Jump-Starting America

Can the United States grow faster, create more good jobs, and genuinely spread opportunity?

Yes: by investing more in science and technology, by placing those investments strategically around the country, and by creating an Innovation Dividend – paying cash to all Americans every year, based on the success of public investments in the tech sector.

What technologies should receive support?  Which cities have the potential to become the next generation tech hubs?  How do we ensure that benefits from the next tech boom are shared more broadly?

Join Jon Gruber and Simon Johnson in discussing their new book, Jump-Starting America: How Breakthrough Science Can Revive Economic Growth and the American Dream, in a series of events and media appearances around the country.

The first public event is on Tuesday, April 9, organized by Harvard Book Store and held at the Brattle Theater in Cambridge, MA: http://www.harvard.com/event/jonathan_gruber_and_simon_johnson/

All are welcome!

Hey Democrats, the Problem Isn’t Jobs and Growth

It’s inequality.

By James Kwak

This American Life‘s forays into politics and economics are generally less satisfying than their ordinary storytelling fare. That’s especially true when they try to answer some specific question, like “What is wrong with the Democratic Party?”—the subject of a segment last month. The story did have some telling moments, however, most vividly when moderate Congresswoman Cheri Bustos was trying to pitch the party’s forgettable and already-forgotten “Better Deal” message (which she helped design) to a local newspaper. Here are a couple of excerpts. (The audio begins at 53:50, or you can read the transcript).

First, on jobs:

Cheri Bustos

We want to be in a position to help create 10 million good-paying, full-time jobs. There are still people hurting, and I think we need to acknowledge that and say that we want to do something about that.

Chuck Sweeney

Right. Well, Donald Trump says that, too. … He says exactly the same thing. Too many people are still out of work. You know, we need to do something about bringing back jobs.

And on Democratic support for cutting corporate taxes:

Cheri Bustos

And so as long as [the corporate tax rate is] highest in the world, we’re not going to have corporations who are going to bring that money home. So there’s got to be some incentive.

Chuck Sweeney

OK. I didn’t—see, I think, once again, I have no idea what the Democratic Party actually stands for anymore. I didn’t during the 2016 campaign, either, which is probably why it wasn’t the winning campaign.

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Tax Rates and Entrepreneurship

By James Kwak

My friend and co-founder Marcus Ryu wrote an op-ed in the Times today. Here’s how it begins:

The tax cut framework recently put forward by President Trump relies on a central claim: that reducing taxes on corporations and wealthy individuals will open the wellsprings of entrepreneurship and investment, turbocharging job growth and the American economy. Were this premise true, reasonable people might countenance giving a vast majority of benefits to the very rich, as Mr. Trump’s plan does, in exchange for greater prosperity for all. But it’s not.

I don’t have a lot to add, since Marcus makes the case very well. I’ll just expand on two of his points. One is that lower tax rates do not actually encourage people to start companies. When we started our company in 2001, there were a lot of factors I considered: the risk of leaving a well-paying job in the middle of a recession; my simultaneous move across the country to a place without a lot of technology jobs; the difficulty of raising money from venture capital firms; the relatively large pool of talented developers looking for interesting jobs; the poor competition in the field we had chosen; the difficulty of saying “no” to Marcus; and so on. Tax rates weren’t on the list. As I like to say, I didn’t even know what the tax rate on capital gains (the one that matters for startup founders) was, so it’s hard to see how it could have had any effect on me.

The second point, which is only a bit more complicated, has to do with the impact of corporate tax rates on company behavior. One of the common arguments for a corporate tax cut is that it will encourage capital investment, which will create jobs. This happens, in theory, because a lower tax rate increases the after-tax value of corporate profits (technically speaking, expected future dividends) to shareholders. This means investors will pay more for the stock of what is otherwise the same corporation. For the most part, that just results in a one-time increase in the stock price in the secondary market, which has no direct impact on the company itself. The company only benefits if it issues new stock in a secondary offering, because it can raise a bit more cash for the same number of shares. As Marcus points out, however, a corporate tax cut can only increase investment if companies are actually having trouble raising capital, which has emphatically not been the case for the past several years. In other words, if we actually want to increase capital investment by U.S. corporations, lower tax rates are just about the last place where we should look. (Raising workers’ wages, to increase demand for the stuff those corporations sell, is probably a better place to start.)

I haven’t been writing about the Trump tax cut because (a) a bunch of personal reasons, (b) intellectually speaking, it’s like shooting fish in a barrel, and (c) lots of other people with much bigger audiences are doing it anyway. So please read what Marcus has to say.

A New Economic Vision, in 27 Words

By James Kwak

A couple of weeks ago I posted a 6,000-word essay laying out a new economic vision for the Democratic Party. It kind of vanished into the ether, although Stephen Metcalf was kind enough to say this:

So here it is, in 27 words:

All people need a few basic things:

  • An education
  • A job
  • A place to live
  • Health care
  • A decent retirement

Let’s make sure everyone has these things.

If you want more, there is always the long version.

The Importance of Fairness: A New Economic Vision for the Democratic Party

By James Kwak

A lot has been written recently about the direction of the Democratic Party. This is what I think.

I have been a Democrat my entire life. Today, the Democratic Party matters more than ever because it is the only organization currently capable, at least theoretically, of preventing the Republicans from turning the United States into a fully-fledged banana republic, ruled by and for a handful of billionaire families and corporate chieftains, with a stagnant economy and pre-modern levels of inequality. Yet I cannot find anything to disagree with in Senator Bernie Sanders’s assessment:

“The model the Democrats have followed for the last 10 to 20 years has been an ultimate failure. That’s just the objective evidence. We are taking on a right-wing extremist party whose agenda is opposed time after time and on issue after issue by the vast majority of the American people. Yet we have lost the White House, the U.S. House, the U.S. Senate, almost two-thirds of the governors’ chairs and close to 900 legislative seats across this country. How can anyone not conclude that the Democratic agenda and approach has been a failure?”

A central shortcoming of the party is that, on economic issues, it has nothing to say to people trapped on the wrong side of our country’s growing inequality divide. Hillary Clinton won the “working class” (household income less than $50,000) vote, but by a much smaller margin than Barack Obama in 2012 or 2008—despite Donald Trump’s ardent efforts to alienate African-Americans and Latinos. Some people voted for Trump because of racism or misogyny. But Clinton was also flattened by Trump among voters who feel their financial situation was worse than a year before or who think that life will be worse for the next generation. She lost the Electoral College in the “rust belt” states of the Upper Midwest, whose economies have never fully recovered from the decline of American manufacturing.

The Democratic Party was once the party of working people. So why is it increasingly becoming the party of well-educated, socially tolerant, cosmopolitan city-dwellers? Because, in an age of stagnant median incomes and a disintegrating social safety net, Democrats have no economic message for the many people who are struggling to make ends meet, to pay for college, to stay in a home, or to save for retirement.

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Economism and Arbitration Clauses

By James Kwak

As banking scandals go, Wells Fargo opening millions of new accounts for existing customers so that it could pump up its cross-selling metrics for investors is about as clear-cut as it gets. It’s up there with HSBC telling its employees how to get around U.S. regulations in order to launder money for drug cartels, or traders and treasury officials at several banks conspiring to fix LIBOR.

Holding Wells responsible, however, was a bit trickier. The bank agreed to restitution (i.e, refunding the fees it had collected from its customers for the phony accounts) and a paltry $185 million in fines. When customers sued for damages, however, Wells hid behind its mandatory arbitration clauses, which were so broadly written that they even applied to accounts that the customer never intended to exist and that the bank had fraudulently created. Wells eventually reached a settlement with the class of plaintiff customers, but the settlement amount was no doubt influenced by the bank’s ability to compel arbitration.

The Consumer Financial Protection Bureau has proposed to eliminate the Wells Fargo defense by prohibiting class action waivers—clauses that take away customers’ right to participate in class action lawsuits—in arbitration clauses of financial contracts. (Class actions are crucial to deterring and punishing systematic fraud against consumers, because the harm to any single person will not be worth the expense of pursuing a lawsuit; without a class action, no one will sue, and the company will escape unharmed.)

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How Markets Work

By James Kwak

The Congressional Budget Office’s assessment of the Republican health care plan, as passed in the House, is out. The bottom line is that many more people will lack health coverage than under current law—23 million by 2026—even though the bill allows states to relax the essential health benefits package, which should in theory attract younger, healthier people. This is not a surprise.

I just want to comment on the role of markets in all of this, which I think is not fully understood. For example, the Times article by the very up-to-speed Margot Sanger-Katz explains that the American Health Care Act of 2017 will make markets “dysfunctional.”

Screen Shot 2017-05-25 at 2.29.31 PM

This is consistent with the rosy view that many people, particularly centrist Democrats, have of health care: if we could only get markets to behave properly (correct for market failures, to use the jargon), everything would be great.

But that’s not how markets work.

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