“Taking Care of Business and Working Overtime” Bachman-Turner Overdrive

While the current jobs and economic agenda of the Administration remains largely focused on income inequality (e.g. minimum wage hikes, extension of unemployment benefits, further tax hikes on the “wealthy few”), a far bigger issue is largely being neglected-increasing the number of better paying jobs in the US. To be sure, there has been some progress on the overall job front associated with a lower unemployment rate and a decent new job number in February, the progress has been painstakingly slow and often illusory. Consider that the most important job statistic – the employment participation rate – recently fell to its lowest level in almost 35 years. After reaching peak levels of about 67% during 1998-2001, the labor force participation rate stabilized at above 66% between 2002-2008. However, since November 2008, the participation rate has hit the skids starting with the recession and continuing thru the recovery. As of October 2013 , labor force participation rate has hit a new low of 62.8% -the lowest level it has been since February 1978 and it has only rebounded slightly since then.

On top of this, many of the new jobs being added are in the lower-paying retail, accommodation and food services industries (about a third of the 2.2 million new jobs in 2013) and some of these aren’t even full-time jobs. In contrast, only 3.5% of all jobs added in 2013, were in the higher paying manufacturing industry. The overall median income picture reflects this problem as near zero growth in real (inflation adjusted) terms during the 2000-2008 has been replaced with outright declines during 2008-2013 such that median US income is now 8.7% lower in real terms in 2000.

The focus during the Obama years and also to some degree in the years prior to 2009, has been to use government subsidies and stimulus spending as the primary tool to increase job/economic growth in the US. This approach has had only mixed success and only temporary success at that. Subsidies of activities that are NOT economic today such as electric cars or solar power  inevitably lead to a lot of wasted dollars (e.g. Solyndra, Amonix and other companies that went belly up, never created jobs and never will pay back their subsidized loans, tax credits or outright grants) and only a few successes. Stimulus spending designed to increase near term demand and hence near term jobs is usually only temporary. Consider the “cash for clunkers” program which encouraged a number of new car sales in the near term (as customers flocked to dealers to get the government-funded $$$ credits for turning in their older vehicles) but not surprisingly hurt longer term sales because most were simply moving up the date in which they would buy a new car. Most importantly, by financing these and other increases in government spending during 2009-2013 with massive increases in federal debt, there will be a longer term price to pay. This includes increases in interest rates (which will likely soar in the next few years once the fed runs out of monetary firepower) and high inflation. These will hurt private capital spending and hence long-term economic and job growth.

This is NOT to say that ALL government stimulus spending is a bad idea or that near term economic/ job benefits aren’t important. Most economists would agree for example that some infrastructure spending which has traditionally been funded by the government (e.g. road repair and new roads and bridges where they are needed) can increase the efficiency of the economy and provide some needed near term construction jobs. The funding of basic research by the government is also important given the “public goods” problem that makes companies reluctant to fund research, other than applied research. However, the $800 billion+ (per year) stimulus package of 2009 that was rammed thru a then largely panicked Congress contained little of what I would call “efficient” stimulus spending. The result so far has been predictable, and we havent even felt the long-term consequences from our massive debt buildup and accompanying money printing yet!

So if not stimulus, what can be done to fix this problem? The answer is surprisingly simple. Though per usual, politically,  it may be very difficult to achieve even a few of these suggestions. Nonetheless, since I apparently love banging my head against the wall, let me give you my list of 5 major suggestions.

(1) Eviscerate the Current Federal Tax Code and replace it with the Fair Tax–I have blogged about this several times. I refer you to my blog on May 12, 2012 entitled “Should 5% appear to small….” and FairTax.org for more detailed information. The reasons for replacing our currently horrendous tax code with a simple and far more efficient consumption tax are many. However, when it comes to economic and job growth much of what I said almost 2 years ago still applies today:

“By eliminating the large amount of unproductive activity associated the current tax code, resources are freed up to produce more goods and services more efficiently across the economy. In addition, the elimination of subsidies and penalties in the current tax code, will help eliminate inefficient overinvestment (e.g. Real Estate!!!), eliminate overconsumption which is also inefficient, and encourage savings and investment which are badly needed in our debt-laden economy.  Net retail price increases in the first year of the tax should be relatively small because the 23% tax on prices will be mostly offset by the elimination in corporate and other business taxes (which are estimated by economists to account for about 20%+ of  retail prices today). The US will become the mecca for foreign investment and US companies will no longer produce as much offshore given the elimination of these embedded taxes on exports, and foreign imports will finally face the same effective tax burden as domestic production. This will mean many more jobs in the US and better paying jobs as well.”

I won’t belabor the economic analysis on the FairTax site or for that matter countless studies of how major tax reform is a huge plus for the economy. Suffice to say that tax substitution with the FairTax or something like it, is the single most important economic growth and job growth action that we can take as a nation. We are talking millions of new good paying jobs and trillions$ in economic benefits.

(2) Eliminate Unneccessary and Duplicative Regulation of Business and Commerce – To be sure, “some” regulation is very important. It helps ensure that new plant and equipment is being added and operated safely and with minimal environmental impact. It helps ensure that financial and tax reporting is fair and legitimate, and that market activities are transparent with broad market price discovery. However, the problem arises when we have regulation that becomes unnecessarily burdensome or duplicative. Examples of this abound ranging from the extraordinarily complex and burdensome requirements of Sarbanes-Oxley (enacted in reaction to Enron and WorldCom scandals of 2000-01) and of Dodd-Frank (enacted in reaction to the meltdown of the housing market and the banking industry in 2008). Building a power plant, a pipeline, a transmission line,  a factory or a new retail property or building can involve filing for and obtaining scores of permits (from federal, state and local authorities) , completing in most cases an Environmental Impact Study(EIS) and often lots of legal work to ensure compliance with all applicable regulations. In the environmental arena, some rules require costly additional equipment often for very small (and in some cases arguably zero) environmental benefits. All of this activity requires capital investment, and costs time and money, often lots of it, and means that costs and hence prices of products are higher. This hurts economic growth and translates into less new jobs.

Again, some regulation is necessary, but anyone who has experience dealing with the multitude of requirements and regulations from all levels of government (count me in this category) knows that we have gone WAY OVERBOARD when it comes to regulation in the US.

(3) Turn Public K-12 Education into a More Competitive Market– I often, not so jokingly, say when teaching classes on US electricity that Electricity Distribution is largely “19th Century Technology in a 21st Century World”.  Similarly, one might look at our current primary and secondary public school education system in the US and conclude that while a number developed nations have moved to better and more efficient  educational systems, we have remained as if nothing has changed in a century. Our math and science testing scores versus other countries are abysmal. We remain near the bottom of the list of developed countries based on tests of 12th graders in both Math and Science, behind even Russia! (For more info, google Pascal D. Forgione, Jr., Ph.D. U.S. Commissioner of Education Statistics who gave an excellent recent report on this). This is very problematic of course for the long-term US job markets, because the share of unskilled jobs continues to shrink, while the number of jobs that requires these same math, science (and reading) skills and at least a college education continues to grow.

Some would argue that this is because we don’t spend enough on public education, but the facts speak otherwise. In the US, we are now spending more per student on education than any other nation in the world. According to a 2013 OECD report which covered more than 40 developed countries, the United States spent $15,171 on each young person in the system — more than any other nation covered in the report. And it isn’t as if we havent tried to improve our educational performance by increasing our spending over time. Over the past 30 years, federal/state and local government education spending has grown at much faster than the rate of inflation with little improvement to show for it.  So clearly it is not a matter of  how much we spend but HOW we spend it.

The one area where we have had some success (though the experiment has been very limited by the dominance and resistance of the teacher’s unions) is thru charter and other school choice options for parents. Simply expanding these choices would represent a step in the right direction. However, a much more attractive option would be to move US K-12 education to market competition thru a voucher system. Parents would be given annual vouchers for school age kids equal to our current spending levels per student and then would be allowed to choose their school. Over time, this system would result in schools competing to get the best teachers, principals, facilities etc. Poor performing schools would have to improve or they would eventually go “out of business” while schools that perform well would grow further and likely add more teachers and facilities. Other countries have had a generally good experience with vouchers/ school choice systems such as Denmark, Sweden and the Netherlands.

I realize that not all of our educational problems will be solved by competition, but right now inner city schools are not doing their job with only rare exceptions. Shouldn’t parents of school age who are poor and live in the inner cities have access to better education for their kids? Of course, they should, but it will only happen sporadically and for precious few under our current system.

4. Immigration Reform – Many economists agree that a more open and reformed immigration policy would be a big boon to US economic growth. An analysis of  S. 744 (the immigration reform bill that passed the Senate) by the Bipartisan Policy Center shows significant increases in jobs (7 million more jobs by 2033) and economic growth. There are many important features of immigration reform when it comes to the labor markets, but two are most notable. First, there is an increase in legal immigrants and a reduction in illegal immigration (which has historically depressed wages for unskilled or less skilled workers). Second, reform gets rid of limits on professional/highly educated workers immigration (most of which are trained at US universities) which helps create more jobs. Most educated workers end up as professionals or entrepreneurs, often creating several jobs for Americans thru the businesses they create and/or the extra consumption they bring to the US.

To be sure, immigration reform is complicated and unfortunately very political. There would need to be compromises in how long and what would be required for current illegal immigrants to become citizens, and the degree to which we would protect our borders. Not surprisingly, those along our Southern borders with Mexico are most alarmed by immigration reform because they have seen a spike in crime related to the drug cartels.  I believe we should be able to work out these differences and more adequately secure our borders in future legislation. Clearly, there is a lot of upside for the US economy in doing so.

5. Increase Free Trade Agreements- In general, the evidence is strong that freer trade is a plus for the US economy and jobs. This will particularly true if free trade agreements are coupled with the Fair Tax  that levels the tax playing field and thereby encourages exports and discourages imports. The US currently has free trade agreements with 20 nations, mostly with countries in the Americas (i.e. Canada, Mexico, Chile, Colombia, Costa Rica, Dominican Republic. El Salvador, Guatemala, Honduras, Nicaragua, Panama, Peru) but only a few with developed economies (I.e. Australia, Israel, Korea and Singapore). Notably, the US has NO free trade agreements with Europe and most of Asia. Two significant trade partnerships are currently being worked on which is very encouraging. One is the Transatlantic Trade and Investment Partnership, between the US and EU with the first round of negotiations to take place in July. The other is the Trans-Pacific partnership which includes many of the nations that the US already has bilateral agreements with plus Japan, New Zealand, Malaysia and Vietnam. These negotiations are fairly far along as announced this past December.

The evidence regarding the advantages of free trade for the US economy and jobs is fairly compelling based on the well documented economic theory of comparative advantage . This allows the US to expand production in industries that it is a low-cost producer or better producer of good and services. And in so doing often lowers its costs and efficiency in producing these goods. Conversely, it allows companies to benefit from low cost imports which help increase US net disposable and lowers the cost of doing business. On a net basis, free trade has created more jobs in the US than have been lost. The bigger (and again more political) issue is that for certain industries (e.g. manufacturing and heavy industry) jobs have been lost and often these have been in unionized sectors (e.g. Steel making) where pay is higher. This is why it is important that further expansion of free trade agreements be accompanied by the Fair Tax reform which will give the US even greater competitive and comparative advantages in trade.

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There are other structural changes to the US economy that can help improve long-term jobs. In addition to education, we can look to make our health system MORE competitive which has helped lower prices and improve output and jobs in virtually every industry that deregulated over the past 30-40 years. This includes telecommunications, trucking, railroads, wholesale electric power, and natural gas production and pipelines among others (many of which I have studied in-depth during my career).

Will my top 5 suggestions ever happen? Hopefully, someday, though never in the current divided Congress. For now, I just hope that more and more people get a chance to work and have a good job and be “taking care of business and working overtime”!