AEI » Latest Content American Enterprise Institute: Freedom, Opportunity, Enterprise Fri, 21 Nov 2014 19:04:37 +0000 en-US hourly 1 Why America’s entrepreneurial heart is beating more slowly Fri, 21 Nov 2014 19:04:37 +0000 Again on the subject on the decline of US entrepreneurship — or at least the decline of US startups — over the past three decades, here is the latest research from Ian Hathaway and Robert Litan, as summarized by the great Ben Casselman at 538:

Hathaway and Litan look at more than three decades of data on business startups, expansions and failures from the Census Bureau’s Business Dynamics Statistics. They find a strong correlation between a region’s population growth and its startup rate. That makes intuitive sense: For example, Arizona, Florida and Utah experienced booming economies for much of the late 20thcentury that attracted new residents and new entrepreneurs. Overall population growth, however, has been gradually slowing over the past 20 years, possibly dragging the startup rate down with it.

The second big trend Hathaway and Litan look at is consolidation. Virtually every sector of the economy is more dominated by big companies today than it was 30 years ago. The authors find that regions that have seen more consolidation have also seen bigger declines in entrepreneurship. That, too, makes sense: For all the talk about disruption, it’s much harder to break into an industry that’s dominated by a handful of big, entrenched incumbents.

Hathaway and Litan conclude these two factors could be responsible for some three-fourths of the multi-decade decline, with bad policy such as regulation and taxes perhaps making up some bit of the rest. As far as a policy agenda goes, the researchers think it is “very likely that creating and expanding both entrepreneur and STEM education/green card visas in the future would increase startup rates. Teaching entrepreneurship in college and K-12 might also have some promise but needs more research and experimentation. Hathaway actually addressed the education issue in a recent podcast with me:

So Bill Aulet at MIT has written a great book on this called “Disciplined Entrepreneurship.”  Some folks say you can’t teach entrepreneurship.   I disagree with that.  And I think Bill’s sort of one of the leaders in this space and has a lot to say on that. And my co-author Bob Litan  has this great idea of instead of just teaching math and science  where students aren’t that engaged, but actually incorporating how that scientific and that mathematical knowledge has been used in the course of business to create goods and services and, teaching the commercial side of this, providing a link to that from young ages so it’s sort of a part of that curriculum and that learning all along throughout the education process.

Beyond that, let me add this: Increased immigration overall and fertility rates would be one way to address the first startup inhibitor. As for the second, consolidation, that could be result of less competitive intensity in the economy and the rise of strong creative monopolies like Facebook and Apple due to network effects. As economist Mike Feroli of JP Morgan has argued, ” … the decline in start-up activity has been a disconcerting feature of this expansion. … This is especially the case since most measures of business profit margins look elevated, which should stimulate new business formation. … One hypothesis is that those elevated margins owe to natural monopoly profits, perhaps due to an increased prevalence of network effects. In this case, the incumbent profits are incontestable, and start-up activity shouldn’t be expected to increase.”

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Red ink redux: Why a return to trillion-dollar budget deficits starts in 2017 Fri, 21 Nov 2014 18:00:28 +0000 It’s an underreported story — except on this blog — but the US budget deficit has come way down in recent years. The fiscal gap has narrowed from $1.4 trillion, or 9.8% of GDP, in fiscal 2009 to $483 billion, or 2.8% of GDP in fiscal 2014. The key drivers:an improving economy, 2013 tax hikes, and the spending cuts/caps of the 2011 Budget Control Act.

But enjoy it while it lasts. Trillion-dollar deficits are likely on their way back. Citi:

Despite recent reductions in the Federal deficit, we believe that FY2016 will be a turning point, after which the deficit (as a share of GDP) resumes its rise. Unless policymakers implement substantial measures now, a legacy of outsized mandatory spending on health care (Medicare and Medicaid) and retirement (Social Security) benefits, rising debt service and inefficient tax collection, along with demographic trends, will cause the Federal deficit and debt to balloon over the next decade. …

Outsized deficits and debts may reduce the pace of economic growth and lower the standard of living of many. Moreover, government resources that could be used for national priorities or mitigating shocks, might be crowded out by interest expenses generated from borrowing to finance fiscal obligations. Currently, such pressures have been muted because nominal and real interest rates on Federal debt are at record lows. But over time, debt service will mount amid more normalized interest rates. On balance, the large amount that the government will have to borrow to finance rising future mandated expenditures will raise US Treasury securities issuance well above historical norms.



Citi, CBO

Citi, CBO

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The rise of the machines vs. workers, in one chart Fri, 21 Nov 2014 16:49:05 +0000 For a long time, the share of national income going to labor vs. capital (represented in the above chart as worker income vs. corporate profits) was a steady relationship. But as University of Chicago economists Loukas Karabarbounis and Brent Neiman note in “The Global Decline of the Labor Share”, “the global labor share has significantly declined since the early 1980s, with the decline occurring within the large majority of countries.” A macro-observation deserves a macro-explanation:

We show that the decrease in the relative price of investment goods, often attributed to advances in information technology and the computer age, induced fi rms to shift away from labor and toward capital. The lower price of investment goods explains roughly half of the observed decline in the labor share, even when we allow for other mechanisms influencing factor shares such as increasing pro ts, capital-augmenting technology growth, and the changing skill composition of the labor force.

As machines can do more,  companies need man less — at least the kind of man without complementary skills. Policymakers must at least consider that technology-driven unemployment is a long-term factor that should influence next steps on reforming everything from education to taxes to the safety net. More from Andrew McAfee in the FT, who pointed me to the chart:

I expect the red line to continue to fall as robots, artificial intelligence, 3D printing, autonomous vehicles, and the many other technologies that until recently were the stuff of science fiction, permeate industry after industry. Policies intended to keep these advances out of a country might halt the decline of the labour share for a while, but they’d also halt competitiveness pretty quickly, thus leaving both capital and labour worse off.

I think the continued decline of the labour share, brought on by tech progress, will be a central dynamic, if not the central dynamic, of the world’s economies and societies in the 21st century. It’s a story much more about what will happen to the livelihood of the 50th percentile worker than to the wealth of the 1 per cent. And a much more important story.

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Something to be thankful for: the real cost of a Thanksgiving dinner is 1.3% cheaper than last year, 21% cheaper than 1986 Fri, 21 Nov 2014 16:35:08 +0000 ...]]]> turkey2From the American Farm Bureau Federation (AFBF):

The American Farm Bureau Federation’s (AFBF) 29th annual informal price survey of classic items found on the Thanksgiving Day dinner table indicates the average cost of this year’s feast for 10 is $49.41, a 37-cent increase from last year’s average of $49.04. The big ticket item – a 16-pound turkey – came in at $21.65 this year. That’s roughly $1.35 per pound, a decrease of less than 1 cent per pound, or a total of 11 cents per whole turkey, compared to 2013. The average cost of the dinner has remained around $49 since 2011.

The AFBF survey shopping list includes turkey, bread stuffing, sweet potatoes, rolls with butter, peas, cranberries, a relish tray of carrots and celery, pumpkin pie with whipped cream, and beverages of coffee and milk, all in quantities sufficient to serve a family of 10. There is also plenty for leftovers.

Foods showing the largest increases this year were sweet potatoes, dairy products and pumpkin pie mix. Sweet potatoes came in at $3.56 for three pounds. A half pint of whipping cream was $2.00; one gallon of whole milk, $3.76; and a 30-ounce can of pumpkin pie mix, $3.12. A one-pound relish tray of carrots and celery ($.82) and one pound of green peas ($1.55) also increased in price. A combined group of miscellaneous items, including coffee and ingredients necessary to prepare the meal (butter, evaporated milk, onions, eggs, sugar and flour) rose to $3.48.

In addition to the turkey, other items that declined modestly in price included a 14-ounce package of cubed bread stuffing, $2.54; 12 ounces of fresh cranberries, $2.34; two nine-inch pie shells, $2.42; and a dozen brown-n-serve rolls, $2.17.

“America’s farmers and ranchers remain committed to continuously improving the way they grow food for our tables, both for everyday meals and special occasions like Thanksgiving dinner that many of us look forward to all year,” said AFBF Deputy Chief Economist John Anderson said. “We are blessed to be able to provide a special holiday meal for 10 people for about $5.00 per serving – less than the cost of most fast food meals.”

A total of 179 volunteer shoppers checked prices at grocery stores in 35 states. Farm Bureau volunteer shoppers are asked to look for the best possible prices, without taking advantage of special promotional coupons or purchase deals. The AFBF survey was first conducted in 1986. While Farm Bureau does not make any scientific claims about the data, it is an informal gauge of price trends around the nation. Farm Bureau’s survey menu has remained unchanged since 1986 to allow for consistent price comparisons.

Some comments:

1. Compared to last year’s cost of $49.04 for a complete classic Thanksgiving dinner for ten people, this year’s cost of $49.41 for the dinner is only 0.75% (and 37 cents) higher (see blue line in chart). That compares to increases in overall consumer prices over the last year of 1.7% and average wages of 2.2%.

In addition to the 0.5% decrease in turkey prices compared to last year, the other items that decreased in price over the last year were: rolls (-0.5%), stuffing (-4.9%), cranberries (-3.3%), peas (-7.2%), and pie shells (-2.8%). The items that were more expensive this year compared to a year ago were sweet potatoes (+6.0%), pumpkin pie mix (+0.6%), milk (+2.7%), relish tray (+1.2%) and whipping cream (+8.1%).

2. Adjusted for inflation, the cost of a classic Thanksgiving dinner for ten this year is 1.3% cheaper than last year, 3.6% cheaper than two years ago and 5% cheaper than 2011 (see blue line in chart).

3. Compared to the cost of a Thanksgiving dinner of $62.30 in 1986 (in 2014 dollars), today’s classic turkey dinner for ten is almost 21% cheaper at $49.41.

4. Measured in time worked at the average hourly wage for all private production workers of $20.70 in October 2014, the “time cost” of this year’s classic turkey dinner for ten is only 2.39 hours, down by 1.2% from 2.42 hours last year and down by 4.7% from 2.50 hours in 2012 (see bottom chart). Compared to 1986 when the average American would have worked 3.22 hours to earn the income necessary to purchase the turkey dinner for ten, the “time cost” for a worker today (2.39 hours) is almost 26% lower.

5. Cost conscious shoppers can buy the same classic Thanksgiving meal at Walmart for only $32.64 (see top chart above), a savings of 34% compared to the AFBF national average, according to this press release from Walmart. In hours of time worked at the average hourly wage for private production workers, that would be a “time cost “of only 1.58 hours for one worker to purchase a holiday feast for ten people at Walmart, a truly amazing bargain.

Bottom Line: The fact that a family in American can celebrate Thanksgiving with a classic turkey feast for less than $50 and at a “time cost” of only 2.39 hours of work for one person (and only $32.64 or 1.58 hours of work for Walmart shoppers) means that we really have a lot to be thankful for on Thanksgiving: an abundance of cheap, affordable food. Compared to 1986, the inflation-adjusted cost of a turkey dinner today is 21% cheaper, and 26% cheaper measured in the “time cost” for the average worker. Relative to our income and relative to food prices in the past, food in America has been more affordable in recent years than at any time in history.

Bon appetit!

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Lessons from the 1995 strategy Fri, 21 Nov 2014 15:42:48 +0000 ...]]]> The Republican victory in the midterm election was decisive. Now the victors must chart a sensible course for the next two years—one that demonstrates they can be trusted as America’s governing party and sets the table for 2016.

The landscape is more treacherous than it looks. The Republican majority is strong in the House but surprisingly thin in the Senate. Even with 54 Republican senators (if Rep. Bill Cassidy is victorious in his runoff against Mary Landrieu in Louisiana), there will be precious little room for maneuver, as a few defections on any given vote would give Democrats the upper hand. Moreover, Democrats are sure to hold together at least 41 senators, and probably more, on critical votes. That gives them the power to filibuster most legislation pushed by Republicans, which can only be overcome with a supermajority of 60 votes. Then there is the problem of the presidential veto. If Republicans somehow manage to get a piece of legislation through both chambers, the president can still kill it. Rounding up enough votes for a congressional override under these circumstances would be the longest of long shots.

At the same time, there is much pent-up frustration among conservatives that is already turning into high expectations for the incoming Congress. The GOP’s core supporters have watched with increasing dismay and alarm as the president has implemented his agenda, often with arguably unlawful executive actions, and they will expect a Republican Congress to put a stop to it. Complaints about the limited power of one branch of government are unlikely to go over well.

So a Republican Congress will have to balance the need to make tangible progress in rolling back the Obama agenda against the very real obstacles it will face in trying to achieve that goal.

To navigate this difficult terrain, it will be important for Republicans to clearly set expectations and articulate their goals at the outset. The first temptation for the new Congress will be to follow the 1995 road map. After the Republican sweep of 1994, the House spent the first months of 1995 passing the legislative provisions of the Contract With America. Although important symbolically, these bills were not consequential in terms of reforming government. The real work in early 1995 was taking place behind the scenes, as House speaker Newt Gingrich, House Budget Committee chairman John Kasich, and the key committee chairmen plotted out a balanced budget plan that incorporated just about every feature of a conservative vision for governance: tax cuts and reforms; major changes in entitlement programs; welfare reform; elimination of scores of programs and agencies; and significant spending reductions.

The idea was to lay out a comprehensive agenda that contrasted sharply with the plans of President Bill Clinton, precipitate a confrontation of some sort, and then use the power of public opinion to force the president to accept a substantial part of the Republicans’ program. It was also important that the budget process, and especially budget reconciliation, allowed this plan to move forward in the Senate without any supportive votes from Democrats.

The 1995 strategy did not work as planned, to put it mildly. It took nearly a year for the Republican leadership to draft and pass its agenda. During that time, very little else was considered in Congress, as the entire GOP agenda was wrapped up in the budget process. Democrats spent the year regrouping and attacking the politically weak points of the Republican approach. In the confrontations with the Clinton administration that ensued, it was the Republican Congress, not the president, that suffered the most in public opinion. President Clinton’s standing with voters improved dramatically as the confrontation dragged on into 1996, and he won reelection handily over Sen. Bob Dole.

In the end, Republicans did secure enactment of welfare reform in 1996—a major achievement. But little else from the 1995 reconciliation effort made it into law, save for the creation of child tax credits.

In 2015, Republicans should resist the temptation to pursue a 1995-style maximalist agenda, which would very likely squander valuable time and ultimately put the party in a worse position heading into the critical election of 2016.

A better approach would be to start with politically sensible first steps, and build from there. At the beginning of the year, Republicans should identify straightforward legislation that is targeted, understandable, achieves an important objective, and is a clear political winner. The prototype is legislation repealing the employer mandate in Obamacare. Democrats included this mandate in Obamacare out of an anticorporate, populist impulse. But now, even many liberals are realizing that imposing new costs for “full-time” employees (those working at least 30 hours per week) is a recipe for fewer jobs and lower pay. Bringing up repeal of the employer mandate for a vote early in 2015 in both the House and the Senate would put Democrats and the administration on the defensive. In fact, such legislation would likely garner some bipartisan support. And if it were ultimately filibustered by Senate Democrats, Republicans would benefit from forcing the issue and holding the Democrats accountable for blocking it. Other candidates for early action include rolling back costly and ineffective regulations, restoring fast-track trade authority, authorizing (again) the Keystone XL pipeline, and allowing Americans to reenroll in the insurance plans canceled by Obamacare.

Rather quickly after scoring some legislative victories, however, Republicans in Congress will need to lay out a plan for passing a budget. Virtually all Republicans have called for a balanced budget, so a GOP-led Congress will need to pass a plan that reaches fiscal balance within the next decade. And that plan will need to be built on a foundation of broad-based tax and entitlement reform. Those are the pillars of conservative governance.

But a distinction needs to be made that wasn’t in 1995. It is possible for a Republican Congress to lay out a vision for governing in a budget plan and not proceed to consider all of the component parts in actual legislation. The budget plan will be considered in the form of a budget resolution, which does not get sent to the president for approval. Consequently, the House and Senate can write a general budget plan, and it cannot be vetoed. In 1995, Republicans followed up the budget resolution with implementing legislation—called a reconciliation bill. Reconciliation bills are critically important legislative vehicles because they cannot be filibustered in the Senate and thus can pass with a simple majority vote. The 1995 reconciliation bill became the centerpiece of the GOP’s agenda, and the main target for Democratic attacks.

It does not have to be that way in 2015. Among other things, the Republican budget plan could assume structural reform of the Medicare program, along with other entitlement reforms, but there’s no reason these changes have to be taken up and passed as part of a reconciliation bill. The president would engage in his usual demagogic attacks, and the issue would become highly politicized again. It is very likely that the Republican nominee in 2016 will embrace at least the concept of structural entitlement reform, and so it would be better to allow the debate to occur during the presidential campaign—without the baggage of a specific proposal considered in Congress serving as an easy target for Democrats.

Republicans instead should use the reconciliation process to advance targeted budgetary items that constitute fiscal progress, but also pose more political risks for Democrats than Republicans. For instance, reconciliation could be used to make targeted changes to Obamacare that lay the foundation for repeal and replacement of the law. Among other things, excessive subsidies for insurers could be eliminated, the tax on going uninsured rolled back or eliminated, the Independ-ent Payment Advisory Board (IPAB) repealed, and states could be freed to pursue creative reforms without the need of a waiver from the Department of Health and Human Services. All of these changes unite Republicans and divide Democrats.

It will be particularly important for a Republican Congress to approach Obama-care rationally. It will not be possible to repeal and replace Obama-care without a Republican president. Moreover, moving a full repeal bill without an accompanying replacement plan is politically risky for the GOP. The public is not interested in returning to the pre-Obama-care status quo, which was flawed. But repeal without a clear replacement plan implies returning to just that, in addition to removing insurance protection from several million people now on Medicaid or enrolled in insurance plans offered on the Obama-care exchanges.

It will be far more effective for Republicans to use the reconciliation process to begin rolling back Obamacare as much as possible and to enact aspects of a replacement plan that have broad support, such as enabling the cross-state purchase of health insurance or giving states greater freedom to fashion creative health care solutions that lower costs and expand coverage.

Beyond their efforts on the budget and Obamacare, Republicans should also use the next two years to demonstrate their depth in policy areas that traditionally haven’t been the focus of the party’s attention. That includes passing legislation to make higher education more accessible and affordable, enhancing choice in K-12 education, particularly for kids in failing schools, and reforming the federal government’s approach to antipoverty programs. The impending exhaustion of the Social Security Disability Insurance Trust Fund in 2016 presents another opportunity for Republicans to advance systemic reforms that will benefit the party’s nominee in the upcoming presidential election.

These legislative initiatives are not a substitute for action on the core economic concerns of middle-income Americans, particularly job growth. That must remain the top focus for Republicans going into 2016. But a robust agenda that addresses other top concerns of middle-class families will go a long way toward convincing voters that Republicans can govern effectively and with an eye toward helping working families improve their standing.

Republicans won a resounding victory in the midterm election in November 2014, but that was just the beginning of their work. To be trusted with control of the White House in 2017, Republicans will need to demonstrate that they have the strategic vision, tactical skill, and ability to execute on a coherent agenda between now and the next presidential election, which is less than two years away.

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The disappointment of President Obama’s executive action Fri, 21 Nov 2014 15:28:36 +0000 President Obama’s supporters and opponents are likely to be disappointed by his executive action on immigration, albeit for different reasons. His supporters may be disappointed that the action does not cover more unauthorized immigrants and falls far short of a pathway to citizenship. Meanwhile, his opponents may be disappointed—or more accurately outraged—by a blatant sidestepping of congressional authority and disregard of most voters’ expressed desire that he not take such action. Both of these disappointments miss the bigger picture.

The real disappointment is that this executive action distracts Congress and the American public from the far more important issue of the need to reform the entire US immigration system. Instead of focusing on unauthorized immigrants, who are less than 30% of all immigrants in the US, the US should rethink how it admits legal immigrants. The US needs to change its legal immigrant system to increase the number of visas available to workers and to reduce chain migration based on family ties.

Only 14% of permanent resident visas, or green cards, are awarded on the basis of employment, and half of those are to accompanying dependents of workers. Two-thirds of green cards are awarded on the basis of family ties. We limit every country to at most 25,620 green cards a year across numerically limited categories, resulting in some skilled immigrants from India and China waiting years for a green card. Many give up or never even apply. The number of H-1B visas for skilled specialty workers is capped at 85,000 per year, and so the US ran out of them within a week after they became available in the last two years. The number of H-2B visas for temporary non-agricultural workers is capped at 66,000 per year, also less than the number desired by employers and potential workers. And the H-2A visa system for temporary agricultural workers remains filled with bureaucratic red tape that leads farmers to turn to unauthorized workers. The system discourages high-skilled workers from trying to enter or remain in the US while encouraging low-skilled workers to enter illegally or overstay visas.

This executive action, as well as the earlier Deferred Action for Childhood Arrivals program, does nothing to address these fundamental flaws in our immigration system. The few changes that the executive action makes regarding legal immigration, such as increasing some temporary visa holders’ ability to switch employers, are steps in the right direction, but they are only baby steps. Worse yet, the outrage over the action makes it even less likely that bigger steps will occur in the next Congress, which seems likely to instead spend its time arguing about whether to block funding for carrying out the executive action. Congress and the White House would better serve the American public by adopting changes that would boost immigration’s economic contribution. Such changes would include increasing the number of green cards available to workers, particularly the high-skilled, and streamlining and expanding temporary worker programs.

Dealing with the large number of unauthorized immigrants in the US is a challenge. The unauthorized population has grown so large—and, in the case of the Dreamers, so vocal—that some action may be required. And a population that has worked so hard in the US for so long may have morally earned the right to stay here. But surely any action should consider the incentives it creates. The executive action creates an incentive for more people to come here illegally and have children here. Coupling legal status for some 5 million people with increased border enforcement is not enough. If the US wants to get serious about reducing future illegal immigration, it needs to require all employers to participate in E-Verify while also providing a legal way for more temporary workers to enter the US. The executive action does neither of those. Instead, it seems doomed to just worsen the problems created by current policy by delaying true reform for even longer.

I sometimes remind my children, just because you can doesn’t mean you should. President Obama would have been wise to follow such advice.

Follow AEIdeas on Twitter at @AEIdeas.

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Long live the Maidan! Fri, 21 Nov 2014 14:27:22 +0000 The Ukrainian revolution, which began a year ago, started with no more than 150 people deciding to stay on Independence Square (also known as the Maidan) to protest the decision of former President Viktor Yanukovich to turn away from signing an Association Agreement with the European Union and, instead, accept $15 billion from Moscow, on top of a 30% discount on the Russian natural gas.

Yet what was truly remarkable and inspiring about the unfolding protests —in addition, of course, to the heroism of the people who stayed, day and night, in an open square in freezing temperature, beaten and, toward the end of the three month vigil, even killed by the “anti-riot” police — was how quickly it evolved into a movement that at its finest could serve as a prototype for a kind of mature democracy that they hoped Ukraine may one day become.

To begin, unlike the previous anti-authoritarian mass protests, including the 2004 Orange Revolution, the people were not predicating their hopes on a particular party or an individual. Instead, they were counting primarily on themselves: their own determination, their own wisdom. “Vlast —eto my!” (“We are power!”) was the chant that became the leitmotif of the protest.

Very quickly, the demonstrators began to exhibit another key feature of successful democracy: an active,  self-organizing and responsible civil society. Feeding and, if only sporadically, warming up tens of thousands of people every day required a sustained, daily and nightly, voluntary effort of hundreds of men and women, donating their time and money to a cause they deemed morally imperative.

Unlike the Orange Revolution (or the Winter 2011-2012 mass protests in Russia), the Maidan movement was not about a flaw in the current regime, but about the national purpose, the country’s strategic direction. “Ukraine is Europe!” and “For a European future for Ukraine” were key slogans, whose cyber symbol was #EuroMaidan.

And the Maidan was European, at least in the ideal sense, in the unity of ethnicities and religions represented on the square: Ukrainians and ethnic Russians (at least 30% of the protesters were Russian speakers), Jews and Muslims, Ukrainian Catholics and Orthodox froze and fought and sang and danced together to forge a new Ukraine.

Now, by the decree of President Petro Poroshenko, November 21 is declared a national holiday, the Day of Dignity and Freedom.

Kiev – the cradle of the Russian state and its Christianity – is suddenly showing Russia the way toward dignity in liberty and democratic citizenship.

No wonder Vladimir Putin is mortally afraid of this Ukraine.

Follow AEIdeas on Twitter at @AEIdeas.

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Executive disorder Fri, 21 Nov 2014 13:38:35 +0000 ...]]]> The executive order on immigration announced by President Obama on Thursday night has Republicans in Congress so mad they can’t think straight. But when they can, they will realize that the president cannot give effect to his words without their consent. Indeed, his speech will be remembered for making it harder to fix our immigration system so that it serves our economic interests, secures our borders, and offers recourse to millions of illegal aliens who are part of our communities.

The president has insisted more than a dozen times in the last several years that he has no legal authority to act unilaterally to suspend deportations. Last night, he made a far less convincing argument that he could not wait six weeks to work with a new Congress to fix a problem that he has not addressed in six years.

To many observers — not just Republicans — his actions are not nearly as aggravating as his cynicism. His decision to go it alone is a transparent provocation to Republicans who just won a sweeping electoral victory. It may be asking too much for the new Congress to be magnanimous and do the hard work on immigration that the president has left undone.

Most Americans who support reforming our immigration system and offering some recourse to illegal aliens probably wish that President Obama had made his impassioned appeal to a new Congress, as part of a genuine strategy for seeking comprehensive, lawful solutions to this national problem. If the president’s primary objective was fixing our broken immigration system, he should have been willing to wait until the Republican-led Congress takes power in a few weeks and challenged it to act on a series of practical reforms.

For example, the steps he announced to strengthen the border should be matched with a vigorous strategy to prevent employers from hiring or exploiting illegal aliens. He could have proposed extending visas to scientists, mathematicians, engineers, and entrepreneurs who have much to offer our country. He could also have advocated a workable plan for addressing the status of all undocumented aliens, not just those covered by his ill-conceived decree.

It may be asking too much for the new Congress to be magnanimous and do the hard work on immigration that the president has left undone.

By waiting, the president would be effectively answering the call of a majority of Americans who agree that our immigration system must be fixed and our border made more secure. However, by attempting to bypass Congress, Obama has made it harder to reach those objectives. For most Congressional Republicans the president’s measures destroyed what little was left of his credibility and proved that he cannot be trusted to enforce our immigration laws, let alone draft new ones.

As Democrats in Congress dutifully line up to back the president’s action, they too will forfeit some of the trust of their colleagues. Although a few hearty advocates in both parties might continue to speak out for “comprehensive immigration reform,” the likelihood of meaningful legislation has diminished greatly. So any serious effort to change the crazy quilt of overlapping laws that is our immigration code may have to wait until Obama has left the White House.

The president’s decision to grant lawful residence and work permits to about 4 million aliens with children who are US citizens or legal US residents cannot be implemented without funding, and, starting in January, a Republican Congress pulls the purse strings. Even if funds were forthcoming, about 8 million aliens are not covered by Obama’s order. So, the White House decision has merely sown more confusion and anxiety among these illegal aliens.

In the meantime, as word spreads in Mexico and Central America that President Obama is doling out green cards and work permits, more immigrants might take their chances at an illegal crossing. At a time when Mexico is beset by its own domestic security crisis, authorities there are unlikely to divert resources to stop a wave headed to our border.

President Obama’s executive order — quite unlike related actions by presidents Ronald Reagan and George H.W. Bush — is in defiance, not furtherance, of the law. Many doubt that it will stand up to judicial scrutiny. In addition, the president and his party may pay a political price if a border crisis ensues and after it becomes clear that they tried to create more work permits for foreigners than they have jobs for unemployed Americans.

The president may have forgotten that, under the Constitution of the United States, his full and equal partners in governing are the Congress and the courts. With only two years left in his term, now is as good a time as any for him to learn.

Roger F. Noriega is a visiting fellow at the American Enterprise Institute. He served for more than 10 years on House and Senate staffs and held senior foreign policy posts in three Republican administrations. His firm, Vision Americas LLC, represents US and foreign clients.

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Have changing household composition and retirement caused the decline in median household income? Fri, 21 Nov 2014 04:15:02 +0000 ...]]]> earners

One of the most frequently reported economic trends is the gradual decline in US real median household income from its 1999 peak of about $57,000 to below $52,000 in each of the last three years (see blue line in top chart above). We hear a number of reasons from politicians and pundits for the decline in median household income over the last decade, mostly reasons that involve a narrative about economic stagnation and growing inequality caused by the progressives’ usual suspects: gains in worker productivity, income and wealth going to corporations and “the rich” instead of being shared by average workers; failure to increase the minimum wage or pass “living wage” laws; the combined effects of globalization, free trade and outsourcing putting downward pressure on middle-class incomes in America, and other variations of economic pessimism. Former President Bill Clinton recently offered his three reasons for stagnant median household income that include not raising the minimum wage and excessive corporate greed.

But there are some other very obvious, but mostly overlooked, factors that could easily explain why median household income has declined over the last decade that have nothing to do with economic stagnation: demographic changes in the composition of US households. AEI’s Alex Pollock addressed this issue recently in his essay “If income is going up, can median household income go down? It’s possible.” Here’s how Alex frames the issue:

One of the most commonly cited numbers in discussions of inequality is the trend in median household income, often used as if it settled the issue. Using median household income poses a fundamental problem, however. It conflates two measurements — changes in the composition of households and changes in income — and thus can easily mislead us.

Has the composition of households in America been changing? Obviously, it has. The percent of married couple households has fallen from more than 60 percent in 1980 to less than 50 percent in 2010. One-person households have risen from 23 percent to 27 percent of households in this period. Shifting from two-earner households to one-earner households lowers the median household income, even if everybody’s income is the same as before [or rising].

Alex provides a series of hypothetical examples showing how simple household demographic changes can result in rising individual incomes while at the same time the median household income is falling. For example, if there is a shift from two-earner, married households to one-earner single households as a result of divorce, the overall median household income could fall even when income is increasing for all individuals in the new mix of households with a greater share of single households.

Alex’s key point is that when demographics and household composition are dynamically changing, individual income and median household income can naturally move in opposite directions. The most frequent mistake, according to Alex, is to look at median household income over time assuming that household demographics are static. And that is precisely the mistake made in almost all of the discussions about median household income, and that leads to a distorted and inaccurate conclusion about why median income is falling.

One example of a major dynamic change in household composition is the significant increase in the share of US households with no earners, from fewer than 20% of all US households in 1980 to 23.7% of households in 2013 (see blue line in bottom chart above, Census data here from Table H-12). Likewise, the share of single-earner households has also increased from 33.2% in the early 1990s to above 37% for the last five years (see red line). In contrast, there’s been a decrease in the share of US households with 2 or more earners from above 46% of all households in 1989 to fewer than 40% of US households in every year since 2010 (see brown line in bottom chart above).

In summary, over the last several decades, there’s been an increasing share of no-earner, single-parent and single-earner households and a decreasing share of married and two-or-more-earner households. That major demographic shift has likely depressed median household income significantly in the last decade, even though it’s possible, as Pollock shows, that the income of individual working Americans could be rising.

Another key demographic shift is the increasing number of retired Americans as a share of the adult population based on Social Security data. As the red line in the top chart above shows, US retirees represented a pretty stable 15% share of the US population from 1990 to 2008. Starting around 2008 when the early “baby-boomers” – those born in 1946 — reached early retirement age of 62, the share of retirees started increasing from less than 15% of the adult population in 2007 to more than 16.6% in 2013.

In the five year period between 2008 and 2013, the number of retired Americans increased by 5.6 million, which was the largest five-year increase in US history, and more than double the 2.5 million increase in the previous five-year period. Given that wave of recent retirements, there have been millions of older, experienced, highly-paid workers going from their peak earning levels to a much lower retirement income that would typically include Social Security payments, pensions, and distributions from retirement accounts. As those millions of retirees are replaced in the workforce by younger, less experienced, lower paid workers, median household income could be falling even though the average income of working Americans could be rising.

It’s probably no coincidence that the recent increase in retirees, both in absolute numbers and as a share of the adult population, along with the other demographic changes described above, has naturally coincided with a decline in median household income. It would be hard to imagine that an aging population with a significant increase in the number and share of retirees, wouldn’t depress median household income, for purely demographic reasons.

Bottom Line: Most explanations of the recent decline in US median household income are based on some variation of a narrative of economic stagnation, rising inequality and pessimism. But what is almost always overlooked are the very significant demographic changes that have taken place in the composition of US households over time that would significantly impact the income of the median US household. Taken together, a) the increase in the share of no-earner, single-earner, and single-parent households, b) the increase in the number and share of retirees, along with c) the decline in the share of two-earner and married households, would logically and necessarily depress the income level of the median US household.

In summary, the composition of US households is not static, fixed and permanent; rather it’s dynamic, evolving and ever-changing. Discussions on changes in median household income over time that ignore the changes in household composition over time will always be incomplete, distorted and misleading. Perhaps the decline in median household income this century is not a narrative of economic pessimism and stagnation after all, but a more upbeat story of a greater number of Americans living longer lives, and enjoying periods of time in retirement that were never possible until this century.

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Capitalism and compassion: Why morality matters in a market economy Mon, 17 Nov 2014 17:53:20 +0000 ananta-AEI-logos_800px

Please note this event is Indian Standard Time.

In much of the world, including India, the free enterprise system has come to be associated with material greed, or wealth creation for its own sake. AEI President Arthur C. Brooks believes that supporters of the free market system need to develop a new way of addressing the big human questions of our time. Based on both empirical research he conducted as an economist and his interactions with some of the world’s leading spiritual figures — including the Dalai Lama and Sri Sri Ravi Shankar — Brooks argues that supporters of free enterprise must make not just an economic but also a moral case for their ideas.

During this event at the Ananta Centre in New Delhi, India, Brooks and acclaimed Indian author and commentator Gurcharan Das will discuss the dynamic between making money and doing good.

Full video of this event will be posted 2-3 business days after.

Email or click here to RSVP.

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Good policy, good politics Thu, 20 Nov 2014 22:56:52 +0000 ...]]]> After years of playing defense, apologizing for while doubling down on his lies about the Affordable Care Act, President Barack Obama has chosen to go on offense. Not against the junior varsity terrorists of the Islamic State group in any sort of new, more meaningful way, but on the domestic front, by finally taking action to shield large numbers of illegal immigrants from deportation. Later today, in a prime-time address, the president is expected to announce that he will grant millions of undocumented aliens, seemingly mostly those with close family ties to U.S. citizens (often their children), reprieve from deportation and some sort of permission to work legally.

These actions appear to be wise ones, both on political and on substantive grounds. What the president is doing, in effect, is going from not enforcing federal immigration law (much like his predecessors) to announcing that he is not enforcing federal immigration law, and detailing more of the specifics of this non-enforcement. In other words, he’s gone from not deporting 11 million people to not deporting 5 million or 3 million people. For a number of reasons this is, along practically all dimensions, good and helpful public policy.

You can read the rest of the article at the US News & World Report. It will be available here on November 27, 2014.

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