 — in fact, more progress than Gen X households headed by high school or college graduates.

For many decades, the income gains of most Americans have slowed as they aged. Nevertheless, the new income data contain moderately good news for households headed by late baby boomers, those who were 45- to 49-years-old in 2009 and today are voters ages 52 to 56.  Their median household incomes rose in 2013 and 2014 by an average of .5 percent per year; but even that was a big improvement from 2009 to 2012, when their incomes fell 1.1 percent per year.

As with the millennials and Gen Xers, the Hispanic boomer households again fared better than their white and African American counterparts in 2013 and 2014: The median incomes of these Hispanic households grew 2.8 percent per year in 2013 and 2014, compared to gains of 2 percent per year by African American boomers and .1 percent per year by white boomers. Also, once again, the data show that the incomes of households headed by boomers without high school diplomas grew faster in 2013 and 2014 than the incomes of boomer households headed by high school or college graduates.

The Census Bureau will release the 2015 incomes data in a few months. We already know that the economy created another 2.65 million new jobs in 2015. If, as expected, the broad income progress seen in 2013 and 2014 persists in 2015, it will rebut much of the economic message touted by Trump, and badly weaken Sander’s critique of Hillary Clinton. These data may not penetrate those campaigns and the media that surround them, but American voters know when their own incomes have improved — and that will alter the landscape for next November in ways almost certain to favor Democrats and their nominee.



Donald Trump’s Chutzpah: His Tax Plan Doubles Down on Inequality and Gives His Own Company a Huge Tax Windfall

March 3, 2016

Donald Trump, often a master of snide generalities, has been very precise about not only his plans for undocumented immigrants and Obamacare, but also his approach to taxes.  The presumptive GOP nominee has laid out detailed proposals to cut tax rates, expand the standard deduction, and sharply shift the approach to business taxes.  I’ve reviewed his proposals, and the conclusions are sobering.  For a starter, Trump’s tax cuts are so expansive, they would decimate either the federal budget or the U.S. credit rating.  Moreover, the GOP “populist” channels most of the benefits from his tax cuts to the country’s wealthiest individuals and businesses.  So, Trump characteristically doubles down on the Democrats’ central meme of income inequality, and ensures that one of the biggest winners would be the Donald himself, through a giant tax windfall for The Trump Organization, LLC and other privately-held enterprises.

Just to begin, Trump’s proposals are wildly reckless as fiscal policy.  According to the Tax Policy Foundation, a joint enterprise of the Brookings Institution and the Urban Institute, Trump’s tax plan would gut federal revenues by $9.8 trillion over 10 years.  In 2020, his plan would reduce personal income tax revenues by $695 billion or more than 36 percent, and gut corporate income tax revenues by $196 billion or 50 percent.   All told, the revenue losses under Trump’s plan in 2020 come to $915 billion, equal to all defense spending projected for that year ($570 billion), plus 44 percent of all Social Security retirement benefits in 2020 ($793 billion) .  If Trump wants to finance his tax plans by borrowing instead of cutting spending, he should know that such a large, additional burden on credit markets would push up interest rates and slow growth, and likely trigger a U.S. debt crisis.

Turning to the details, one feature of Trump’s plan that would help some middle-class Americans is his proposal to expand the standard deduction from $6,300 to $25,000 (singles) and from $12,600 to $50,000 (couples).  His plan also simplifies and lowers marginal income tax rates to 10 percent, 20 percent, and 25 percent.  But these changes provide nothing for the 45 percent of U.S. households with low or moderate incomes, because they are not liable today for any federal income tax.

Apart from the big standard deduction, Trump channels virtually all of his tax benefits to high income people and businesses.  Trump’s plan would save an average household that pays income taxes $2,732 in 2017, mainly from the expanded standard deduction.  Those in the 95th to 99th percentile, however, would save $27,657 in 2017, 10 times the benefits for an average taxpayer.  Further, households in the top 1 percent would save $275,257 in 2017, 100 times the benefits for the average taxpayer.  And those at the very top of the income ladder, the richest one-tenth of 1 percent of households including Donald Trump, would save $1,302,887 in 2017, or 480 times the benefits for average taxpayers.

These windfall gains are driven mainly by Trump’s proposals to reduce the top tax rate from 39.6 percent to 25 percent and slash taxes on businesses.  So, Trump would cut the corporate income tax rate from 35 percent to 15 percent.  Trump’s enthusiasts will note that his business tax reforms include ending the right of U.S. multinationals to defer their U.S. tax on income earned abroad, much as President Obama has proposed.  But only Trump would cut the U.S. corporate rate to 15 percent.  Some 96 percent of the foreign income of U.S. companies is earned in countries that tax corporate income at rates of 15 percent or more, and those U.S. companies get U.S. tax credits for the taxes they pay abroad.  So, under Trump’s 15 percent corporate tax rate, 96 percent of the foreign-source income of U.S. multinationals would be free of any U.S. tax – much more than under current law.

Trump provides equally large tax windfalls for non-corporate businesses such as LLCs and partnerships, which account today for more than half of U.S. business revenues and profits.  Here, Trump appears to agree with Obama and Hillary Clinton about closing down the “carried interest” loophole, which taxes most of the income earned by hedge fund and private equity fund partners at the 23.8 percent capital gains rate.  But Trump’s version of this reform is meaningless, because he also cuts the top tax rate for income earned in all “pass-through” entities such as hedge funds and private equity funds to 15 percent:  So, they would pay even lower taxes under Trump’s plan than under the current, carried interest loophole.

That’s not even the worst of it:  This 15 percent rate would apply not only to hedge funds and private equity funds, but to all partnerships and privately-held businesses, including the Koch Brothers’ companies and The Trump Organization, LLC.   Instead of paying taxes at the current 39.6 percent top personal rate, or the current 23.8 percent capital gains rate, or even the 25 percent top personal rate under Trump’s plan, the Koch brothers, hedge fund partners and the Donald himself would pay 15 percent.  Under Trump’s plan, he and his company would pay a lower tax rate than an average American earning $47,750 today.  That’s chutzpah even for Donald Trump.



GOP Hopefuls Understand Little about Older Americans and Social Security

February 1, 2016

In last Thursday’s GOP debate, Marco Rubio, Ted Cruz, Jeb Bush and Chris Christie avoided any mention of their common proposal to “reform entitlements” by raising the Social Security retirement age from 67 to 70. Their silence was the right decision: Their proposal demonstrates their lack of understanding about the demographics of older Americans, especially the dramatic disparities in their life expectancy associated with education and race.

Recent research on life expectancy indicates that their proposed change would effectively nullify Social Security for millions of Americans and sharply limit benefits for many millions more. While many people in their 30s and 40s today can look forward to living into their 80s, the average life expectancy for the majority of Americans who hold no college degree hovers closer to 70, or the average life expectancy for all Americans in 1950.

A recent study in Health Affairs explored the average life expectancy of Americans who were age 25 in 2008, or 33 years-old today. It reports that the average expected life span of 33-year-old high school educated men is now 73.2 years among whites and 69.3 years among black—n compared to 81.7 years for whites and 78.2 years for blacks for their college-educated counterparts. American women on average live longer than American men, but their differences based on race and education also are dramatic. The average life expectancy of high-school educated women age 33 today is 79 years for whites and 75.4 years for blacks, compared to 84.7 years for 33-year old whites and 81.6 years for blacks of that age with college degrees. The projected life spans of Americans now in their 30s without a high school diploma are lowest of all, ranging from 68.2 years (black men) and 68.6 years (white men) to 74.2 years (black and white women). Surprisingly, the data suggest that Hispanics have the longest life expectancies of any group, even though they also have the lowest average years of education; but those anomalous results may reflect sampling problems.

(The Brookings Institution just issued a more detailed version of my analysis, with tables, which you can find here.)

Using Census data on the distribution by education of people age 30 to 39 in 2014, we further know that 20,292,000 thirty-somethings or 54.9 percent of all Americans in their 30s fall in educational groups with much lower life expectancies. Some 45.4 percent of whites in their 30s or 10,613,000 Americans have a high school degree or less, and their average life expectancy is 9.4 years less than whites in their 30s with a B.A. or associates degree. Similarly, 64.4 percent of blacks in their 30s or 3,436,000 Americans have a high school degree or less; their life expectancy is 8.6 years less than blacks in their 30s with a B.A. or associates degree. Finally, 75.6 percent of Hispanics in their 30s or 6,243,000 Americans have a high school degree or less, and their life expectancy is 5.0 years less than Hispanics in their 30s with a B.A. or associates degree.

Across all communities – white, black, Hispanic — improvements in secondary education to prepare everyone for higher education, and measures to ensure full economic access to higher education, would add years to the lives of many millions of Americans.

These findings have special significance for Social Security, because the number of years Americans can claim its benefits depends on how long they live. Americans in their 30s today will be able to retire with full benefits at age 67; but depending on their education and race, they should expect to collect those benefits, on average, for a period ranging from 1.2 years to 19.3 years. The most pressing cases involve white men, black men, and black women without college degrees. Among Americans age 33 today, white and black men without high school diplomas and black, male high school graduates can expect to live long enough, on average, to claim Social Security for less than three years. Similarly, white and black women without high school diplomas and black, female high school graduates, on average, can expect to collect their monthly benefits for less than eight years. By contrast, white college-educated men and women age 33 today can expect to receive Social Security for between 14.7 and 17.7 years, respectively; and 33-year old black men and women with college degrees, on average, will claim benefits for 11.2 to 14.6 years, respectively.

These findings dictate that proposals to raise the Social Security retirement age should be rejected as a matter of basic fairness. As noted earlier, GOP hopefuls Ted Cruz, Marco Rubio, Jeb Bush and Chris Christie all have called for raising the retirement age to 70 years. Among Americans in their 30s today, their proposal would mean that black men without a college degree and white men without a high school diploma, on average, would not live long enough to collect any retirement benefits. White and black women without high school diplomas, and in their 30s today, along with 30-something white men with a high school diploma and black women who graduated high school, on average, would live long enough to receive Social Security for just 3.2 to 5.4 years. All told, the GOP proposals would mean that after working for 35 years or more, 25.2 percent of white Americans now in their 30s and 64.4 percent of blacks of similar age would be able to claim Social Security benefits for about five years or less. And that alone should disqualify any proponent of a higher retirement age from the presidency.



Where Congress and the President Could Find a Few Trillion Dollars

August 20, 2015

This year’s presidential hopefuls all agree that America has serious problems, with each party blaming the other. As readers of this blog know, the Number One problem in my view is the end of strong income growth for a majority of American households since 2002. However the candidates define the problem, they all have answers (of sorts), ranging from sweeping tax cuts to major initiatives for training, higher education and infrastructure. None of them will say how to pay for their agendas; but as it happens, they’re all in luck: A new book by Swedish economists Dag Detter and Stefan Foster, titled immodestly, The Public Wealth of Nations, has found hundreds of billions of dollars, even trillions of dollars, hiding in plain sight.

It begins with two facts. Governments own more assets than all of their richest citizens put together; but unlike wealthy people, governments don’t manage their assets. The U.S. government owns more than one million buildings, vast networks of roads, military and space installations, public utilities and railroad facilities, and 25 percent of all the land in the country (including 43 percent of all forest land). No one in government even knows precisely what all of those assets are worth, because there is no standard or systematic accounting of public assets, much less professional management to enhance their value, like private assets.

Professionally managing a country’s public assets is an idea associated mainly with the national wealth funds created by Norway, Saudi Arabia and a few other countries that found themselves with more energy revenues than they could handle. The Swedish economists make a good case that the United States and other countries should apply this model to their physical assets.

Here’s what it could mean if we tried it. The Bureau of Economic Analysis estimates that the federal government’s non-financial assets are worth about 20 percent of GDP, or about $3.5 trillion today. (The physical assets of city and state governments, including their networks of schools, hospitals, prisons, roads, and so on, are worth some $10 trillion.) Detter and Foster reviewed the evidence and the literature, and conclude that the professional management of public assets can raise their returns by 3.5 percentage-points, which by any measure is a lot of money.

Let’s be conservative and say it would raise those returns in the United States by just 2 percentage-points. At that rate, the professional management of federal assets would generate an additional $70 billion per-year without raising a dollar in taxes or cutting a dollar in spending.  With a reasonably growing economy, 10 years of such professional asset management should produce more than $800 billion for the government and its taxpayers, and 20 years would produce $1.9 trillion.

And if the Swedes are right that professional management could raise those returns by 3.5 percentage points, it would generate more than $120 billion per year, $1.4 trillion over 10 years, and $3.3 trillion over 20 years. That would cover about 40 percent of the projected funding shortfall of Social Security.

There also are models on how to do it, since versions are in place today in the United Kingdom, Norway, Finland, Sweden, and Singapore. First, establish an independent enterprise with the authority to manage the government’s nonfinancial assets, overseen and operated by independent, publicly accountable directors and executives. The closest domestic model we have is the Federal Reserve, and like Janet Yellen and her deputy, senior executives and board members would be appointed by the president and confirmed by the Senate. The executives and board would hire platoons of professionals in every area, all outside the civil service, to competently manage our public wealth.

It could mean, for example, that the Postal Service might use its assets as deftly as UPS or Fedex, or at least close enough so that its productivity gains were half those of UPS and Fedex instead of less than 30 percent. Or consider the Bureau of Land Management (BLM), which oversees 260 million acres of federal lands. Those holdings include the “Green River formation” in Colorado, Utah and Wyoming, which happen to be the world’s largest known sources of shale oil and gas. Unlike the BLM, professional asset managers could lease some of those lands for shale production. And in another division, managers could weigh the case for moving various military facilities currently sited on some of the country’s most expensive land, like the barracks for dress Marines on Capitol Hill in Washington, D.C., and leasing such desirable facilities to commercial tenants.

Most people would fire their investment managers, if they didn’t know what their clients held and had done nothing for decades to increase their value. If we applied the same standards to federal assets, we could find the means to carry out the ambitious initiatives the country so badly needs.



The 2016 Politics of Income Stagnation and Decline

August 13, 2015

America has a big incomes problem: The incomes of most Americans largely stopped growing around 2002.  Wide public resentment over that hard fact already dominates the 2016 debate.   On the Democratic side, income issues have been conflated with concerns about inequality, so every plan to cushion the impact on middle-class is financed by more taxes on the unworthy wealthy.  From the right, where the uber-wealthy, unworthy or otherwise, fund a flock of would-be presidents, income issues get mixed up with the dogma that most problems come from the corruption of liberal government and pollution of foreigners.  So, GOP plans for restoring rising incomes usually boil down to tax cuts, especially for the uber-wealthy, that tacitly blame the people who liberal government traditionally help, and threats to undocumented workers.

Both approaches have had only limited success.  Hillary Clinton understands that today’s inequality is the result, not the cause, of broad-based income stagnation and decline.  So, she can never outflank Bernie Sanders, who brings to their debate the fervent (if quirky) enthusiasm of a genuine socialist.   The GOP faces an even tougher challenge, since much of the party’s base blame their economic problems on a corrupt establishment that includes big business as well as big government, and the foreign labor they need or protect.   On this front, Jeb, Marco, Scott and even Ted and Rand will never outflank a self-assured¸ self-financed xenophobe like Donald Trump, or at least not until they can change the subject.

These half-baked responses are tailored for the base voters already fully engaged in the partisan wars.  They won’t be enough when the candidates have to address the majority of Americans, who care more about their jobs (and football teams) than about party posturing.   For the Democratic candidate, winning will depend on maximizing the support of women, minorities and young voters, while containing the disaffection of working class white men.  The Republican will face the opposite and tougher challenge – energize the support of working class white men while attracting more support from women, minorities and millennials.

My recent report from the Brookings Institution laid out some hard facts that will be in many voters’ minds.  Let’s consider households headed by people in their mid-to-late 30’s when each of the last five presidents took office.  Among such households that were headed by women, annual average income gains of 3.9 percent under Reagan and 5.8 percent under Clinton have been followed by much smaller progress, averaging 1.0 percent per-year under Bush and 2.0 percent per-year in Obama’s first term.

Most tellingly, consider households headed by people without college degrees, and which account for 70 percent of all households.  Among households headed by people in their mid-to-late ’30s when each president took office, and with only a high school diploma, their annual income gains averaged 2.6 percent under Reagan and 2.4 percent under Clinton.  But the comparable households under Bush experienced income losses averaging 0.3 percent per-year, followed by even greater losses averaging 1.8 percent per-year in Obama’s first term.

Similarly, households headed by Hispanics of comparable age when each president took office made annual income progress averaging 2.2 percent under Reagan and 3.1 percent under Clinton, which were followed by barely any gains at all, averaging 0.3 percent per-year under Bush and 0.1 percent per-year in Obama’s first term.

The country’s broad economic disappointment has energized the Tea Party and the Occupy movement, and it now animates the bases of both political parties.  The challenge for those who would be president is to bypass popular anger and partisan simplifications and present a serious agenda that can restore normal income progress.



How Greece Could Short-Circuit the U.S. Expansion

June 18, 2015

In chaos theory, the flutter of a butterfly’s wing can ultimately cause a typhoon halfway around the world. This week, Greece, a nation with a GDP smaller than the Philippines, became that butterfly – and its ongoing economic struggles could cause storms that would upend the financial stability of Europe and wreak serious collateral damage on our own economy.

Greece has flirted with sovereign debt default for more than three years. The latest talks for another bailout from the European Union and the IMF broke down this week, with Greek Prime Minister Alexis Tsipras calling the EU proposal “humiliating” and the IMF’s conduct “criminal.” Normally, the debt troubles of a country with an economy barely one percent the size of our own wouldn’t matter much to us.  But as a member of the EU and the Eurozone monetary union, Greece’s problems can reverberate deeply throughout Europe.  Global investors already are nervous that the EU and IMF may be unable to head off Greece’s looming insolvency.

If the worst happens, Greece’s default could trigger runs on government bond markets in other Eurozone countries seen at risk, including Italy and Spain.  Since Europe’s large financial institutions hold more than $1 trillion worth of those bonds, a Greek default could spark a financial meltdown rivalling even the 2008-2009 crisis.

This crisis has unfolded in fits and starts for a long time, and the EU and the European Central Bank (ECB) have spent hundreds of billions of Euros trying to support those bond markets and strengthen the banking system. No one knows if it will be enough to stave off the worst-case scenario. But if a genuine crisis unfolds over the next month or so, everyone does know that European voters will never accept another bank bailout. And if Europe’s economy falls into a tailspin, the ECB will have little room to support and stabilize it by cutting interest rates.

Greece’s default also would trigger its exit from the EU and the Eurozone. No country has ever done so before, so no one knows precisely what would happen next. Inevitably, the consequences would be destructive. To begin, if Greece has to abandon the Euro and revive the drachma, its economy would come to a halt.  The government could not pay its employees or vendors, or issue pension checks; and untold thousands of Euro-based contracts today across Greece and between Greek and foreign concerns would have to be renegotiated.  So, on top of an unfolding financial crisis, the balance sheets of those foreign firms would suffer further, and a rapidly-deepening recession would spread across much of Europe.

These prospects explain why President Obama made the Greek crisis a top priority in his talks at the recent G-7 summit. The EU is America’s largest trading partner; and perilous times there would quickly affect U.S. jobs and investment – and those costs would increase as the fast-falling value of the Euro would drive up the foreign prices of U.S. exports. Even more serious, our financial institutions and multinational companies have thousands of deals involving European banks.

In a crisis, that becomes bad news for U.S. stocks: If cascading events threaten the solvency of those banks, many of those deals will become problematic, depressing the value of our own banks and companies.  The results here at home could be a credit crunch, falling employment, and a new recession – and this time, the Federal Reserve could do little to help.

The United States needs a prosperous Europe for not only the obvious economic reasons, but also as our geopolitical partner from the Middle East to the Korean peninsula and the South China Sea. A weakened Europe, consumed by recession and facing the possible unraveling of a half-century of economic union and political collaboration, won’t be there for us the next time a U.S. president needs support to advance American and Western interests and influence.

What are the odds?  A scenario in which everyone loses usually inspires steps to head off the terrible reckoning.  Yet, events in coming weeks may demonstrate how domestic politics in Greece and across much of Europe put the two sides at such cross purposes that everyone will needlessly suffer. At this point, calming this butterfly’s wings will require uncommon statesmanship and a real willingness by leaders in Greece, the EU and Washington to take measures that will cost them popular support.  So far, we’ve managed to side-step a serious crisis, and we could see another deal that papers over the problems for a while.  But if Greece and the EU do run out of options this time, your retirement accounts could lose a third of their value over the next year.



What Happens to Your Healthcare When Catastrophes Strike?

April 28, 2015

Hospitals, clinics, pharmaceutical distributors, and other parts of American healthcare face a quandary: When natural or manmade disasters make their services most vital, the infrastructure they depend on may collapse. Superstorm Sandy highlighted the danger of power outages to patient care. Today, the United States is at increasing risk of blackouts lasting much longer and covering a wider area, from cyberattacks, earthquakes and other events. These “black sky” events will disrupt electricity not only to hospitals and other facilities, but also to the water and wastewater systems that are just as critical to public health.

Last week, I considered these issues in an address to the Healthcare and Public Health Sector Joint Meeting, of the Critical Infrastructure Partnership Advisory Council (CIPAC). Here’s the gist of what I said:

First, it’s time to scale emergency power facilities and plans for long, widespread outages. During the Sandy blackout, the failure of the emergency power generators at the Langone Medical Center, as well as nursing homes and other facilities, highlighted the desperate need for secure, reliable emergency power systems. A growing number of healthcare facilities are installing generators and storing fuel on-site to serve their loads for 44 or 72 hours.

But in a genuine black sky event, emergency power systems will have to do for even longer periods. First, many emergency generators will burn out. Hospitals, nursing homes and other facilities should follow the guidelines of the U.S. Army Corps of Engineers on emergency power and expedite the installation of long-term backup generators for extended events or ensure that they can be rapidly installed when disaster strikes.

Second, the distribution of emergency fuel also constitutes an Achilles heel for healthcare during disasters. Too many hospitals and other facilities depend on a small number of suppliers who would be overwhelmed in a disaster by clients across numerous critical sectors. And in the wake of earthquakes, sophisticated cyberattacks on energy systems, and other black sky events, the pipelines, bridges and roads essential to deliver emergency fuel will be severely disrupted.

No state, regional or nationwide plans exist today to ensure that hospitals and other critical systems can and will receive fuel in such a badly disrupted environment. We need to develop those plans now.