Tension between Politics and Economics

Tension between Politics and Economics 1

Why is US growth so stagnant? From the great recession in 2009, usually a time of super-fast catch-up growth, it has only grown at two percent per year. Two percent, or less, is starting to look like the new normal.
Is the Internet undetected growth? Maybe productivity isn’t declining at all and we’re just measuring new products badly, for example Google maps is free. 
Faster than regulations. If Uber had to ask permission ahead of time, it never would have happened, because the point of regulation is to protect the taxi industry. Uber  only happened because it grew so fast and so well that its customers became a political force. What has made the Internet revolutionary is that it’s permissionless. No one had to get approval from Washington or city hall to offer Google searches, Facebook  profiles or Apple  apps. It is a technology policy question: must the creators of new technologies seek the blessing of public officials before they develop and deploy their innovations?
Gross domestic income has been on average higher than measured gross domestic product since 2004 indicating workers are being paid to make products that are given away for free or at highly discounted prices. This trend began before the productivity slowdown and reflects high capital income rather than labor income (i.e., profits are unusually high)
Economic growth comes from one source: productivity, the value of goods and services each worker can produce in a unit of time. Productivity growth is declining. New business formation is sharply down. Mobility of people from job to job has declined.Productivity comes from new ways of doing things. New ideas, at heart; new inventions, new products, new processes, new technology; new ways of organizing companies; new and better skills among workers. Higher productivity typically comes from new companies, which displace old companies. Southwest enters and either displaces the legacy carriers or forces wrenching changes for survivors such as American and United.
Growth I’ll discuss forest, not trees. There are weeds that I’m happy to get into but that would be burdensome for this post. Let’s look at the foundation of doable changes, no revolution needed.
Solving  our growing and severe problems depends on robust economic growth. Tax revenue equals tax rate times income, and growth determines how much income there will be. The amount of tax revenue our government has available to pay off debt and to pay the ballooning social security and health care expenses depends almost entirely on economic growth. Larger tax rates can’t come close to raising that much money.
Regulation relief. The purpose of most economic regulation is to transfer money to a specific group of people, companies, or industry. It does so by slowing down new entrants, impeding competition, mandating uneconomic actions or cross-subsidy.
The overwhelming cost of regulation is the economic dislocation: companies not started, products not produced, innovations not innovated, people not hired, costs not slashed, prices too high. And growth too slow.
Finance The costs of running a compliance department are so high that it is nearly impossible to start a new financial company. The Dodd-Frank act only doubles down on the same basic design that has failed again and again: Regulation did not fail for being absent. Regulation failed for being ineffective.Energy and Environment policies indulge magical thinking. California, facing a drought, and not having built water projects in decades, is going to spend well over $60 billion dollars on a high-speed rail line.  the case has been made that by building the rail line, we will lower global temperatures, and increase rainfall. If on a dollars per ton of carbon saved the rail line fails elementary cost-benefit analysis, on dollars per drop of water created, it fails the magic vs. reality test.
A large price of polluting energy is the most efficient way to induce clean energy innovation; far more efficient than massive amounts of federally subsidized research and development to financially unprofitable businesses and bureaucrats picking technologies. Price-induced behavior changes can reduce usage much more easily than mandating fancier technologies. Paying some attention to turning off the lights when you leave the room is more efficient than mandating LED bulbs and leaving the lights on.Taxes Our tax code is a massively complex and broken mess, needing reform. Lower marginal rates are needed and massively simplify the code. Not everyone agrees that tax reform should be oriented to growth. The advocates for high taxes argue for redistribution or decapitation — removal of high incomes, even without benefit to lower-income people — freely admitting the growth consequences of high taxes are at least not positive. They just view distributional goals as more important than growth.
The economic distortions of the tax system result from the overall marginal tax rate, not each tax alone. The economic distortion due to taxation does not care that there are separate federal, state and local taxes. The economic distortion is the sum of all these.
The right corporate tax rate is zero. Corporations never pay taxes. Every dollar of taxes that a corporation pays comes from higher prices of their products, lower wages to their workers, or lower returns to their owners.Taxing corporations rather than people and taxing income rather than consumption is behind many complexities of the tax code. Far too much tax discussion considers federal income taxes alone as if the others did not exist.
“ObamaCare” is thousands of pages of law and tens of thousands of pages of regulations. Like finance, health was already highly regulated. And like finance, most of ObamaCare doubles down on regulatory structures that had caused so many pathologies before. The central problem of preexisting conditions was an artifact of regulation.
As an example, the problem of preexisting conditions was an artifact of regulation. In the ideal form of health insurance, you buy cheap catastrophic insurance when young, but the insurance policy can follow you as you age, change jobs, and move from state to state, and does not radically increase premiums if you get sick.
Why don’t we have that ideal insurance? Because previous rounds of regulation outlawed it. In the 1940s the US government allowed tax deductions for employer-provided group insurance, but not employer contributions to individual insurance or individuals’ contributions to such insurance. By laws, insurance is not portable across state lines and/or can lapse between jobs and/or after COBRA has run out. Thus, there is no reason for anyone who might get a job or move to buy long-term individual insurance that protects against the emergence of pre-existing conditions. In response to the preexisting conditions problem, the ACA forces community rating — everyone pays the same price—tries to mandate healthy people to buy insurance, and steps up pressure on employer provided group plans, which are the source of the problem.
The size of the US government is greater than we think. It looks like Federal spending is only about 20% of GDP. But each deduction and mandate is the same thing as a tax and a subsidy. By bringing each deduction and tax credit on budget, we can correctly see exactly the size of our government, and more wisely vote on that size.Labor laws. Taxes: income taxes, payroll taxes are primarily taxes on employment. Minimum wages, occupational licensing, anti-discrimination laws, laws regulating hours people can work, benefits they must receive, leave they must be given, fear of lawsuits if you fire someone, and so forth all impede the labor market.We are becoming a nation divided between “haves” with expensive, highly regulated, full time jobs and often illegal, under the table, part time “gig” work.
The usual argument is that workers need protection of all these laws. But the supposed protections do cost economic growth, and they do reduce employment. How much do they actually protect workers? The strongest force for worker protection is a vibrant labor market growth.
Infrastructure That much of the nation’s infrastructure is crumbling is a common observation. And infrastructure supports growth. Low interest rates are a particularly propitious time to build infrastructure.The process of infrastructure investment needs a complete overhaul. Costs spiral when projects must pay “prevailing wages” and obey set-asides for specific contractors, or when environmental review takes years.
The tension between politics and economics. The golden rule of economic policy is: Do not transfer incomes by distorting prices or slowing competition and innovation. The golden rule of politics seems to be: Transfer incomes by distorting prices and regulating away competition

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