…a new Treasury Department analysis finds that, measuring from the start of the peak of each expansion, wages so far in this decade’s cycle are running ahead of the recovery pace during the 1990s. Thus the “stagnant wages” story can join the “jobless recovery,” the “outsourcing” crisis and the runaway budget deficit as other tales of woe that have all turned out to be evanescent.
Real wage growth generally lags economic growth, a fundamental that seems to escape such as the New York Times who “either have short memories or political agendas”…
The latest reports on wages and income have been rolling in, and with them we can discount one more canard about the current economic expansion–namely, that wages are stagnant and workers are doing far more poorly than they did in that second Age of Pericles known as the 1990s.
…Why are wages finally starting to show smart gains for workers? First, the labor market is tight with very low unemployment (4.5% nationwide), giving workers more bargaining power. Second, the big spike in energy prices in recent years raised the cost of living and offset nominal pay hikes, but energy costs have declined since Labor Day and those lower costs translate into higher real wage gains. Third, the surge in business capital spending that began in 2003 with the passage of the investment tax cuts has increased the capital to labor ratio that is a major driver of wage increases over time.
Contrary to popular myth, worker benefits have also been rising, not falling. Yes, many companies are changing to more sustainable 401(k)s from traditional pensions, and most are passing along some of the costs of rising health insurance to workers in co-pays and higher premiums. But the Labor Department measures employer pay packages and finds that fringe benefits paid to workers have risen 39% since 2000, or nearly twice the 22% rate of increase in nominal wages.
Take-home pay would be rising even faster if the cost of health benefit plans hadn’t climbed by 65% since 2000. Health insurance now costs the average employer $2 an hour per employee–money that could otherwise be paid in wages. But that $2 still goes toward benefits, not into corporate profits.
All told, the pattern of wage growth this decade isn’t all that different from that of the 1990s. Wage increases always lag behind economic growth, corporate profits and productivity gains. In the 1990s in fact, workers didn’t enjoy really big paycheck gains until 1997. This isn’t to disparage the 1990s, but only to point out that those who assail this decade’s gains either have short memories or political agendas.
We certainly agree with those who’d like to do more to lift worker paychecks, so here are two ideas. First, make the Bush tax cuts permanent. If Congress lets them expire in 2010, as many Democrats are urging, the average family will suffer the equivalent of a $2,000 a year pay cut.
Second, slash the corporate income tax. A recent study for the American Enterprise Institute by economists Kevin Hassett and Aparna Mathur examined 72 nations over 22 years and found that “wages are significantly responsive to corporate taxation.” In today’s global economy, capital migrates across national borders away from high-tax nations to places where tax systems are less punitive. Workers suffer when capital flees, and job and wage growth slow.
Many political leaders have adapted to this reality, which is why the average corporate tax rate across the globe has fallen over the past 25 years to an average of about 30% from 50%. The AEI study finds that, if the U.S. were to cut its 35% corporate tax to the OECD average of 30%, American manufacturing workers would gain nearly a 10% pay raise dividend within five years, which is the equivalent of roughly a $3,500 a year pay boost.
Charles Krauthammer’s keynote address at the Foreign Policy Research Institute’s November 14, 2006, annual dinner, at which Dr. Krauthammer was the second recipient of FPRI’s Benjamin Franklin Award for Public Service.
The concluding paragraphs:
As the Bush Doctrine has come under attack, there are those in America who have welcomed its apparent setbacks and defeats as a vindication of their criticism of the policy. But the problem is that that kind of vindication leaves America in a position where there are no good alternatives. The reason that there is general despair now is because if it proves to be true that the Bush Doctrine has proclaimed an idea of democratizing the Arab/Islamic world that is unattainable and undoable, then there are no remaining answers to how to counter ultimately the threat of Islamic radicalism.
It remains the only plausible answer–changing the culture of that area, no matter how slow and how difficult the process. It starts in Iraq and Lebanon, and must be allowed to proceed and not precipitate an early and premature surrender. That idea remains the only conceivable one for ultimately prevailing over the Arab Islamic radicalism that exploded upon us 9/11. Every other is a policy of retreat and defeat that would ultimately bring ruin not only on the U.S. but on the very idea of freedom.
Definitely RTWT. Thanks to Michael Barone for the link.
Between 1996 and 2000, the FDA averaged about 153 new drug approvals. Between 2001 and 2005, the number was down to 55, with only 15 in 2005 and 29 in 2004.
This is a useful essay on the costs of regulation by Richard A. Epstein, a professor of law at the University of Chicago and a senior fellow at the Hoover Institution. Epstein consults for the pharmaceutical industry - nevertheless his arguments match up with what I know of the industry.
The above-captioned Epstein quote on what has happened to new drug releases is shocking.
…The truth is, the pharmaceutical industry is too heavily regulated. Its big problem today is not that it’s free to run roughshod over the needs of consumers, but that it operates in a hostile and excessive regulatory environment that frustrates sound business decision-making and keeps down pharmaceutical company share prices in the stock market.
Consider the following: Ever-tougher conflict-of-interest rules in the National Institutes of Health and such academic medical centers as the University of Pennsylvania, Stanford and Yale have reduced opportunities for fruitful collaboration between industry, government and universities. More stringent requirements for clinical drug trials — including rules that demand larger test populations and more extensive documentation — have reduced the flow of new drugs to market. (Between 1996 and 2000, the FDA averaged about 153 new drug approvals. Between 2001 and 2005, the number was down to 55, with only 15 in 2005 and 29 in 2004.)
In addition, the industry faces major liability risks. Consumer fraud legislation adopted in many states has generated massive, often eye-popping claims for refunds of the original purchase price — in some cases even for drugs that have worked as promised or on the part of people who have not taken the drugs at all.
Epstein describes some of the consequences of the industry’s high fixed cost, low variable cost structure, but doesn’t prescribe any solutions to the bargaining problem: nobody wants to pay the high fixed cost portion. I would like to see an objective study of the drug market, which would show how these negotiations play out in the real world. I’m fairly certain that the national health negotiators cut deals where they pay much less than their share of the fixed costs [we know Australian and New Zealand on-the-list pricing]. I suspect that big HMO’s also don’t pay their share. Then who pays more than their share? I think it is the US consumer.
The central challenge to drug pricing is to figure out, quite literally, who swallows (and in what proportions) that huge front-end cost. Unfortunately, no company has a precise method to fairly, reasonably and palatably allocate the cost of drug development among the varied classes of subsequent consumers — large HMOs, hospitals, full-service pharmacies and Medicaid for starters. Each buyer has a strong incentive to push as many of those costs as possible onto someone else.
The upshot is a rough-and-tumble bargaining game in which drug prices vary substantially across different market segments. But the corner drugstore doesn’t have the same leverage to play one drug manufacturer off against another, so it usually pays higher prices for its wares than a large HMO. The resulting confusion leads to loud calls for equitable, industrywide price controls. But price controls would have the same dire consequences as they would in any other industry. Investment dollars will quickly move elsewhere if the regulatory system does not allow manufacturers to maximize their revenues over the useful life of the drug (which, incidentally, never exceeds the 11 or so years of patent protection).
I can’t believe legislators are hawking price controls! Please keep an eye on this - we certainly will.
Professor/blogger Dan Drezner wrote this commentary on new strategy books for the Washington Post. I’ve ordered the Michael Mandelbaum book. If you are planning to read some of these read on. Here’s his view on necessary ingredients:
In this climate, policy heavyweights from Washington to New York to Boston are grasping for the Next Big Idea, the grand strategy that will guide U.S. foreign policy in a post-Iraq world and earn its creator fame and, if not fortune, perhaps a spot on the next administration’s foreign-policy team. So who will be the next George Kennan? The current strategies on offer in various books and articles include new buzzwords, promising ideas — and miles to go before a consensus emerges.
Mere dissatisfaction with today’s foreign policy doesn’t guarantee that a new vision will take its place. As Jeffrey Legro, a political scientist at the University of Virginia, recently pointed out in his book “Rethinking the World: Great Power Strategies and International Order,” a lot is required for a real shift in worldviews. A new strategy must be more than visionary; it must provide attractive and practical solutions to current challenges. During the Cold War, containment’s appeal was that it offered a coherent vision for how to deal with the Soviet Union, as well as concrete policy steps that flowed from that vision.
The Economist has a few blogs now. E.g., Free Exchange where this analysis of the Bush record on free trade was posted. I found the explanation of Bush backing the steel tariffs very interesting - a political trade to gain the essential Fast Track trade negotiation authority. With Fast Track the special interests can easily block any trade deal - which they have done. In this trade it appears Bush gave up nothing - the steel tariffs were doomed before their launch.
…But I have heard convincing arguments—indeed, I have actually been convinced—that the steel tariffs were a necessary sop to the Rust Belt in order to get Mr Bush Fast track trade negotiation authority. Fast track, which forces the Congress to vote either “yes” or “no” on a treaty with no amendments, is an absolute prerequisite for doing any trade deals with America. In a parliamentary system, the PM has the power over the legislature to ram his proposals through. In America’s representative system, on the other hand, any member can revolt at any time, and the committees (which have proliferated like bacteria over the last forty years) will happily kill any trade bill with endless amendments to please favoured constitutencies, unless forcibly prevented from doing so. Given the critical Doha negotiations coming up, steel tariffs were, Mr Bush’s supporters argue, fairly obviously less important than fast track.
Moreover, Mr Bush took absolutely no care to impose them in any way that had the slightest chance of withstanding a WTO challenge; a really anti-trade president would have crafted some environmental fiddle, or leveled charges of “dumping”, and tied the thing up for years. As it stands, America briefly had steel tariffs, and now permanently has CAFTA and various bilateral deals. Doha collapsed, of course; the president cannot singlehandedly wangle a trade deal when the Europeans are resolutely intransigent and the developing countries oddly willing to derail a deal (and of course Mr Bush and his negotiators had America’s own powerful farm lobby hanging around their necks). But there is a reasonable argument that on trade, Mr Bush did the best he could with what he had.
Now that the Democrats are in power, however, it seems likely that Mr Bush will have to do more than make strategic gestures towards protectionism. Protectionist sentiment is on the rise in the country, and Democratic party, because of its ties to Big Labour, has long been more solidly protectionist than the Republicans. That protectionist sentiment seems to be freezing solider by the minute. The pro-trade wing of the party, exemplified by Bob Rubin, is apparently losing its fight to couple free trade with assistance to those who lose out. The new senators and congressmen are more protectionist than the Republicans they replaced, and, at least some argue, even more protectionist than the group of Democrats they are joining. This piece in the Wall Street Journal (subscription required) presages a painful future for ardent liberalisers:
RTWT.
My father, who was in the history trade, said that it took forty or fifty years for the interpretation of any American presidency or epoch to stabilize. People have to die, documents have to be declassified, and — most importantly — we need historians who were not politically aware at the time the events in question happened…
Here are some wise words from Tigerhawk, commenting on the emergence of one of the first true histories of the Vietnam War:
Historians are revising the history of the Vietnam war right on schedule. Power Line has an interview of Mark Moyar, a graduate of Harvard and Cambridge and presently a professor at Marine Corps University. Professor Moyar is the author of Triumph Forsaken: The Vietnam War, 1954-1965, published by Cambridge University Press. John Hinderaker wrote that to say that the book “is revisionist would be putting it mildly.” Naturally, I ordered a copy.
Mark Moyar was born in 1971, so my father would have considered him to be just about the perfect age to revise the history of the Vietnam War.
I wish I had access to Foreign Affairs so I could read the Lee Kuan Yew article.
UPDATE: I found the speech from which the article was taken: Global War Against Terror Can Be Won, A Speech by Minister Mentor Lee Kuan Yew, Recipient of the Woodrow Wilson Award for Public Service.
Given a fate of living under the magnifying glasses of SOX and FD, who in their right mind would want to sit on a corporate board these days? The smart board-level people I know in Silicon Valley now reduce their involvement to being merely corporate “advisers.” Thus, the intellectual capital of America’s high tech company boards is falling by the month.
Have you been wondering why, given the current booming economy and stock market, there are so few IPOs? We know that on average more regulation makes an economy less competitive — i.e., regulation is negatively correlated with economic growth. The principle reasons are friction [cost of compliance], and restrictions on competition [think telecom, FCC, …]. But there can be exponential negative consequences of over regulation, such as discouraging startups and encouraging early-stage buyouts. That’s the subject of The Pump-and-Dump Economy.
The short summary is that the Sarbanes-Oxley Act of 2002, the SEC’s Regulation FD, and FASB-initiated new rules on stock option valuation have combined to advantage big over small companies. One of the unintended consequences is measured by the big drop in IPOs. Michael Malone’s concluding paragraphs:
It is often noted in dismay that military academies teach the last war, not the next one. The same can be said for business regulation. In the zeal to punish the excesses of the dot.com boom, the federal government, with the tacit approval of the electorate, sought to not only punish the small number of real evildoers but also build the perfect universal plugs for all of the perceived holes in existing business practices.
The result was Sarbanes-Oxley, Regulation FD and stock option valuation — three great lessons in the law of unintended consequences. Let’s do our own accounting: Thanks to this troika, fewer new companies are going public; economic power is being concentrated in the hands of fewer companies; competition is reduced; new wealth is less widely distributed; the rich are getting richer; fewer talented people want to join entrepreneurial ventures; and corporate boards are getting stupider and more paranoid. And, please note, one of the crucial triggers for economic booms — a burst of young tech company IPOs — has now largely evaporated.
Just curious, but is this really what federal regulators, Congress and shareholder rights activists had in mind?
Regulation and compliance costs are one of the key reasons that agriculture has so few small-medium players. I hope we are not seeing the first phase of such a trend in the high tech arena.
I’m on the same page as Glenn
I’ve been pushing that idea since 2003, of course, and it’s also been supported by the likes of Milton Friedman and Vernon Smith. I don’t understand why the Bush Administration hasn’t been more supportive.
who points out that Hillary Clinton has co-authored a WSJ op-ed supporting the Iraq Oil Trust. It is good to see Clinton come down on the right side of this issue - she explains the case for the Oil Trust fairly well. But she doesn’t make clear one of the most important benefits: that is empowering Iraqis to take control of their government. Making the government dependent upon taxes [rather than on controlling the oil revenues], places the levers of power in the hands of the citizens. Here’s Clinton’s benefits summary:
• The future of Iraq’s oil reserves remains at the heart of the political crisis in Iraq, as the regional and sectarian divides in Iraq play out over the division of resources and revenues. As the Iraq Study Group writes, “The politics of oil has the potential to further damage the country’s already fragile efforts to create a unified central government.” An Iraq Oil Trust would chart an equitable path forward for dividing oil revenues in a way that transcends the divide among Shiites, Kurds and Sunnis.
• As report after report indicates, one of the challenges to building Iraq’s oil revenues has been insurgent attacks against oil infrastructure. A distribution of revenues to all Iraqis would mean they would have a greater incentive to keep the oil flowing, help the economy grow, reject the insurgency, and commit to the future of their nation.
• While demonstrating that the U.S. is not in Iraq for oil, an Iraq Oil Trust would also inhibit corruption and the concentration of oil wealth in the hands of a privileged few.
• Finally, an Iraq Oil Trust would demonstrate the values at the heart of democratic governance: Individuals would have the rights and responsibilities of citizenship. Indeed, the study group reports, “Iraqis have not been convinced that they must take responsibility for their own future.” By trusting ordinary Iraqis, ordinary Iraqis would in turn gain greater trust in the national government while seeing something positive about the future at a time when positive signs have been few and far between.
The World Bank’s latest report supports the positive impacts of globalization on the developing world:
According to Global Economic Prospects 2007: Managing the Next Wave of Globalization, growth in developing countries will reach a near record 7 percent this year. In 2007 and 2008, growth will probably slow, but still likely exceed 6 percent, more than twice the rate in high-income countries, which is expected to be 2.6 percent.
On how globalization will shape the global economy over the next 25 years, the report’s ‘central scenario’ predicts that the global economy could expand from $35 trillion in 2005 to $72 trillion in 2030…
Broad-based growth in developing countries sustained over the period would significantly affect global poverty. “The number of people living on less than $1 a day could be cut in half, from 1.1 billion now to 550 million in 2030. However, some regions, notably Africa, are at risk of being left behind. Moreover, income inequality could widen within many countries, compounding current concerns over inequality between countries,” said François Bourguignon, World Bank Chief Economist and Senior Vice President, Development Economics.
But the good economic news doesn’t preclude acceleration of the tragedy of the commons, such as fisheries and pollutants [such as carbon loading].
The next wave of globalization will likely intensify stresses on the “global commons,” which could jeopardize long-term progress, the report warns. Nations will have to work together to play a larger role in issues involving global public goods - from mitigating global warming, to containing infectious diseases like avian flu, to preventing the decimation of the world’s fisheries.
Failure in Iraq today will require far greater sacrifices tomorrow in far more desperate circumstances. Committing to victory now will demonstrate America’s strength to our friends and enemies around the world.
Fred Kagan led the AEI study group which prepared this report - due to be published in January. A summary was presented in D.C. on Dec 14th. The slides from that presentation are available in PDF here. Kagan’s group is recommending a very different strategy than the ISG, critics or MSM pundits — that of providing security to Iraqi citizens in Baghdad. Given the limits on available resources that means changing the mission priority from training the ISF to clear and hold Baghdad.
Personally I have thought a major weakness of Coalition policy from the beginning is the lack of focus on providing basic security to Iraqis. I think Kagan’s plan deserves a hearing.
Some background for the Dec 14th presentation:
The president is gearing up for a major change of strategy in Iraq. Now that the Iraq Study Group has reported its findings, Joint Chiefs of Staff chairman General Peter Pace will provide his recommendations, and President George W. Bush will address the nation next week. Democratic leaders advocate withdrawal, the Iraq Study Group recommends withdrawal within fifteen months, and the military has yet to speak out. But which course will the president take?
At this crucial turning point, AEI will present its own report, “Choosing Victory: A Plan for Success.” The study calls for a sustained surge of U.S. forces to secure and protect critical areas of Baghdad. AEI resident scholar Frederick W. Kagan directed the report in consultation with military and regional experts, including former acting Army chief of staff General Jack Keane, former Afghanistan coalition commander Lieutenant General David Barno, and other officers involved with the successful operations of the Third Armored Cavalry Regiment in Tal Afar.
At this event, Mr. Kagan and General Keane will present the report, which outlines how the United States can win in Iraq, and reinforces the idea that victory is the only acceptable outcome. Kenneth Pollack of the Brookings Institution will comment.
I’m keen to hear Ken Pollack’s comments - hopefully there will be a transcript. From the presentation, here’s the beef of the proposal:
We must change our focus from training Iraqi soldiers to securing the Iraqi population and containing the rising violence. Securing the population has never been the primary mission of the U.S. military effort in Iraq, and now it must become the first priority.
We must send more American combat forces into Iraq and especially into Baghdad to support this operation. A surge of seven Army brigades and Marine regiments to support clear-and-hold operations starting in the Spring of 2007 is necessary, possible, and will be sufficient.
These forces, partnered with Iraqi units, will clear critical Sunni and mixed Sunni-Shi’a neighborhoods, primarily on the west side of the city.
After the neighborhoods have been cleared, U.S. soldiers and marines, again partnered with Iraqis, will remain behind to maintain security.
As security is established, reconstruction aid will help to reestablish normal life and, working through Iraqi officials, will strengthen Iraqi local government
This approach requires a national commitment to victory in Iraq:
The ground forces must accept longer tours for several years. National Guard units will have to accept increased deployments during this period.
Equipment shortages must be overcome by transferring equipment from non-deploying active duty, National Guard, and reserve units to those about to deploy. Military industry must be mobilized to provide replacement equipment sets urgently.
The president must request a dramatic increase in reconstruction aid for Iraq. Responsibility and accountability for reconstruction must be assigned to established agencies. The president must insist upon the completion of reconstruction projects. The president should also request a dramatic increase in CERP funds.
The president must request a substantial increase in ground forces end strength. This increase is vital to sustaining the morale of the combat forces by ensuring that relief is on the way. The president must issue a personal call for young Americans to volunteer to fight in the decisive conflict of this age.
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