Lack of Federal Investment in Children Ignores the Future of the Country

Vijay K. Mathur

 On Nov. 27-28, 2021, I published a guest commentary in this newspaper where I argued for investment in children for human capital growth. Human capital is one of the most productive inputs in the future growth of the economy. I was especially concerned about the U.S. Senate’s refusal to consider President Biden’s proposal for more federal expenditures on childcare, early childhood education and health, with special emphasis on economically disadvantaged and low-income families. I am concerned that evidence shows that politicians and many policy makers pay more attention to investment in older people than in children. I am not arguing that the federal government should ignore older people’s needs. However, lack of investment in children is not going to benefit Americans in the future. Human capital is a source of innovation, technological change and growth of the economy.

In May 2021, Administration for Community Living (www.acl.gov) reported that the 65 years of age and older population will increase from 16% in 2019 to 21.6% in 2040. If the current spending rate continues, an increasing share of gross domestic product (GDP) will go to the older population. Howard Gleckman reports in Forbes (Feb. 1, 2019) that in 10 years half of the federal government budget (excluding interest on debt) will be spent on older people, an unsustainable scenario. A reasonable way to think is to efficiently allocate federal spending to older residents to lighten their children’s burden and to children to assure future growth. It will require rethinking of tax and subsidy policies to sustain Social Security and Medicare trust funds and to save on resources for investment in children, a topic requiring detailed investigation.

 

A May 2019 report, “Kids Care,” by Urban Institute states, “Early childhood is a critical period of development, laying the foundation for lifelong skills, behaviors, and health outcomes.” From 2011 to 2017, per capita federal expenditures on infants and toddlers had gone down by 5%. In 2020, 7% of the federal budget was allocated for spending in children 18 years old and under and 33% on adults for Medicare, Social Security and Medicaid combined. The emphasis represents misallocation of federal resources that undermines efficiency and thus economic growth.

The country is attempting to improve the skills of high school students by starting STEM programs, as well as programs to improve the skills of adults, to prepare them for the labor force in the technology-oriented economy. But this effort still ignores a significant investment commitment in children, especially in low-income and poor families. Growth theorists find that even after accounting for inputs of labor, capital, materials and human capital in production, there is residual output that is unaccounted for. The theorists account that residual output to technology. However, it is human capital that is one of the most significant generators of innovations and technical change. If we only concentrate on the short-term investments in education, improving skills and talents, and ignore the future accumulation of human capital, the standard of living of future generations of Americans will deteriorate.

Investment in children in disadvantaged families not only builds their human capital but also increases labor force participation of parents in the job market. This creates more output and growth in the current period and helps build parents’ skills that affect their wage growth and poverty status. Lack of childcare created hardships for such families during COVID-19, causing them to drop out of the labor force. The labor market still has not recovered from labor shortages in many businesses requiring personal services. Federal spending provided some economic relief to many such families.

Since the schools were closed during the spread of the pandemic, children’s education, especially in low-income and poor families, suffered. There is a concern among many educators and policy makers that this loss of education will affect the future educational performance of those children who were not able to participate in distant learning. Researchers Eric Hanushek and Ludger Woessman find that the loss of learning due to school closings during the COVID pandemic is expected to cost $14.2 trillion in current dollars. A paper by R. Akee et al. in American Economic Review (March 2018) argues that parental resources affect “children’s test scores, physical health in childhood, long-term educational attainment, and social outcomes.”

Studies show that investments in early childhood in disadvantaged families has a very significant payoff in the future achievements of children in education and success in the labor market.

Vijay Mathur is a former chairman and professor in the Economics Department and now professor emeritus at Cleveland State University, Cleveland, Ohio. He resides in Ogden.  It was published in the Standard Examiner, Ogden, UT,11/27-28/2022.

Are Americans losing their identity as Americans

Vijay K. Mathur

For more than a few decades, economics has branched out beyond the inclusion of traditional economic areas of investigation, such as crime, fertility, marriage and suicide. Following that tradition, George Akerlof, Nobel laureate in economics, and Rachel Kranton have investigated the role of identity in decision-making in their book “Identity Economics.” Their focus on identity implies how people think of themselves and others, how society and its norm affect their motives and behavior. They argue that” identities and norms derive from the social setting.”

 Identities have economic consequences for people and the economy since they affect motives, behavior and decisions toward work, fair treatment of others, sense of responsibility, saving and investments, and even vaccination for contagious diseases to protect themselves and others. Americans among different subidentity groups do believe in the core value of freedom and liberty. However, among many, this value seems to be forgotten when others’ freedom is concerned. John Lock (1632-1704), a British philosopher, believed that “when one voluntarily joins a community, he/she inherently consents to the forfeiture of some freedom.” (John Locke Foundation, Oct. 31, 2017).

 

Our identity as Americans must supersede our secondary identities, such as white, Black, Asian, conservative, liberal, Catholic, Protestant or Muslim. All, as Americans, have to work, make decisions and take actions for the common good of the country. The divisiveness in the country, along political party lines, political ideology, region, religion, race, country of origin, not believing in the same set of facts, not trusting other Americans and the political leadership, and even hostility against others’ points of view, is undermining our identity as Americans; it also creates an environment for adverse political, socioeconomic consequences.

 

Peggy Noonan opined in the Wall Street Journal (Sept. 18-19, 2021) that, “It had to do with a sense that we are losing the thread, that America is losing the thread.” The uniting common thread is that we are all Americans, and as Americans we must strive for the common good that promotes political stability and an economically healthy economy. For example, if all Americans do their part to eliminate the pandemic of COVID-19 and its variants, all Americans will benefit from the increase in economic activity and growth.

 

Pew Research (Feb. 19, 2020) found in a survey that only 34% have trust and confidence in the wisdom of American people in making political decisions and 59% do not. This attitude filters down from the political leadership at all levels of government. The Center for Economic Progress (May 26, 2021) reports, “Talk of national unity is seen as an illusionary goal as various factions press their ideological agendas on government.” Even leaders in Congress and the states emphasize ideological agendas to win favors from their ideological groups, rather than working on an American agenda that benefits all Americans. Antagonistic effects of divisiveness have even reached medical professions, school boards and the media.

The divisiveness prevailing in the country is astounding, even though surveys of adult Americans at Grinnell College (www.grinnell.edu) on Dec. 3, 2018, and March 3, 2021, reveal that Americans still believe in certain core values that unite us. Almost 70% to 90% of adult Americans surveyed in the poll believe in core values such as treating others with respect; belief in responsibility; acceptance of different races, backgrounds and religious affiliations; free and fair elections; and peaceful transfer of power. However, the survey in 2018 revealed a disturbingly un-American and unconstitutional view. Close to 25% believe that real Americans are those who are born in the country or have lived here for a long time and are Christians. The same poll also found that “hate of a person, group or organization is becoming more normalized.” President Trump and most of his followers highlighted this extreme animosity and divisiveness toward others.

 

Our identity as Americans affects our behavior toward others and our sense of cooperation for the common good, political stability and national prosperity. Divisiveness threatens democracy, as implied in the Grinnell surveys, and hence the economic well-being of all freedom-loving Americans. I earnestly hope that most Americans remember the core values that bind us as Americans and work toward a more perfect union. Losing our identity as Americans could be damaging domestically and internationally. As President Joe Biden stated, “Our future cannot depend on the government alone. The ultimate solutions lie in attitudes and the actions of the American people.”

 

Mathur is former chairman and professor in the Economics Department and now Professor Emeritus at Cleveland State University, Cleveland, Ohio. He resides in Ogden. Published in the Standard Examiner,October, 21, 2021.

It is time for the unvaccinated to be incentivized and nudged

Vijay K. Mathur

Despite the emergence of the more contagious and lethal delta variant of the COVID-19 virus, many stubborn people in the U.S. and Utah are guided by their own selfish view of freedom of choice to remain unvaccinated. As I mentioned in my commentary on this issue in the Standard-Examiner on July 20, this behavior does not fit the usual assumption of rationality that requires deliberate, consistent and logical behavior.

 In that opinion piece, I outlined some of the explanations provided by professor Richard Thaler in his book “Misbehaving.” Peoples’ decisions are influenced by others who are close to them and by those who influence their identities, the opportunity cost of their decisions, the cognitive intelligence to decipher factual information from misinformation, the effect of leaders they trust, as well as some other psychological factors discussed by professor Daniel Kahneman in his book “Thinking Fast and Slow.”

 

Perhaps unvaccinated people have not yet reached the tipping point. Some of them might do so if someone in their family becomes very sick or dies, or a neighbor whom they trust becomes seriously ill. Malcolm Gladwell argues in “Tipping Point” that all epidemics have tipping points. In the case of the delta variant virus and the probability of development of other, more complex and virulent variants, the country’s health care system and the economy as a whole are facing perilous times. Therefore, it is in the national interest to convince a significant proportion of Americans to get vaccinated for the virus in order to develop herd immunity.

 

However, even a substantial increase in infections and more deaths of young and old have not persuaded 52.8% of the population of Utah to get fully vaccinated (Becker’s Hospital Review, Aug. 30). Based upon CDC tracker data for Aug. 9, Becker’s Hospital Review also reports that 47.7% of the U.S. population is not fully vaccinated. This data reveals that we are facing desperate times now and perhaps in the future.

 

Choice research shows that most people systematically make wrong choices that are not in their best interest. They have what Thaler and Cass Sunstein call “status quo bias” in their book “Nudge.” It is time to nudge naysayers who are still zealous defenders of maintaining their freedom of choice and liberty, even though their freedom of choice impinges upon others’ freedom of choice of good health and freedom from illness. John Locke (1632-1704) an English philosopher and ardent supporter of freedom and liberty as natural rights, argued for equality in freedom and liberty and doing no harm to others. He also argued that some freedoms are lost as part of the social contract with governments responsible for providing security and services.

 

In any event, nudging is a default mechanism. Thaler and Sunstein state that nudging influences choices that will make people better off “as judged by themselves.” Nudging is not a mandate. It retains and even expands freedom of choice. People also respond to incentives, as when people were offered monetary rewards for vaccination. Cleveland-Cliffs Inc. incentivized its workers to get vaccinated by offering a bonus of at least $1,500. It saved costs due to fewer turnovers. Even the federal government is providing incentives. Some unvaccinated people, who are procrastinating, may respond and find time to get the vaccination. Incentives and nudges are effective persuasion mechanisms.

 

A good example of nudging and incentives was reported in The New York Times (Aug. 27). Starting Nov. 1, workers at Delta Air Lines could choose to remain unvaccinated but have to agree to: 1) wear masks indoors, 2) get tested weekly, 3) lose protection of wages lost while quarantining and 4) pay $200 more per month for health insurance. This keeps workers’ freedom of choice to remain unvaccinated. They do not lose their jobs. Goldman Sachs requires vaccination status from its employees only as a nudging device.

 

Other examples that keep the freedom of choice of being unvaccinated are the proof of vaccination required by some universities, restaurants and hotels. Many hospitals are now charging more to unvaccinated people even when they are insured. People who want the freedom to remain unvaccinated do not have to choose those universities, restaurants and hotels and should be willing to pay for their freedom when it harms others of life, liberty and the pursuit of happiness.

 

Mathur is a former chairman and professor in the Economics Department at Cleveland State University, Cleveland, Ohio. He resides in Ogden.

Is refusal to get COVID-19 vaccination a rational decision?

Vijay K. Mathur

The CDC recently reported that 67% of Americans have at least one dose of the COVID-19 vaccine. The U.S. Census Bureau estimates that 51% of adults are still unvaccinated, and almost a quarter of adults probably or definitely will not get the vaccine. Thus, the significant percentage of unvaccinated people poses a threat to others from this contagious disease — especially from the surge in delta variant. The surge in this virus in some regions also imposes a heavy burden on the health care system. Employment and economic growth may be thwarted, thus creating once again economic misery among many Americans. The question arises — are these unvaccinated adults, especially those who do not want to get the vaccine, making a rational decision?

 

Refusal of vaccination does not fit the assumption of rationality in economics. Rational behavior requires deliberate, logically cohesive, consistent behavior, as well as behavior that results in the most satisfying outcomes. Professor Thaler, a 2017 Nobel laureate in economics, in his book “Misbehaving,” lays down some foundational principles of behavioral economics that may provide some insights into the behavior of people adverse to the COVID-19 vaccine. The principles Thaler discusses overlap many of the principles discussed by Professor Daniel Kahneman, a psychologist and a 2002 Nobel laureate in economics. He wrote a path-breaking book on human behavior, “Thinking Fast and Slow.”

Thaler argues that humans pay more attention to “identified life” than “statistical life.” For example, when your neighbor’s son dies due to COVID-19, you are more willing to assist your neighbor, financially or otherwise, than when the Utah Health Department publishes deaths in Utah due to COVID-19. Perhaps many Utahns’ decision to avoid vaccination is not based upon rational thought that involves more complex decision-making, cognitive abilities and serious and deliberate thought processes. Kahneman describes two modes of thinking that affect human behavior and decision-making. He refers to them as System 1 and System 2 of the mind. In many decisions, System 1 operates automatically, quickly, effortlessly and without any forethought.

 

However, complex decision-making requires System 2 that affects System 1 thinking. Such decisions involve cognitive intelligence, total focus on the issue, logical thought processes, serious and deliberate effort, and investigation to acquire as much factual information as possible.

Human behavior is also affected by costs born by making a decision. However, people pay more attention to out-of-pocket costs than opportunity costs (costs of giving up something because of a particular decision). If people think that they will pay a very small sum or none at all out of their pockets if they are hospitalized or get sick temporarily due to COVID-19, then that is a small price to pay for their behavior. However, the opportunity cost of being sick — e.g., lost income from work and/or good health — is too complex to calculate. It will require Kahneman’s System 2 in ascertaining the cost of their decision to avoid vaccination. Most likely, if unvaccinated people face higher insurance costs and/or out-of-pocket hospitalization costs, many, if not all, may decide to get the vaccination.

The prevalence of behavior based on System 1 provides an opportunity to influential people, politicians, bureaucrats and media outlets to “prime” such individuals with certain ideas and words. The priming effect occurs when one influences actions of others by ideas and using key words. Images and environmental factors could also prime individuals into certain actions. Kahneman states that,” A reliable way to make people believe in falsehoods is frequent repetition, because familiarity is not easily distinguished from truth. Authoritarian institutions and marketers have always known this fact.”

Primed ideas also prime other ideas like “ripples in the pond.” It seems that former president Trump has learned this lesson well. He has primed his followers, including many politicians in the GOP and supporters in some conservative media outlets, in not believing in the benefits of vaccination for COVID-19. Fearmongering about the dangers of vaccination still continues among many GOP politicians in Congress, other conservatives and media outlets.

Americans must not be blinded by illusionary facts about the efficacy of the vaccine. In matters of life and death of others and themselves, and costs to their communities and the nation if the virus spreads, Americans must use their cognitive abilities to modify their ad-hoc decision about their refusal to get the vaccination. As Maya Angelou stated, “You may not control all the events that happen to you, but you can decide not to be reduced by them.”

 

Vijay Mathur is a former chairman and professor in the economics department at Cleveland State University, Cleveland, Ohio. He resides in Ogden. Published in Standard Examiner, July 20, 2021.

Solving homelessness requires rethinking of strategy

Vijay K. Mathur

The homelessness problem throughout the country, including Utah, has existed for decades. Poverty and low income relative to affordable housing are the root causes of homelessness. The COVID-19 pandemic has worsened the problem, since many have lost their jobs without adequate financial benefits from the government to cope with the economic hardships.

 

However, individuals and families become homeless because, even if employed, they cannot afford housing prices in their areas. For example, the California Policy Lab study, February 2020, found that in Los Angeles County for all employed homeless average earnings were $9,970 per year before becoming homeless. Similarly, a study on New York City’s homelessness by the National Low Income Housing Coalition (April 2018) found that 45% of single homeless adults and 38% of homeless adults in families earned wage income at or near the poverty level.

The federal effort started with passage of the McKinney-Vento Homeless Assistance Act of 1987. It created varied grant programs to support homeless people and families. Grants to localities include prevention programs, housing subsidies and different housing and sheltering programs. However there is an overall lack of vision that recognizes the feedback loop between low income, housing prices and homelessness. Mental health, substance abuse, criminal record and domestic violence also result in the loss of employment opportunities and adequate income and are part of the same overall narrative for homelessness.

 

Low income with reduced supply of low-cost housing contributes to homelessness. When households owning and/or renting mid-income-level housing move out to higher-end housing or rental units, they leave behind units that filter down as low-cost units. Upward mobility affects housing prices at all income levels. But when the filtering process of homeowners, one of the main supply factors, slows down (as it is now) it causes housing prices to soar at all levels, including rental units.

 

Rental units’ residents have less incentive to maintain the current units, and landlords may not want to spend too much money on maintenance. Thus, landlords tend to filter the units down as low-cost housing. The study by the Joint Center for Housing Studies (JCHS) at Harvard University (September 2019) finds that affordability is dropping over the last three decades due to the decline in low-cost rental units for under $600 per month (inflation adjusted). This rent threshold is the maximum affordable rent for households earning $24,000 per year.

 

The homelessness problem is primarily a city problem. Low-cost housing threshold varies by cities both in low and high cost of living states. States such as Utah and Wyoming are low-cost states, but California and New York are high-cost states. The JCHS study found that, in Utah, rental units at the $600-per-month threshold and at earnings of $24,000 dropped by 47% from 1990 to 2017. In high-cost states, larger declines in low-rental units were at a $1,000-per-month threshold. M. Honing and R. Filer, American Economic Review, 1993, found that a 10% increase in low-quality housing rent increases homelessness by 12.5%.

 

In addition, new construction activity, usually at the high end of the market, has also dropped in many cities due to antiquated land use and housing regulations. According to the Council of Economic Advisers (CEA) (2019), varied deregulations to remove housing supply constraints in 11 metropolitan areas would decrease rental prices and reduce overall homelessness by 13% in the U.S. Construction and hence housing prices are also influenced by interest rates. For example, a 1% increase in interest rate decreases housing prices by 7.6% in San Francisco and 2.6% in Atlanta (see E. Glaeser and J. Gyourko, Berkeley Economic Press, October 2008).

 

A policy initiative that encourages more jobs skills, job assistance and mental health services to the homeless would reduce poverty, and deregulations and incentives for the construction of low-cost housing and rental units to increase supply would make a significant dent in homelessness. Utah is recognizing the problem of supply constraints and efforts are being made in Salt Lake City and Ogden to loosen zoning laws to encourage building affordable high-density housing and “mother-in-law” units.

 

Less emphasis should be given to public and private services to homeless people and families on a permanent basis (see CEA). Such activities provide disincentives to the homeless population to make an effort to seek and welcome gainful opportunities to get out of homelessness. Homelessness is a blemish on this rich and wealthy country.

 

Vijay Mathur is a former chair and professor in the economics department at Cleveland State University, Cleveland, Ohio. He resides in Ogden.  It was published in the Standard Examiner, December 3, 2020.

Is minimum wage increase good economic policy?

Vijay K. Mathur

      Most supporters believe that the federal minimum wage must be increased to close to $15 per hour. Sen. Bernie Sanders is an ardent proponent of increasing the minimum federal wage to $15 per hour by 2024 and indexing it to the median wage thereafter. According to the Bureau of Labor Statistics (April 2020), among 82.3 million (16 years and older) hourly paid workers (but not all workers), 392,000 earned the minimum federal hourly wage of $7.25 and 1.2 million earned lower than that wage in 2019. Hence, close to 1.6 million were paid the federal hourly minimum wage or less in 2019.

 

The usual argument against increasing the minimum wage, especially advocated by conservative politicians and others, is that the increase will result in unemployment of unskilled workers, teenagers and beginners in the labor market trying to gain work experience. The argument assumes a competitive labor market where workers and employers have the same bargaining power. The argument implies that given the demand and supply conditions in such a labor market, there will be excess supply of those who wish to work at the higher minimum wage than the quantity demanded. Workers most affected by the increase will be in industries such as leisure and hospitality, education and health care, and wholesale and retail that combined employed 79% of such workers in 2019.

 

However, the above argument against the increase misses some important counterpoints. The purchasing power of the minimum wage is 17% less than it was in 2009 (Economic Policy Institute, June 17, 2019). In addition, the wage has not been adjusted to the increase in productivity and/or technical change over a period of time. The resulting increase in demand for labor due to productivity gains would absorb the increase in the number of workers attracted by higher wage, hence no unemployment. In addition, labor economists have argued that when workers are paid a wage rate that they deem to be fair, they are more loyal to their employers (thus decreasing turnover cost), work hard and increase productivity. Thus, the increase in productivity, labor force participation and increases in consumption expenditures would increase economic growth.

 

Henry Ford introduced this idea of efficiency wage in January 1914 when he increased the wage of his plant’s male workers in Detroit to $5 per day for 8 hours a day of work from $2.34 for a 9-hour work day (for females in 1916). It increased productivity, loyalty and created a more stable workforce, thus decreasing turnover cost. It also made the plant workers economically better off, resulting in increased sales of Fords (www.history.com).

 

Empirical evidence also seems to support minimum wage increase. Studies by David Card and Alan Krueger in 1994 and 2000 showed that a minimum wage increase in a large sample of food establishments in New Jersey did not decrease employment, but showed some increase. The fear of large teenage employment decline is also unfounded, but benefits of wage increase are substantial. The EPI reports (February 2019) that a minimum hourly wage increase of $15 by 2024 will benefit 39.7 million workers. It will also increase consumption and address problems associated with high income inequality and the poverty rate.

 

It is apparent that a $15 minimum wage is not high enough at this time in the economy to result in an adverse effect on employment and/or inflation, but rather will result in more benefits to the economy and to those working at minimum- and lower-wage rates. President Theodore Roosevelt had the right idea when he remarked, “No man can be a good citizen unless he has a wage more than sufficient to cover the bare cost of living and hours of labor short enough so that after the day’s work is done, he will have time and energy to bear his share in the management of the community, to help in carrying the general load.”

 

Vijay Mathur is a former chairman and professor in the economics department at Cleveland State University, Cleveland, Ohio. He resides in Ogden.             

 

Winner-take-all capitalism undermines democracy

Vijay K. Mathur

 “We can have democracy in this country, or we can have great wealth concentrated in the hands of few, but we can’t have both.”

— Louis D. Brandeis

 

In the U.S., we find the emergence of winner-take-all capitalism (WTA) in markets. In WTA markets, capitalists become prosperous and labor’s share of income declines. There are winners and losers in such markets. Professor Robert Frank states in “Winner-Take-All Society”: “The top prizes in many winner-take-all markets, however, significantly overstate the social value added by top performers.” Hence they attract undue amount of resources.

 

WTA markets create income and wealth inequality. Pew Research (January 9, 2020) reports that median income of high-income households was seven times the median income of low-income households in 2018. Wealth inequality was even greater. Median wealth of high-wealth households was 75 times the median wealth of low-wealth households in 2016. These inequalities are rising and may get worse.

Professor Frank notes that the extraordinary reward structure, common in entertainment and sports, has become more widespread in the economy as illustrated by a couple of examples here. Nobel Laureate economist Joseph Stiglitz, in “The Price of Inequality,” finds that “the six heirs to the Wal-Mart (sic) Empire command wealth of $69.7B, which is equivalent to the wealth of the entire bottom 30 percent of the US society.” Chrystia Freeland states, in “Plutocrat,” that during the deepest recession in 2007, Blackstone, a large private equity firm, raised $4 billion by creating a publicly held company worth $31 billion at that time (now worth $554 billion). And one of the cofounders, Steve Schwarzman “came away with personal stake worth $8 billion at that time, along with $677 million in cash.” Now, he is worth $18.3 billion.

 

One probable result of WTA markets is that the growth of elites with substantial resources undermines democracy. Theoretical and empirical evidence show that in the early beginning of a democracy, income inequality increases, but in more mature democracies, income inequality decreases. However, Stiglitz wonders why pre- and post-tax income inequality, even including transfer payments, is greater in the United States than in other advanced countries with similar technologies and per capita incomes.

 

Stiglitz hypothesizes that laws and regulations through institutional political framework govern the nature of market forces, and I may add, the trajectory of the distribution of the social product. Political scientists Jacob Hacker and Paul Pierson, in “Winner-Take-All Politics,” also share similar views. WTA markets affect not only income and wealth inequality but also political inequality, where the political process works for the superstars who control most resources. WTA creates crony capitalism, where the capitalists engage in rent-seeking behavior (using political process to seek economic benefits such as subsidies, less market competition, lax laws and regulations, and favorable tax laws). This ultimately distorts the distribution of income and wealth.

 

WTA markets also affect overall productivity, hence growth rates. Stiglitz argues that the decline in the productivity of low-wage workers is more than the increase among high-wage workers. He also adds that experimental evidence shows that “raising wages of workers who felt that they were being treated unfairly had a substantial effect on productivity.” Productivity affects economic growth. WTA markets misallocate resources due to less labor mobility and competition in markets, therefore creating inefficiencies in the economy. Concentration of resources in few hands and less market competition also creates disincentive for innovations, a hallmark of economic growth. WTA markets and politics also reduce trust and create uncertainty in the overall economy, as we are going through now, and hence decreasing investment.

 

It appears that the COVID-19 pandemic may further lead to the concentration of resources and power in the hands of a few capitalists, since there is an incentive to substitute capital for labor in production. Capital cannot get infectious diseases, hence reducing the threat of production shutdowns. However, as a result the consumer base may dry up, thus worsening the effect of WTA. Democracy and social justice for all cannot survive in a society that consists of winners and losers.

 

Mathur is former chairman and professor of economics, Department of Economics, Cleveland State University, Cleveland, Ohio. He resides in Ogden.

Fear of refugees depriving Americans of jobs is groundless

  

Vijay K. Mathur

 

 

Arrival of refugees at an increasing rate at the US-Mexico border in the past couple of years has further heightened the hostility of the Trump administration toward refugees and immigration.  Now the administration has issued proclamation 10014, June 22, 2020, to stop the entry of aliens as immigrants for 60 days with some exceptions (www.whitehouse.gov).  The excuse is to protect Americans from adverse health outcomes and job loss to aliens due to the Covid-19 outbreak.

 

Since 1947 various attempts have been made by the US administrations to reform the chaotic rules and regulations that deal with the refugees’ issue, according to the State Department study, August 2017. Finally, Congress decided to pass the Refugees Act in 1980 and used the UN definition of refugees. It also standardized the procedures for their resettlements and established the Office of Refugees Resettlement (ORS).

 

The question is whether the fear of refugees (including asylees) taking jobs from Americans and becoming a burden on American society is grounded in facts.  Perhaps the fear created by the Trump Administration is not based on the evidence of the economic status of refugees in the labor market.  Courtney Bell, Christian Dustman and Ian Preston (BDP), Journal of Economic Perspective, Winter 2020, find that male refugees, even with less human capital, lacking language and job skills, caught up to the employment rates of other immigrants within two years and to the natives within ten years after their arrival, a better outcome than Canada, Australia and many countries in Europe.  However, employment rates of refugee women were less than their male counterparts, other migrant and native women.   

 

The complaint that refugees would affect employment and wage rates of lower skilled workers is also unsubstantiated. The research by Professor David Card of Princeton University in 1990 examined the consequences of the Mariel Boatlift of 125,000 Cuban refugees in 1980, to Miami.  Close to 45,000 Cuban refugees, who permanently settled in Miami, had almost no effect on wages and unemployment of less skilled workers in the Miami labor market.  Other studies reported by National Immigration Forum (NIF), June 14, 2018, also support this result.   In addition, the Forum found that in 2015 there were more refugee entrepreneurs than native-born entrepreneurs.  Over 181,00 refugee entrepreneurs generated $4.6 billion in business income.  Refugees’ total net fiscal contribution to budgets at all levels of government was $63 billion during 2005-2014.

 

Gardner Policy Institute reports, April 2017, that Utah had 11,408 total new refugee arrivals from 2006 to 2016.  Most were concentrated in Salt Lake County and were from nations such as Congo, Syria, Vietnam and Iraq.  The IZA Institute of Labor Economics, Bonn, Germany, February 2018, reports that during 2005-2010 Utah’s average employment rate among all refugees was slightly less than 30%, ranking 24^thout of 41 reported states. Their self-employment rate ranking (a sign of entrepreneurship) was even worse than other states (see IZA DP NO 11343).  Utah policy makers need to pay more attention to this unsatisfactory record.

 

Despite the general success in the employment sector of the US, refugees faced a greater wage gap than in many other countries within 2 years of arrival: 60% lower than natives and 51% lower than other immigrants. The wage gap, though lower, persisted even a decade after their arrival (see BDP).  Perhaps poor health and lack of language and job skills may be contributory factors.  However, after 25 years, refugee households’ median income was $14,000 above overall median income of US households (see NIF), thus the fear of economic burden of refugees is illusionary. 

 

The US has thrived on the contributions of immigrants and refugees.   Cato Institute, July 20, 2018, finds that Australia and most Western and Northern European countries are more accepting nations for refugees than the US. The fear created by the Trump Administration about refugees and immigrants is unwarranted.  However, an orderly admission process is needed. Congress is obligated to pass a comprehensive immigration bill to resolve the current chaos caused by haphazard policies on refugees and immigration.

 

Mathur is former chairman and professor of economics, Department of Economics, Cleveland State University, Cleveland, OH.  He resides in Ogden. 

Economic recovery policies must focus on income inequality rather than on GDP growth

Vijay K. Mathur

Policymakers, following economists and media in general, have traditionally focused on implementing policies to increase growth in GDP (Gross Domestic Product). However, beginning in the early 1970s, increasing income inequality shows that all Americans have not shared the prosperity generated by economic growth. Isabel Sawhill, in her book "The Forgotten Americans," raises this issue very cogently.

Sawhill primarily addresses the economic plight of the white working class between the ages of 25 and 64. Since the ’70s, labor force participation has been decreasing and wage and salary income has been stagnant for this group, even with the increase in productivity. The same holds true for most Americans. The labor force participation rate peaked at 67.3% in early 2000 and has since declined to almost 63% percent, per the Bureau of Labor Statistics. Most productivity gains have gone to Americans in the top of the income distribution. Hence, income inequality has increased, and its incidence is harder on low- and middle-income Americans with an inadequate social insurance system.

Congressional Research Service reported July 23, 2019, that cumulative percent change during 1979-2018 in real wages for households in the top 10% of the income distribution was 37.6%, while for the middle- and low-income households it was 1.6% and 6.1%, respectively. Men in the middle and low income lost and women gained real wages. Household income for the top 1% increased 229% while the bottom 90% gained only 46% for the years 1979-2015 (Economic Policy Institute (EPI), March 27, 2019). Wage inequality is the driving force for income inequality. Using census data, Utah Workforce Services reports that Utah’s income inequality index (Gini coefficient) declined during 2014-2017 but has increased since 2017.

The capitalist system, supported by technological revolution and globalization, lately has not generated an economic system where all Americans have shared in private sector prosperity and growth in productivity. Real wages have diverged from productivity since the ’70s. EPI reports that cumulative percentage change in productivity from 1979 to 2017 was 70.3%, while hourly compensation grew only 11.1%. It is the responsibility of the government and the private sector to ensure jobs’ growth, with wage growth commensurate with increase in productivity. The gig economy, with more part-time workers and contract workers, and more self-employed (not by choice), is not a healthy sign of a growth economy, higher standard of living and happiness.

Involuntary unemployment surprises many economists, especially conservative politicians and policymakers. They would argue that a rational individual should be willing to accept a job, even if wages paid are below his or her expectations. However, as Nobel Laureate Professors George Akerlof and Robert Shiller argue in the book "Animal Sprits," the answer lies in efficiency wages. Effectiveness and efficiency of work effort in a job depends upon the wages paid. Employers cannot monitor their workers' efforts perfectly in doing their jobs. Employers’ preference for lower wages may backfire in lack of motivation, reduced work effort and productivity.

The COVID-19 pandemic has further worsened the economic well-being of low- and middle-income Americans. Their employment prospects look dim even after the emergence of a virus treatment and vaccine. Policymakers have to implement plans for education and training programs to prepare the labor force for emerging technologies. Utah has done better than many other states during the epidemic. Reduction in unemployment claims in Utah is a healthy sign for a quicker recovery. However, attention must be given to shared prosperity.

The growth rate of the economy is essential, but the focus must be on its distributive aspects — i.e., how it affects working Americans whose main earnings and standard of living is determined by labor market participation. Income is based upon education and training in the technologically sophisticated economy. I hope that our policymakers and politicians are wise enough to foresee the upcoming challenges.

Mathur is former chairman and professor of Economics, Department of Economics, Cleveland State University, Cleveland, OH. He blogs at mathursblogonomics.blogspot.com

The Free market: An instrument of economic growth

Vijay K. Mathur

In the current Democratic presidential debates, concern is raised that free market capitalism is contributing to income and wealth inequality. Capitalism now is seen as crony capitalism, where businesses get political and regulatory favors to benefit themselves rather than most Americans, thus increasing income inequality. Is there a better economic system than free market that brings growth and prosperity to the nation and its people?

Presidential candidate Sen. Bernie Sanders is a proponent of “democratic socialism,” a term borrowed from the economic system of Nordic countries (such as Sweden, Norway, Denmark) that existed in the 1960s. These countries are now far removed from socialism and have a thriving free market system, more freedom (www.heritage.org), less regulation, higher per capita income and lower income inequality than the US. They have a very robust and extensive social safety net compared to the US, and their residents are willing to pay higher tax rates to support it.

What kind of free market system produces high growth and prosperity that benefits most people in a country? Contrary to the general notion among many economists, William L. Baumol, professor of economics at Princeton and New York Universities (now deceased), cogently argued in his book “The Free-Market Innovation Machine” that an oligopolistic market structure with few firms dominating in competitive free markets drives innovation and growth. Free market competition among a few dominant firms forces them to make innovations part of their economic strategy to survive. Innovations are “systematized” and “routinized” in oligopolies and are the drivers of economic growth and higher standard of living. Utah’s growth is largely driven by innovating industries, called super-centers by the Brookings study (The New Yorker, Feb. 3, 2015). Utah is one of the top 15 innovation centers in the country.

Oligopolies have resources to routinize innovations and keep track of other firms’ behavior in order to be competitive. However, a large number of small firms competing in perfectly competitive markets (an ideal free market structure) do not have resources to routinize the innovation process. In addition, they cannot keep track of other competitors’ economic strategies, ascertain emerging technologies and dynamic movements of markets.

Many individual innovators and entrepreneurs eventually transform themselves into larger oligopolistic firms. Examples of new small-scale startups that eventually became giant multinational companies are Google (now part of Alphabet), Microsoft and Apple. These companies compete in oligopolistic markets and are constantly engaged in incremental product innovations to keep ahead of their competitive rivals.

A labor force that matches the skills and talents needed in innovative companies participates in the economic growth and prosperity. Professor Thomas Philippon argues in his book “The Great Reversal” that market concentration in the U.S. has been increasing since the 1990s due to oligopolies, thus causing income inequality and efficiency problems. However, as Baumol, John Panzar and Robert Willig contend in their book on contestable markets, efficiency problems do not arise when markets are contestable, where entry and exit of businesses are relatively easy. Antitrust laws and regulations must make sure that there are minimum barriers to entry and exits in markets.

The threat of entry is precisely what persuades incumbents to constantly engage in innovations, maintain market share and increase profitability. In the long run, exorbitant profits are driven down by competition due to the entry of new competitors, who also bid up wages for the labor they need to compete. I am sure most are familiar with the fate of companies such as IBM, Xerox and Kodak, and traditional auto companies due to the entry of Tesla.

The U.S. economy is a free market economy and increasingly dominated by oligopolistic firms, mostly in service and high tech industries. In the short run, the labor market is going through a structural change, because it has not kept up with the emergence of new technologies. In some corners of the country, there is a battle cry for democratic socialism since a significant part of the labor force, due to inadequate technological training, especially in manufacturing, has not participated in the prosperity of businesses and the economy.

The short-term hardship of Americans, who are severely impacted by technological change, must be dealt with. But democratic socialism and crony capitalism (with tacit political favoritism) are not the answers. I hope our government learns some of the novel ways Nordic countries have dealt with the economic hardships of their citizens, not by promoting socialism and crony capitalism but by adopting free market strategies that promote innovations and growth.

Mathur is former chairman and professor of economics, Department of Economics, Cleveland State University, Cleveland, OH. He blogs at http://mathursblogonomics.blogspot.com.

Reversing American leadership in free trade subverts US interests

Vijay K. Mathur

In 1817 David Ricardo, in “Principles of Political Economy and Taxation,” proposed his theory of comparative advantage where he argued that trade policies in England were protectionist. Comparative advantage proposed that beneficial trade, between two countries and two products, for example, is probable even if one country is absolutely more efficient in the production of both products. However, in the 1930s most nations, including the U.S., imposed trade restrictions, such as tariffs and currency devaluations, to boost exports and reduce imports. Hence, world trade and economies shrank.

After World War II, the U.S., U.K. and 42 other nations met at Bretton Woods, New Hampshire, to fix the world trading system. They established the International Monetary Fund (IMF) to monitor rules for trade and international finance and provide financial assistance to countries with balance of payment deficits. Under U.S. leadership, the World Bank and the General Agreement on Tariff and Trade (GATT), precursor to the World Trade Organization (WTO), were established to provide assistance for economic development, promote trade liberalization and arbitration on complaints of unfair trade practices.

The U.S. leadership succeeded in opening up more trade among nations that benefited all countries, including the U.S. The U.S. total trade was 27.09% of the GDP in 2017 and was almost the same in 2018. Despite the U.S. tariffs on imports, the trade deficit increased by 10% during 2016-2017 (www.macrotrends.net) and 12.45% from 2017 to 2018 (https://.world101.cfr.org). It has narrowed slightly in 2019. However, Utah exports are close to three times its imports, thus resulting in a large trade surplus during 2017-2018. (www.census.gov). Regrettably, it may suffer from trade restrictions in future years. Business Roundtable reported that most exports from Utah are by small- to medium-size companies, and trade created 1 in 5 jobs in 2013.

Under President Trump’s administration, the U.S. leadership in promoting free trade is crumbling. The U.S. is engaged in dismantling the WTO court, weakening the institution that promotes free trade. Selectively imposing import tariffs from China and Europe, the largest trading partners, to improve trade deficits is not having much success. The U.S. withdrawal from multinational trade treaties, except replacing NAFTA with USMC (with minor changes), is not in the national interest.

Import tariffs on products do not provide effective protection to home industries. For example, an import tariff on electrical machinery and steel products increases production cost and prices of products. It decreases demand for products in the U.S., hence the demand for labor, capital and raw materials in the production of those products. Price increases also make our products less competitive in export markets, thus contributing to trade deficit, economic growth and employment. In fact domestic investment and growth is declining. Bloomberg economists calculate that a 25% tariff shaves 1.5% off economic growth, according to a May 13, 2019 article.

The Federal Reserve study from Dec. 23, shows that tariffs by U.S. in 2018 and retaliatory tariffs by trading partners have reduced manufacturing employment and increased producer prices due to an increase in input costs. Aside from the beneficial effect of trade on employment and prices, the question is what are the other gains from trade?

Trade enhances product variety and consumer choice. It promotes intra-industry trade. For example, the U.S. exports and imports automobiles of different makes, models, quality and prices. Trade increases competition in the markets, and leads to economies of scale in differentiated products. The most productive firms (businesses) survive and expand and less productive firms contract or go out of business. This increases overall productivity in industries and in the country, and hence wages. More productive and competitive firms with expanding local and world markets innovate new products and processes. Thus competition increases churn in markets and promotes formation of new businesses.

Imports from lower wage countries, especially in manufacturing, do lower wages and real incomes in the U.S., especially of mid-skill Americans. But loss of wages and income is also partly due to the use of new technologies in businesses. This problem can only be fixed if the U.S. competes in the world market in high-valued products, for example in services and intellectual property-based industries. It must train the labor force for those advanced industries. Competing in traditional manufacturing products is a lost cause. The intellectual property dispute with China is an excuse for general protectionist policies. A policy that claims that trade restrictions would brighten the future living standard of Americans is self-defeating.

Leadership requires that U.S. persuade other nations to further open their markets to increase world trade so that all can prosper in the future.

Mathur is former chairman and professor of economics, Department of Economics, Cleveland State University, Cleveland, OH. He blogs at http://mathursblogonomics.blogspot.com.

Adverse Economic Consequences of Ideology Driven, Ill Informed or Not Voting

Vijay K. Mathur

“A man without a vote is a man without protection.” 

 Lyndon B. Johnson

Ill-informed voters and low voter turnout, aside from threatening democratic values, often end up electing politicians who decide on policies that result in adverse economic consequences for most Americans. Pew Research reports that in the 2016 presidential election 61.4% of the voting age population in the U.S. voted, the same as in 2012.

In Utah, the 2016 voter turnout was an impressive 82%. Republicans in the Utah Legislature have had a supermajority since 1992. This supermajority of Republicans in both state Houses is surprising, since only 45% of the voters are declared Republicans. Unaffiliated declared voters are 37% and only 13% are Democrats, according to www.elections.utah.gov. Hence it is more likely that voters in Utah are driven by their conservative ideology and political spin on policy stands, rather than by party affiliation.

Alexander Field states in the December, 2017 Journal of Economic Literature, “ An ideology is an integrated system of belief about how the world should be, how the world is, and how new evidence about the state should be interpreted and used.” Note, ideology clouds independent judgment since it is subject to an ideological interpretation of facts and logic.

Hence, elected by ideology, Utah legislators know that their status is secured. Therefore they were emboldened to change the voters’ recently passed propositions on Medicaid and medical marijuana. The changes will reduce the expansion of Medicaid, thus depriving health care benefits to thousands of Utahns. The state monopoly in medical marijuana will create barriers to entry in production resulting in higher prices. This is the cost voters will pay for electing people on ideological grounds and making ill-informed decisions on politicians.

Nationally, the most alarming fact is that voters who suffer the most from unfavorable economic policies have the lowest voting record. Voting percentages increase with education and income. Blacks and Hispanics have lower percentages than non-Hispanic whites. Young voters (18-29 years of age) vote less than voters of age 45 years and older, according to the Census Bureau. US.. government economic policies reflect this tilt in voting patterns, favoring older, wealthy and white voters.

Most voters old and young, low income and middle class, complain about wealth and income inequality. However, despite promises, the 2017 tax cut primarily benefited corporations and the rich. The research by Professors Emmanuel Saez and Gabriel Zucman, reported by David Leonhardt of The New York Times, shows that the richest 400 households paid less average tax rate (23%) in 2017 as compared to 1950 (70%) and 1980 (47%). The middle class and poor barely benefited from the tax cut.

Trade policies of the current administration are also economically detrimental to small farmers and workers in the industrial belt, most of whom voted for President Donald Trump. The Republican majority in the Senate and President Trump have also tried to dismantle the Affordable Care Act (Obamacare), that primarily provides health care benefits to lower income Americans. Voting also affects the choice of politicians who, for example, care about preservation of national parks, cleaner environment and policies to deal with climate change, skills training for unemployed workers, housing affordability and assistance in paying college debt.

Only 63.3% of women voters voted in the 2016 election (the same as in 2012). It did not help their causes dealing with child-bearing rights, childcare, early childhood education, parental leave and real income security. Randall Akee and other coauthors in the March 2018 American Economic Review find that an increase in household income has significant effect on children’s personality traits, emotional well-being, behavioral health, educational attainment and other beneficial adult outcomes.

Voters’ apathy by not voting or by ill-informed voting causes perils for democracy also, because policy decisions are made to please donors and partisans driven by their agenda and/or ideology. Democracy promotes economic stability, as Dan Rodrik finds in his study published in the American Economic Review in May 2000. Economic stability is vital for economic growth, employment, and the vitality of financial and labor markets. We are witnessing this instability in the Trump administration and its adverse consequences.

American voters must get over their excuses for not voting or for ill-informed voting. Voting by the missing one-third of voters and better informed voters could change things like registration barriers, gerrymandering, placement of voting facilities and voting days; complaints will not resolve such issues. As Louis L’Amour states, “ To make democracy work, we must be a nation of participants, not simply observers. One who does not vote has no right to complain.”

Mathur is former chairman and professor of Economics, Department of Economics, Cleveland State University, Cleveland, OH.  This article was published as opinion piece in the Standard Examiner, October, 31, 2019, Ogden, UT.