AEI » Latest Content http://www.aei.org American Enterprise Institute: Freedom, Opportunity, Enterprise Wed, 24 Dec 2014 19:58:53 +0000 en-US hourly 1 On transportation, power is flowing out of Washingtonhttp://www.aei.org/publication/transportation-power-flowing-washington/ http://www.aei.org/publication/transportation-power-flowing-washington/#comments Wed, 24 Dec 2014 16:37:05 +0000 http://www.aei.org/?post_type=publication&p=825815 Washington is grabbing too much power — just look at Obamacare, environmental regulations and education standards. That has been a constant complaint of conservatives, not only during Barack Obama’s presidency but during George W. Bush’s as well.

But power is also flowing out of Washington, largely unnoticed, and back to the states and localities. You can see that if you look at transportation policy, which is following the same path as the federal government’s little remembered revenue-sharing program that was enacted in the 1970s and repealed in the 1980s.

Federal transportation spending has an even longer pedigree, dating from the Interstate Highway System enacted by Dwight Eisenhower in 1956. While a few states were already building limited-access toll highways, the new law instituted a federal gasoline tax to pay for interstates across the country.

The law made sense at the time, and for years afterward. There was much more economic disparity among states back then, and federal money could be spread from rich states to the poor ones. Interstates would make trucking transportation cheaper at a time when overregulation was making freight rail uneconomical. Routes between states could be coordinated, connecting all major metropolitan areas (but not those which would become major later, notably Phoenix and Las Vegas).

But the law doesn’t work anymore. Gas tax revenue is flatlining. People have been driving less since 2007, gas mileage has improved, and increasing mileage standards along with more electric and hybrid vehicles will reduce gas tax revenues even more in years to come.

Those revenues are insufficient to replenish the Highway Trust Fund. Congress could increase the gas tax, but it won’t; it’s highly unpopular and only a handful of members favor an increase. Obama understands that and is not seeking one.

The alternative is to spend money from general revenues. But that puts a squeeze on discretionary spending, because general revenues will increasingly be needed to pay for entitlements including Social Security and Medicare. In the meantime, Obama has said, the best Congress “could do would be to stagger through another year” of temporary transportation funding.

In effect, the feds are abdicating and the states are taking up the burden. New roads and bridges are needed in some places, and existing roads need to be maintained, repaired and upgraded. More than 30 states have passed transportation finance measures in the past three years, according to transportation consultant Ken Orski. Six states have increased gas taxes. Others have increased highway tolls, floated toll revenue bonds or passed sales taxes dedicated to transportation. “The move toward greater fiscal autonomy, self-sufficiency and financial innovation at the state and local level is likely to grow in strength,” Orski writes.

The gas tax, justified as a user fee, is being replaced by tolls, a more efficient measure of actual use: Transponder technology allows tolls to be levied based on demand, with adjustable fees to reduce congestion during peak use in states including Colorado, Florida, North Carolina, Texas and Virginia. There is a move toward public-private partnerships such as the one Canada adopted to finance a new Detroit River bridge using private capital to be repaid from tolls. Some conservatives complain about tolls, evidently on the theory that highways are built and maintained for free. But private decision-makers are more likely to make better decisions than the feds about where the real needs are.

Democrats have obdurately blocked (and most Republicans have been less than eager about supporting) reforms to entitlement programs, which means that entitlements will continue to squeeze discretionary spending out of federal budgets. Transportation is just a leading example.

Something similar happened years ago with revenue sharing, a program promoted in the 1960s by Brookings Institution economist Joseph Pechman. He argued that revenues from the progressive federal income tax would rise faster than incomes, and that Congress should share the largess with the states. He concocted a formula that rewarded states with progressive tax codes of their own and penalized states without them. It passed Congress in 1972 and was signed by Richard Nixon.

Economic redistribution increased as inflation pushed people with stagnant real incomes into higher tax brackets. In response, Colorado Sen. William Armstrong added income-inflation indexing to the 1981 Reagan tax cuts.

That plus increased entitlement spending led to the repeal of revenue sharing in 1987. Now we’re seeing the slow-motion disappearance of the Highway Trust Fund. Washington is always trying to accumulate power. Now some of it is flowing away.

Michael Barone is a senior political columnist for the Washington Examiner. This column is reprinted with permission from washingtonexaminer.com.

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What’s not to like?http://www.aei.org/publication/like/ http://www.aei.org/publication/like/#comments Wed, 24 Dec 2014 15:39:29 +0000 http://www.aei.org/?post_type=publication&p=825799 Economists, myself included, didn’t anticipate the US growth surge to a 5 percent pace at mid-year. For those still wallowing in notions of underlying problems like middle class malaise, geopolitical risk (Russia, oil, and the ever-present and increasingly tiresome “crisis in the Middle East”), the  December 23 report of an above-consensus 5 percent US third quarter growth pace forces a fundamental re-think: surprises, can be positive. Since the 2008 global financial crisis – a massive negative surprise – we’ve been conditioned to think in terms of “what else can go wrong?”, instead of what might in fact  be going right.

What is going right?  The good news

The good news story – coinciding with an end to official stimulus measures like more quantitative easing (QE) from the Fed and extra government spending – is pretty much American-based.

Consider: Between mid-2013 and mid-2014, the net worth of US households rose by $7.7 trillion, an increase of over 10 percent in the value of stocks and real estate. That is twice the post-crisis trend of 5  percent. Surely, a substantial positive surprise. Wealth (assets owned by households and firms) is a more powerful driver of spending than the much-decried, below-par wages and incomes, though the latter is far more visible.

The private sector and the government sector  have healthier balance sheets (the deficit/GDP ratio has plunged from nearly 10 percent  – awful – in 2009 to below 3 percent – better than average – today), thanks to stronger growth and some help from the 2013 sequester. These positive surprises have enabled stronger consumption growth. Investment too has picked up modestly, so much that in the 5 percent third quarter 2014 growth report, two thirds of the healthy pick up was due to demand growth. Net exports and government spending accounted for the rest.

The usual problems, higher inflation and wages, associated with faster demand growth have not yet appeared and, given very weak global demand, disinflation (slower inflation) has persisted. That positive inflation “surprise” (for those who have stubbornly failed to acknowledge it)  has helped to curb the Fed’s instinct to tighten. The perennial bugaboos of runaway deficits and higher inflation – though they continue to be cited – have not only failed to materialize but rather have become “positive surprises” of lower inflation and smaller budget deficits.

Pundits may not have noticed the good news, but American households and firms have noticed and they have, as a result, been more than willing to spend the substantial 10 percent increase in wealth enjoyed since mid-2013. About 4 percent of wealth increases usually gets spent. That is about a $300 billion wealth-induced spending boost over  the last year, worth about 1.7 percentage points of growth. So about a third of the current growth bounce is tied to positive wealth effects. Add another percentage point of growth from a waning of financial crisis worries and you have just over half (or 2.7 percentage points) of the 5 percent third quarter growth tied to positive surprises and the rest, 2.3 percentage points, representing underlying or trend growth.

So what’s not to like?

Well, enjoy your New Year’s champagne. Looking ahead, US wealth stagnated during the third quarter and probably is rising only modestly in the current/fourth quarter. The Fed wants to tighten and the rest of the world is stagnating. The 2014 mid-year growth surge will be temporary and extrapolative optimism for 2015 will prove unfounded. US growth will slow back to a below trend level, perhaps including a couple of negative quarters before settling back to its 2.5 percent trend pace.

So what else is new?

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Want to help the homeless? Don’t avoid themhttp://www.aei.org/publication/want-help-homeless-dont-avoid/ http://www.aei.org/publication/want-help-homeless-dont-avoid/#comments Wed, 24 Dec 2014 15:19:01 +0000 http://www.aei.org/?post_type=publication&p=825801 ...]]]> It’s a perennial moral dilemma of city living: Should you give money to the homeless person on the street? When a fellow human being, especially one in visible poverty, asks for help we naturally want to do something. We wrestle with our conscience, asking ourselves whether we should give cash, offer food, save the money to donate to shelters or simply ignore the request. Whatever we decide, it can tear at us and lead us to question our moral character.

But the truth is that how you respond to people asking for money on the street isn’t that important. The cash earned from panhandling will not help address the underlying issues keeping people on the streets – such as disconnection from family, barriers to employment, substance abuse or untreated mental illness. And few would argue that panhandling is a promising route to stable housing.

If you really want to help the homeless the answer is simple – don’t avoid them. It’s tempting to try to escape a situation that causes us discomfort. Seeing someone bundled up in blankets against a building might lead us to walk on the other side of the street. A panhandler outside a shop can lead us to take our business elsewhere. Cities with reputations for highly visible homelessness might even be crossed off our list of vacation destinations.

The problem with avoiding the homeless is that it creates a demand for “clean cities.” When constituents no longer feel they can access public areas, when local businesses lose money, and when tourism industries feel threatened, our city leaders respond. Unfortunately, they often provide solutions which do nothing more than drive the homeless out of sight.

Fort Lauderdale, FL passed a law restricting public feedings of the homeless, and followed through by citing a 90-year old World War II veteran for continuing his weekly feeding program of over 20 years. A recent report by the National Coalition for the Homeless finds that Fort Lauderdale is not alone – over the past two years, 21 cities have cracked down on feeding the homeless in public.

In Hawaii, a lawmaker personally crusaded around town with a sledgehammer to smash carts storing the belongings of homeless people. Paired with the tactic of yelling “get your ass moving” to people sleeping at bus stops during the daytime, this was part of a strategy to “solve” Hawaii’s homelessness problem. Despite shaming from the media, the lawmaker was recently reelected.

Some cities take an even more direct approach. “Greyhound therapy” refers to shipping the unwanted homeless out of town without verifying whether they have support networks at their destination. A public hospital in Las Vegas was accused last year of sending homeless, mentally ill patients to cities across the country without any plans for further care. When it comes to the most marginalized and disconnected people, greyhound therapy may be the easiest solution for cleansing cities, and therefore the most troubling.

Fortunately, there are many examples of communities reaching out to help the homeless instead of driving them out of view. In San Francisco, a new streamlined website empowers homeless individuals to seek out services using their own mobile phones. A Houston police officer reaches out to homeless people living on the streets, offering them a sympathetic ear and helping hundreds of them move into housing. And the Pope, rather than pushing for clean cities, literally helped homeless people get clean when he installed public showers in the Vatican.

None of these measures is a solution to homelessness on its own. But each takes the important first step of prioritizing the needs of the homeless over the inclination to quickly sweep them under the rug. Helping people requires seeing them first.

What is our role in this? It starts with the simple step of acknowledging that hardship exists whether we see it or not. It means being willing to experience the discomfort of homelessness in open view so that people in need aren’t driven out of the reach of service providers. It means judging cities not on how many homeless people we see, but on the compassion used to reach out to the homeless people that exist. Doing so will help ensure the homeless have access to the kind of assistance they truly need.

In our approach to homelessness, let’s choose compassion over cleanliness. After all, a society is not measured by how many vulnerable people can be seen – it is measured by how it treats the vulnerable wherever they are.

Kevin Corinth is a research fellow in economic studies at the American Enterprise Institute (AEI) where he focuses on policies dealing with the homeless.

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3 reasons to worry about the 2015 U.S. economy — and 1 mega-reason not tohttp://www.aei.org/publication/3-reasons-worry-2015-u-s-economy-1-mega-reason/ http://www.aei.org/publication/3-reasons-worry-2015-u-s-economy-1-mega-reason/#comments Wed, 24 Dec 2014 14:46:18 +0000 http://www.aei.org/?post_type=publication&p=825798 What next? Maybe that 5% GDP report did nothing for you. Hey, if you really want to worry about the US economy in 2015, there sure is plenty out there to make your stomach churn:

1.) What about Russia, its economy roiled by sanctions and falling oil prices? Sure, as Paul Ashworth and Paul Dale of Capital Economics note this morning, America sends just 0.7% of its exports there, and US bank loans to Russian entities is just 0.2% of GDP. But you never know. Ashworth and Dale:

We can’t completely rule out the possibility that there is some significant spill over into America’s financial system in a similar way to how the Russian debt default in 1998 eventually led to the collapse of the hedge fund Long-Term Capital Management.

2.) Or what about Europe? The euro crisis may be reigniting. AEI’s Desmond Lachman:

Judging by the pace at which Greece’s politics is unraveling, European policymakers could soon be faced with a fundamental policy choice. Do they again make Herculean efforts to keep Greece within the euro? Or do they allow Greece to be cut loose from the euro? How European policymakers decide to answer this basic question will be critical not only for Greece’s economic future but also for that of the eurozone as a whole.

3.) And what about secular stagnation? Plenty of economists think the American economy is suffering from deep structural flaws — ranging from too much inequality to too little competitive intensity — that it could be near-impossible to break out of the New Normal stagnation.

So maybe next is another year of 2%-ish growth, But maybe not. Again, Ashworth and Dale:

It’s also possible to think of a couple of events that would mean economic growth over the next couple of years would be even stronger than we expect. Given the latest comments by Ali al-Naimi, the oil minister of Saudi Arabia, oil prices could fall even further and remain very low for a long time. The 45% plunge in prices, from $110 per barrel in June to $60 per barrel now, is already large enough to add around 0.8 percentage points to annual US GDP growth. As a rough rule of thumb, every $10 decline in oil prices boosts US GDP growth by 0.2 percentage points. A decline to $40 a barrel would therefore result in GDP growth of closer to 3.5% next year than 3.0%, while a drop to $20 would raise growth towards 4.0%.

Even without a positive external shock such as a further fall in the oil price, GDP growth could still be higher than we expect if we have underestimated how much conditions have improved. It’s possible that the economy is entering a sweet spot where the drags from overseas, the domestic fiscal consolidation and the tightening in credit criteria are all behind it while the support from monetary policy stays unusually strong. If so, not much may need to change for GDP to grow by 3.5-4.0% for the next year or two.

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Harvesting crop insurance profitshttp://www.aei.org/publication/harvesting-crop-insurance-profits/ http://www.aei.org/publication/harvesting-crop-insurance-profits/#comments Tue, 23 Dec 2014 23:54:36 +0000 http://www.aei.org/?post_type=publication&p=825810 Over the past three years, proposals from the Obama administration and the House Budget Committee to reform the $80 billion-a-year federal crop-insurance program have been defeated by opposition centered in the House and Senate agricultural committees. With the new Congress, Republicans and Democrats who stand for fiscal responsibility have an opportunity to finally implement reforms.

Farmers have a sweet deal with crop insurance: Taxpayers currently cover all the administrative costs associated with marketing and managing the program and fund more than 60% of the premiums to cover anticipated crop-insurance payouts, according to annual data from the Agriculture Department’s Risk Management Agency. Farmers pay only about one-third of the real costs of their crop-insurance coverage. From 2003 to 2012, crop-insurance subsidies cost U.S. taxpayers $55.4 billion—66% of the cost of the program.

Proponents of federal crop insurance argue that roughly $6 billion a year in subsidized premiums is a small price to pay to guarantee the financial stability of the nation’s food supply. That argument is specious, not least because 85%-90% of all crop-insurance subsidies are channeled to the largest 10%-15% of farm operations, few of which would face any risk of going out of business because of short-term fluctuations in their revenues.

This article appeared in the Wall Street Journal on Tuesday, December 23. It will be published here on Monday, December 29.

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Tuesday afternoon linkshttp://www.aei.org/publication/tuesday-afternoon-links-14/ http://www.aei.org/publication/tuesday-afternoon-links-14/#comments Tue, 23 Dec 2014 21:34:41 +0000 http://www.aei.org/?post_type=publication&p=825717 ...]]]> gasminutes

1. Chart of the Day. Incorporating the combined effects of: a) the increase in average fuel economy over time, b) the increase in the average hourly wage, and c) falling gas prices, the chart above shows the number of minutes of work required to buy enough gasoline to drive 100 miles. At 27.2 minutes, the current cost of gas in minutes worked to drive 100 miles is the lowest since 1999 (26.3 minutes). If gas prices fall another 26 cents per gallon from $2.36 currently to $2.10 per gallon, gas prices adjusted for fuel economy and wages would be the cheapest in US history. In some states like Oklahoma ($2.03), Missouri ($2.04), Kansas ($2.11), Texas ($2.13) and Indiana ($2.14), gas prices are already below or near that level.

2. Updated EIA Forecast: Gasoline prices will average $2.60 per gallon in 2015 (23% below this year’s average of $3.37), which will save American consumers collectively $103.5 billion in energy costs, or almost $900 per US household. Oil prices (WTI) are predicted to average $62.75 per barrel next year, which will be 33% and $31.07 below this year’s average of $93.82 per barrel. For those lower gas and oil prices, you can thank America’s “petropreneurs” who brought us the Great American Shale Revolution with revolutionary “Made in the USA” drilling and extraction technologies.

3. The Next Shale Revolution. Like fracking on the eve of its success, “enhanced oil recovery” is virtually unknown to most Americans, yet like fracking, it has the potential to recover staggering quantities of hydrocarbons that were previously known but considered inaccessible. Peak what?

4. Thomas Sowell regularly delivers more wisdom in just one sentence than any other writer/thinker around, here are three examples: a)  Some think that we must tiptoe around in our own country, lest some foreigners living here or visiting here be offended by the sight of an American flag or a Christmas tree in some institutions, b) Make no mistake about it — there is political mileage to be made siding with demagogues like Al Sharpton who, as demagogue-in-chief, has been invited to the White House dozens of times by its commander-in-chief, and c) If you have always believed that everyone should play by the same rules and be judged by the same standards, that would have gotten you labeled a radical 60 years ago, a liberal 30 years ago and a racist today.

5. Quotation of the Day, is from Peter Kirsanov (emphasis original):

The Obamas could at least have the grace to stipulate that the fact they have to cite getting mistaken for a valet and being asked to help get something off a shelf shows the country has made impressive progress over the last 50 years. By the way, to use Obama’s example, I’m about his age, am a professional, and, on occasion, have found myself standing in front of restaurants. I’ve never been mistaken for a valet. But for the perpetually aggrieved, sometimes honest mistakes are presumptive evidence of invidious discrimination.

We can only hope that one day Mr. Obama will be mistaken for the president of the United States of America. So far, he’s given precious little indication he understands that’s what he was elected to be.

6. Absurd Request of the Day, is from black students at Oberlin College with failing grades this semester because they were too busy protesting and neglected their academic responsibilities. Here is part of their petition to the college’s administration:

Basically, no student especially black students and students of color should be failing a class this semester. A ‘C’ should be the lowest grade students can receive this semester. Professors should be required to work with students, who would otherwise be at risk of failing, to create alternate means of accessing knowledge.

Fortunately, Oberlin President Marvin Krislov has apparently rejected this absurd request, at the risk of being labelled a racist for holding black students at Oberlin College to the same rules and standards as all other students, see Thomas Sowell’s quote above.

7. Finally, Some Statistical Honesty About Campus Sexual Assault. Sen. Kirsten Gillibrand (D-NY) recently removed the following sentence about campus sexual assault from her website: “In addition, according to the National Institute of Justice, an estimated one out of five women who attends college will be sexually assaulted during her time there.” Actually, a new Justice Department study found that it’s more like 1 in 52 college women who are sexually assaulted while in college, so kudos to Sen. Gillibrand for deciding to stop promoting a frequently cited, but very flawed and exaggerated statistic about campus sexual assault. Can we expect the same integrity from the Obama White House, which continues to spread the bogus “1 in 5″ assault statistic? Don’t hold your breath.

8. Some Very Positive Economic News This Week: a) the American Staffing Association’s Staffing Index for temporary and contract employment hiring increased last week to the highest level since the index started in June 2006, b) Total US rail traffic increased last week to a post-recession high and reached the highest level since November 2007, c) the Conference Board’s Leading Economic Index increased in November to the highest level since July 2007, d) the American Trucking Associations’ Truck Tonnage Index increased in November to the highest level on record, and e) the Chicago Fed National Activity Index, based on 85 individual economic variables, increased in November to the highest level since December 2006, almost 8 years ago.

9. Barry Ritholtz’s Wise Investment Advice: Focus on 10 basic, simple truths that many investors seemingly ignore including: a) stock picking is a sucker’s game; b) you are an error machine, a mess of biases and emotions; and c) avoid hedge funds, which are a wealth transfer system (from fund clients to the fund managers) disguised as an asset class.”

10. Markets in Everything: a) Nanoplug, the World’s First Invisible Hearing Aid and b) an Ely, MN entrepreneur will deliver beer and liquor to your ice house for $5.

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Why America would be foolish to wage a cyber-war against North Koreahttp://www.aei.org/publication/america-foolish-wage-cyber-war-north-korea/ http://www.aei.org/publication/america-foolish-wage-cyber-war-north-korea/#comments Tue, 23 Dec 2014 21:14:36 +0000 http://www.aei.org/?post_type=publication&p=825780 North Korea’s creaky internet crashed for nine hours on Monday, and is now mostly back up. This outage is probably no coincidence. Many observers assume that the Obama administration is behind it, retaliating to what the government called North Korean “cyber vandalism” aimed at Sony Pictures. That attack, as everyone knows, led Sony to cancel the release of a comedy, The Interview, about the assassination of North Korea’s young leader, Kim Jong Un.

If President Obama did launch an undeclared cyberwar against North Korea, it may well be the equivalent of Bill Clinton launching cruise missiles at Osama bin Laden’s empty training camps back in the 1990s. Clinton’s salvo was never a real strategy to deal with a growing threat, and resulted only in intensified attacks. Obama may be making a similar mistake now.

North Korea’s attack was no laughing matter, as Sony Pictures’ computer networks were destroyed, emails and business information were released, and intellectual property stolen. All of this was done by a shadowy group calling itself the “Guardians of Peace,” who also sent messages threatening physical attacks on movie theaters that showed The Interview. That led leading movie theater chains to announce they would not screen the film.

In a news conference last week, President Obama hinted at retaliation, vaguely promising a response in a “place and time and manner of our choosing.” If that “manner” turns out to be copycat U.S. cyber attacks, then the administration may find itself trapped in a spiral of ever-growing confrontation, instead of coming up with a serious strategy to deal with Pyongyang.

At one level, if the world’s only superpower apes the tactics of a smaller and weaker antagonist, it would reveal the poverty of American thinking and strategy. Yes, what North Korea did opens a new page in the terrorist handbook, and could presage far more destructive attacks on American business. But unless our cyber response is a real plan either to thwart new attacks or is tied to a broader policy of bringing down the regime, then we simply are playing into North Korea’s evident cyber strengths.

More worrisome, though, is whether the administration has really thought through the implications of lashing back at North Korea. It may placate public opinion, but it could also result in even more North Korean aggression, without a way to de-escalate, short of America giving up when faced with even greater North Korean tit-for-tat response.

Obama’s national security team is probably assuming that Pyongyang will back down when faced with a robust American action. After all, that is what seems to happen each time there is a North Korean military provocation: America sends some B-52s or F-22s to the Korean peninsula, announces a few more wargames with its ally in the South, and then the North goes quiet for months on end.

Yet there is a difference between threatening retaliation and actually carrying it out. American muscle flexing has done nothing to solve the long-term problem of North Korea, but it also has not resulted in past situations spiraling out of control. Nor have American-sponsored sanctions, except in one instance, caused real pain for the Kim family regime, given the lifeline that China continues to provide to Pyongyang. That one instance, the targeting of the leadership’s personal finances, was dropped quickly enough by the Bush administration as a quid pro quo for supposedly meaningful dialogue (which never materialized).

Now, however, the U.S. has struck back physically, so to speak. We simply do not know enough about the regime and especially its new leader to have any confidence how the North will react. The recklessness evident in the Sony attack should at least give pause that this regime may not be as predictable as that of Kim’s father. Moreover, given the apparent ease of employing cyberterrorism, Pyongyang may decide that it can up the ante against the Americans as punishment in a way that it cannot through traditional military means.

The Obama administration needs an integrated strategy for dealing with North Korea, not a spasmodic response that has no more upside than us being able to boast, “We got you back!”

So what should Obama do? China’s continued support for Kim will make it difficult to destabilize the regime, but at a minimum, sanctions that affect the ruling circle should be reimposed, and ways of disrupting Kim’s nuclear and missile development should be explored.

Tit-for-tat responses are no substitute for a smart strategy.

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AEI scholars comment on 5 percent growth in Q3http://www.aei.org/press/aei-scholars-respond-report-5-percent-growth-q3/ http://www.aei.org/press/aei-scholars-respond-report-5-percent-growth-q3/#comments Tue, 23 Dec 2014 20:15:47 +0000 http://www.aei.org/?post_type=press&p=825769 ...]]]> With the final GDP growth estimate for Q3 2014 in at 5.0 percent, there is reason to be optimistic for the economy moving into the new year. This morning’s estimate is the strongest growth in 11 years.

AEI scholars are available for comment.  Michael Strain, resident scholar and deputy director of economic policy studies, writes that this news is a perfect Christmas present for Americans:

This quarter growth was the best in a decade — something to celebrate this Christmas. Both consumers and businesses made solid contributions to third-quarter growth. Combined with labor market data, today’s GDP report strongly suggests that over the last six months or so the pace of the economic recovery has shifted to a higher gear.

To arrange an interview with Michael Strain or another AEI scholar, please contact mediaservices@aei.org (202.862.5829).

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Obamanomics and trap of economic nostalgiahttp://www.aei.org/publication/obamanomics-trap-economic-nostalgia/ http://www.aei.org/publication/obamanomics-trap-economic-nostalgia/#comments Tue, 23 Dec 2014 19:58:09 +0000 http://www.aei.org/?post_type=publication&p=825743 Modern Democrats, including President Obama, have much economic nostalgia for the immediate postwar decades. In the 1950s and 1960s, taxes were high, unions strong, incomes more equal. Workers made stuff. Here is the president back in 2011:

My grandparents served during World War II. He was a soldier in Patton’s Army; she was a worker on a bomber assembly line. And together, they shared the optimism of a nation that triumphed over the Great Depression and over fascism. They believed in an America where hard work paid off, and responsibility was rewarded, and anyone could make it if they tried — no matter who you were, no matter where you came from, no matter how you started out. And these values gave rise to the largest middle class and the strongest economy that the world has ever known. It was here in America that the most productive workers, the most innovative companies turned out the best products on Earth. And you know what? Every American shared in that pride and in that success — from those in the executive suites to those in middle management to those on the factory floor.

But then — to hear Obama tell it — came the Republican resurgence and tax cuts and deregulation. Goodbye to the Golden Age and hello to the Age of Inequality. But rather than dispute Obama’s take on the past 30 years (which I do here), I want to point to a new Minneapolis Fed study which offers a different view of the Golden Age:

The decline of the heavy manufacturing industry in the American “Rust Belt” is often thought to have begun in the late 1970s, when the United States suffered a significant recession. But theory suggests, and data support, that the Rust Belt’s decline started in the 1950s when the region’s dominant industries faced virtually no product or labor competition and therefore had little incentive to innovate or become more productive. As foreign imports increased and manufacturing shifted to the American South, the Rust Belt’s share of manufacturing jobs and total jobs declined dramatically. Eventually the region’s manufacturers began to innovate, resulting in a stabilization of employment share at a significantly lower level. Our model suggests that this factor—lack of competitive pressure—accounts for about two-thirds of the Rust Belt’s decline in employment share. These results imply that vigorous competitive pressure in both product and labor markets is important for creating the incentives for firms to continuously innovate, create and grow, and that government policy should encourage such competition.

This very much syncs with what Ashwin Parameswaran has written:

The first half from 1945 till the 70s was a period when the pace of both product and process innovation was slow. As Alexander Field has shown, much of the productivity growth in the aftermath of the war came from exploiting product innovation that had already taken place during the 1930s. The damage done to the industrial base of the rest of the developed world meant that there was very little competition for American goods from foreign manufacturers. Most large American firms were also largely insulated from strong shareholder pressure to improve profitability. This combination of low import competition, low rate of entry by new firms and weak shareholder pressure meant that there was very little process innovation or cost control. It is not a coincidence that many view the 1950s and 1960s as a golden age of economic growth and stability. It was essentially a period when neither firm owners, managers or workers felt the threat of failure or even had the incentive to improve efficiency or control costs. It was a period of stability for all, masses and classes alike.

So it’s worth asking: When Team Obama looks at the US economy and thinks about dealing with its long-run challenges, does it really have a forward-looking  model? And is the Obama administration adequately informing the American public that globalization and technology mean we’re not going back to the supposed Golden Age?

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5%! About today’s monster GDP reporthttp://www.aei.org/publication/5-todays-monster-gdp-report/ http://www.aei.org/publication/5-todays-monster-gdp-report/#comments Tue, 23 Dec 2014 19:44:45 +0000 http://www.aei.org/?post_type=publication&p=825749 The US economy grew at a sizzling 5% annual pace in the third quarter, according to today’s revised Commerce Department report. The news helped send the Dow industrials over 18,000 for the first time. Europe must be so jealous.

Now the last time we had growth above 5% was summer 2003. Fun fact (or perhaps a  depressing fact): From 1981 through 2000, there were 21 individual quarters where the economy grew by 5 percent or faster — but just two quarters of such fast growth since, including this most recent one. So it’s about time. Anyway, I dig into the data in my new The Week column.

Look, this is good news, and we should probably expect some more good news thanks to the economy’s existing momentum and the big drop in oil prices boosting consumer spending. But let’s go big picture for a moment. From my column:

Good news, to be sure, but that’s really still just catch-up growth after the Not-So-Great Recovery, not mention that nasty storm last winter that sent the economy into the freezer. Most economists think America’s long-term potential growth rate will fall prey to slowing population growth and less innovation, outside of smartphone apps. And even higher GDP growth isn’t a cure-all if most of the benefits go only to a few. Policymakers need to build on this recent economic upturn with policies to reform K-12 education, improve college access and completion, repair our infrastructure, and lower barriers to business startups.
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