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Economics for the Election Year Robert J. Gordon Stanley G. Harris Professor Northwestern University Evanston Rotary Club, October 26, 2004.

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Presentation on theme: "Economics for the Election Year Robert J. Gordon Stanley G. Harris Professor Northwestern University Evanston Rotary Club, October 26, 2004."— Presentation transcript:

1 Economics for the Election Year Robert J. Gordon Stanley G. Harris Professor Northwestern University Evanston Rotary Club, October 26, 2004

2 Agenda of Economic Issues: #1 Recession and Recovery The Recession and Recovery The Recession and Recovery When did it happen? When did it happen? Why did it occur? Why did it occur? (How much blame on Clinton vs. Bush vs. neither) (How much blame on Clinton vs. Bush vs. neither) How Bad was it by Historical Standards? How Bad was it by Historical Standards? Why was it so Mild? Why was it so Mild? Was it “Jobless” or not? Was it “Jobless” or not? The “disguised unemployed” The “disguised unemployed” What happened to wages and incomes? What happened to wages and incomes?

3 Income Distribution and Social Security #2 Income Distribution: the Fundamental Difference #2 Income Distribution: the Fundamental Difference What has happened to inequality? What has happened to inequality? Who is in the top 1%, top 0.01%?’ Who is in the top 1%, top 0.01%?’ Advantages of raising taxes on the rich Advantages of raising taxes on the rich Reduce deficit, pay for health care Reduce deficit, pay for health care #3 Social Security #3 Social Security Is there a crisis? If so, when? Is there a crisis? If so, when? Bush, Kerry, and other solutions Bush, Kerry, and other solutions

4 The Biggest Issue: Medical Care The twisted and deformed U. S. medical care system The twisted and deformed U. S. medical care system 45 million uninsured 45 million uninsured Employer-based, not government-based Employer-based, not government-based GM: not just current workers, also retirees GM: not just current workers, also retirees GM vs. Toyota GM vs. Toyota Bush vs. Kerry Bush vs. Kerry Bush: Health Saving Accounts Bush: Health Saving Accounts Kerry: Catastrophic Coverage by Government Kerry: Catastrophic Coverage by Government

5 Business Cycles: The Incredible Volatility of Real GDP Changes

6 Why the Recession? Why not? Previous expansion was 10 years old (March 1991 to March 2001) Why not? Previous expansion was 10 years old (March 1991 to March 2001) Politics of the dating (November 2000 vs. March 2001) Politics of the dating (November 2000 vs. March 2001) What goes up must come down What goes up must come down Hi-tech and dot.com investment boom Hi-tech and dot.com investment boom Stock market: Irrational Exuberance Stock market: Irrational Exuberance Accounting tricks and overstated profits Accounting tricks and overstated profits Clinton Guilty? Greenspan Guilty? Clinton Guilty? Greenspan Guilty?

7 Why Wasn’t the Recession Worse Greenspan’s Monetary Policy Greenspan’s Monetary Policy Made possible zero-rate auto financing Made possible zero-rate auto financing Made possible housing refinance Made possible housing refinance Loss in stock market wealth offset by gain in housing wealth Loss in stock market wealth offset by gain in housing wealth Bush tax cuts Bush tax cuts Total 2004 saving $269 billion Total 2004 saving $269 billion Bottom 80% $90 billion Bottom 80% $90 billion Top 2 to 20% $90 billion (4.2x as much) Top 2 to 20% $90 billion (4.2x as much) Top 1% $89 billion (80x as much) Top 1% $89 billion (80x as much)

8 Greenspan and the Chicago Board of Trade,

9 The Government Budget with and without the Business Cycle

10 Assessment of Bush Tax Cuts 2/3 went to top 20%, 1/3 to top 1% 2/3 went to top 20%, 1/3 to top 1% If the goal is to stimulate the economy, wrong If the goal is to stimulate the economy, wrong Top 1% save most of their incomes, spend almost none of the tax cut Top 1% save most of their incomes, spend almost none of the tax cut Bottom 80% spend most of their incomes, spend almost all of the tax cut Bottom 80% spend most of their incomes, spend almost all of the tax cut If the goal is to stimulate investment, wrong If the goal is to stimulate investment, wrong Domestic Investment = Government Surplus + Private Saving + Foreign Borrowing Domestic Investment = Government Surplus + Private Saving + Foreign Borrowing

11 How U. S. Domestic Investment is Financed

12 A Jobless Recovery?

13 Differences between the surveys Changes January 2001 to September 2004 Changes January 2001 to September 2004 Payroll survey Payroll survey Total -821,000 Total -821,000 Private -1,634,000 Private -1,634,000 Household survey Household survey Total +1,690,000 Total +1,690,000 Why the Difference Why the Difference Less moonlighting Less moonlighting Missing new establishments Missing new establishments Former employees as self-employed consultants Former employees as self-employed consultants

14 The “Disguised Unemployed” and Changes in Incomes Labor Force = Employed + Unemployed Labor Force = Employed + Unemployed If you’re not looking, you’re not included If you’re not looking, you’re not included 2.6 million people have stopped looking 2.6 million people have stopped looking Adding the INCREASE in the disguised unemployed, the unemployment rate would be 7.2, not 5.4 Adding the INCREASE in the disguised unemployed, the unemployment rate would be 7.2, not 5.4 Incomes? Increasing slower than inflation Incomes? Increasing slower than inflation million people laid off in million people laid off in Only 45% have found new full-time jobs Only 45% have found new full-time jobs Of those, 52% of jobs are lower paid Of those, 52% of jobs are lower paid Loss in manufacturing, gain in low-paying service jobs Loss in manufacturing, gain in low-paying service jobs

15 Income Distribution Ratio top 20% to bottom 20%, last 25 years up from 9 to 14 Ratio top 20% to bottom 20%, last 25 years up from 9 to 14 Top 1% earn 14% of total income, bottom 20% earn 4% (20*14/4 = 70) Top 1% earn 14% of total income, bottom 20% earn 4% (20*14/4 = 70) CEO pay / average worker pay CEO pay / average worker pay , , Who is in top 1%, the theory of the “Four Michaels” Who is in top 1%, the theory of the “Four Michaels” Pure rents: what happens if you tax them more? Pure rents: what happens if you tax them more? Kerry: go back to pre-2001 (33% to 39% marginal rate) Kerry: go back to pre-2001 (33% to 39% marginal rate) Me: go to at least 50% marginal rate Me: go to at least 50% marginal rate This is the golden goose that can pay for health care This is the golden goose that can pay for health care

16 Social Security Why a “Crisis”? Why a “Crisis”? Baby Boomers ( ) shift from paying SS taxes to receiving SS benefits Baby Boomers ( ) shift from paying SS taxes to receiving SS benefits Huge trust fund begins to decline 2015, zero by 2045 Huge trust fund begins to decline 2015, zero by 2045 Bush vs. pay-as-you-go Bush vs. pay-as-you-go Young people set money aside for themselves, don’t pay taxes to support today’s elderly Young people set money aside for themselves, don’t pay taxes to support today’s elderly Risk of bad investments, who will bail them out? Risk of bad investments, who will bail them out? Solutions: slower increase in benefits, slow rise in taxes, index retirement age to life expectancy Solutions: slower increase in benefits, slow rise in taxes, index retirement age to life expectancy Crisis overblown! They don’t understand immigration! Crisis overblown! They don’t understand immigration!

17 The U. S. Medical Care Debacle Most Countries Fund Medical Care through Government Taxes Most Countries Fund Medical Care through Government Taxes No connection between funding and provision No connection between funding and provision Hospitals and doctors can be private/nonprofit, not government owned or government employees (UK the exception) Hospitals and doctors can be private/nonprofit, not government owned or government employees (UK the exception) U. S. Employer-based system distortions U. S. Employer-based system distortions 45m uninsured 45m uninsured Employers convert full-time to part-time jobs Employers convert full-time to part-time jobs Employers aren’t competitive with foreign firms Employers aren’t competitive with foreign firms GM and other legacy firms, $1,400 per car GM and other legacy firms, $1,400 per car

18 Bush vs. Kerry Bush: Health Savings Accounts Bush: Health Savings Accounts Tax-deductible contributions, spending on medical can be withdrawn tax-free, interest tax-free Tax-deductible contributions, spending on medical can be withdrawn tax-free, interest tax-free Unpopular because tied to high deductibles Unpopular because tied to high deductibles Like all such plans, provide greater benefits to those in the top tax brackets Like all such plans, provide greater benefits to those in the top tax brackets Kerry: government-funded catastrophic care Kerry: government-funded catastrophic care Would reduce medical care premiums Would reduce medical care premiums

19 Neither Addresses Basic Problems Employer-based rather than a right of Citizenship Employer-based rather than a right of Citizenship Republicans love “competition” but look what it brings us in medical care Republicans love “competition” but look what it brings us in medical care 3 to 4% of GDP on administrative costs 3 to 4% of GDP on administrative costs Julie’s mail vs. my lack of mail, “this is not a bill” Julie’s mail vs. my lack of mail, “this is not a bill” Promotes imports, favors new startups vs. legacy firms Promotes imports, favors new startups vs. legacy firms Universal care, higher co-pays, eliminate paperwork Universal care, higher co-pays, eliminate paperwork The drugs-from-Canada situation The drugs-from-Canada situation U. S. households subsidize drug research for Rest of World U. S. households subsidize drug research for Rest of World Bush legislation prohibits government wielding purchasing clout Bush legislation prohibits government wielding purchasing clout Why does UK have five firms providing flu shots, U. S. only two? Why does UK have five firms providing flu shots, U. S. only two?


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