Today the White House released an updated economic forecast. The economy is "solid," as Council of Economic Advisors Chairman Edward Lazear puts it. Here's the key paragraph from the press release:

The updated forecast projects somewhat slower economic growth in the near-term than was projected in June 2006. Specifically, the forecast projects real gross domestic product (GDP) will grow 3.1 percent and 2.9 percent during the four quarters of 2006 and 2007, respectively. These growth rates are similar to the U.S. historical average.

Other good news includes a forecasted unemployment rate of 4.6 percent for 2006 and 2007.

We should be careful not to take this good economic news for granted. Today's numbers only strengthen the case for pro-growth policies. If Americans want to sustain this level of growth, their representatives in Washington need to implement the kinds of policies that will leave it intact.

So what can lawmakers do to continue, and perhaps increase, growth? Maintaining pro-growth tax policies would be a good place to start. Lawmakers would also be wise to avoid policies and regulations that would adversely affect businesses and workers--such as raising the minimum wage. Of course, there's the need to rein in spending. And, if lawmakers are feeling ambitious, they could always take on the most serious threat to our fiscal house: long-term entitlement spending.

Posted by J. Lawrence Scholer at 03:04 PM | Permalink | TrackBacks (0)

A recent NBER working paper should cause lawmakers who favor some type of price controls on prescription drugs to rethink their position. Joseph Golec and John Vernon examine the effects that prescription drug price controls have in European Union countries. Here's the abstract:

EU countries closely regulate pharmaceutical prices whereas the U.S. does not. This paper shows how price constraints affect the profitability, stock returns, and R&D spending of EU and U.S. firms. Compared to EU firms, U.S. firms are more profitable, earn higher stock returns, and spend more on research and development (R&D). Some differences have increased over time. In 1986, EU pharmaceutical R&D exceeded U.S. R&D by about 24 percent, but by 2004, EU R&D trailed U.S. R&D by about 15 percent. During these 19 years, U.S. R&D spending grew at a real annual compound rate of 8.8 percent, while EU R&D spending grew at a real 5.4 percent rate. Results show that EU consumers enjoyed much lower pharmaceutical price inflation, however, at a cost of 46 fewer new medicines introduced by EU firms and 1680 fewer EU research jobs.

As the paper points out, Europeans do pay less than Americans for prescription drugs. Innovation, however, is the casualty of these lower costs. Even those who bemoan drug companies' profitability should have a hard time arguing on behalf of policies that would adversely affect research--and the new drugs that come from this research--that can improve lives.

Posted by J. Lawrence Scholer at 01:49 PM in Health Care | Permalink | TrackBacks (0)

BNA reports that a part of the ill-fated "Trifecta" bill of this past summer--so named because it included a minor death tax reform, a minimum wage booster, and a mish-mash of tax "extenders"--may be on the table again during the lame duck Congress.

The new legislation would include only the tax extenders, which are a strange mix of special-interest subsidies, incentives for bad state-level tax policy, and handouts to business. Extending these things for a year would cost $15 billion, according to the JCT. Another year would add $10 billion to the price.

Bill Beach argues that these special exemptions and credits injure the cause of tax reform:

Our current tax code is riddled with enormous tax breaks for particular types of economic and social behavior, and subsidies that the code gives certain taxpayers is a major reason why our broken tax code remains unreformed. After all, why would anyone want to give up a claim to a big tax break? The “tax extenders” about to be considered by the Senate would perpetuate these tax subsidies and, in some instances, increase their value to taxpayers.

These extenders are basically special-interest pork masquerading as tax cuts. Real tax cuts that boost the economy are broad based, don't play favorites, usually don't make the tax code much more complicated, and reduce negative incentives on productive activity. The extenders package fails on all counts.

Congress would do far better to get the ball rolling on real tax reform. Really, even doing nothing would be a better course. And if the GOP is truly interested in reclaiming its mantle as the party for fiscal conservatives, Larry Kudlow has a proposal that would take a big step in that direction and maybe even put the heat on Democrats hoping to boost taxes over the next two years.

Posted by Andrew Grossman at 11:20 AM in Taxes | Permalink | TrackBacks (0)

Daniel Yergin knows energy and he knows oil. Yergin is author of the Pulitzer-winning The Prize: The Epic Quest for Oil, Money, and Power, and is widely regarded as the premier go-to guy on issues of energy supply, energy economics, and energy production statistics.

Peak oil is the idea that oil production will soon hit a peak and fall off precipitously as supplies dwindle. The folks behind peak oil seem like standard nutty alarmists, but some bright people have fallen for the idea, too. A number of environmentalists also buy into it; for them, it's a sort of moral comeuppance for the absolute wrong of carbon-based energy. Some are really just millenarians, basically, and believe that the end of oil will be our end, too.

Fortunately, their faith is misplaced, argues a new report from Yergin's firm, Cambridge Energy Research Associates. "[T]he remaining global oil resource base is actually 3.74 trillion barrels -- three times as large as the 1.2 trillion barrels estimated by the theory’s proponents -- and...the "peak oil" argument is based on faulty analysis which could, if accepted, distort critical policy and investment decisions and cloud the debate over the energy future."

Rather than a peak, expect a plateau:

Global production will eventually follow an “undulating plateau” for one or more decades before declining slowly. The global production profile will not be a simple logistic or bell curve postulated by geologist M. King Hubbert, but it will be asymmetrical – with the slope of decline more gradual and not mirroring the rapid rate of increase -- and strongly skewed past the geometric peak. It will be an undulating plateau that may well last for decades.

Peak oil never made much sense, really. First, oil "reserves" count only oil that is extractable at a certain cost. But as the prices of gas and other petroleum products rise, lots of oil that is now too expensive would be booked as reserves and extracted. This alone should put a damper on any sudden drop-off in energy production or rise in prices.

Second, at higher prices, there's less demand. So if prices rise, we'll just put oil-based products to fewer low-value uses. Walking and biking will become more attractive alternatives. Consumers will demand more fuel efficient cars.

Third, the availability of substitutes caps energy prices. When energy prices rise to a certain level, alternative means of energy production become more attractive. Nuclear, hydrogen, wind, wave, solar, and others fall into this camp. For now, on a dollar basis, these sources are just too expensive for many uses. But their prices are falling.

The key is that we value oil for its uses and not intrinsically--in the end, it's just sticky, mucky black stuff. So far as its uses are concerned, we can substitute other energy sources, and they just might cost a bit more--not great but hardly catastrophic. And if oil production falls off gradually, as CERA's study indicates it will, the likely cost difference will be very small in the end.

Malthus and many since him have prognosticated about the future but undervalued human ingenuity. Their predictions tend towards crisis; but reality keeps coming up with very different outcomes.

Posted by Andrew Grossman at 03:35 PM in Energy | Permalink | TrackBacks (0)

Writing today in the Wall Street Journal, Robert Pozen, chairman of MFS Investment Management, offers a simple proposal to boost Americans' savings for retirement:

A bipartisan Congress should harness these forces of inertia and mandate that all employers not otherwise offering a retirement plan establish a check-off IRA (CIRA) for employees. An employer could take out a minimum percentage (e.g., 3%) of their employees' wages from their paychecks, tax deductible in the year of contribution. But employees would have 60 days from their enrollment date to increase their contribution rate, or to opt out completely of any payroll deduction. The employer utilizing this auto-enrollment approach would be protected from legal liability by a safe harbor, if the employer followed specified procedures and provided specified disclosures.

A concrete proposal for this kind of automatic IRA already exists. It's called, conveniently enough, the Automatic IRA, and it was proposed earlier this year by a diverse pair that commands strong bipartisan respect: Heritage's David John and Brookings' J. Mark Iwry. In addition to legal indemnification for employers offering Auto-IRAs, the pair propose temporary tax credits to tempt small employers to offer the option to their employees.

As Pozen points out, financial institutions would jump at the opportunity to administer auto-IRA-type programs, and workers would enjoy full portability of their accounts as they move between jobs.

It doesn't matter which party is in charge of Congress. This is an idea that's ready for Congress's consideration.

Posted by Andrew Grossman at 02:54 PM in Retirement | Permalink | TrackBacks (0)

Arizona's Goldwater Institute has released a study that examines poverty at a state-by-state level. The key finding: "Using data from the U.S. Census Bureau, the pages that follow demonstrate that low-tax and -spending states enjoyed sizable decreases in poverty rates during the 1990s. High-tax and -spending states, meanwhile, suffered increases in poverty rates."

To complement this study, Goldwater has also unveiled an interactive map from which you can easily view the progress your state has made in reducing poverty. D.C. gets an "F."

The study and map should provide good rebuttals for those who argue that what's need to reduce poverty is big government, not low-tax free enterprise policies.

Posted by J. Lawrence Scholer at 02:54 PM in Taxes | Permalink | TrackBacks (0)

The Pension Benefit Guaranty Corp. (PBGC) is in the hole for $18.1 billion dollars this year. Believe it or not, that's the good news. Last year its shortfall was $22.8 billion.

The PBGC is the government entity that takes over failing defined benefit pensions. These are the kinds of pensions that your grandfather's generation received: put in 40 years at the same job and you get a monthly stipend for life. Today most workers use defined contribution accounts--like 401ks--but a few industries still offer the old kind of pensions. And a lot of those industries have been going belly up in recent years. That's when the PBGC takes over their pension obligations.

As the article linked above reports, a good part of the reason the PBGC is in better shape this year is legislation passed earlier this year that provides more money to the PBGC from the companies operating these pensions. In fact, one specific provision is the cause of most of the improvement:

PBGC mainly attributed the shrinking deficit to a provision in the new pension law that carves out special treatment for the airline industry, giving airlines that are in bankruptcy court and have frozen their pension plans extra time for their pension plans to become financially whole.

To call this misleading would be an understatement. The new law gives airlines special treatment that could make the total cost to taxpayers of their failed pension plans even higher than before. David John explains:

The special treatment provision would allow airline pension plans to fully fund their pension promises over either 17 years or 10 years instead of the 7-year period that would be required for pension plans in other industries....

The special treatment gives the airlines two options: Either freeze the pension plan so that no new benefits are credited to employees or allow employees to build pension benefits but pay for those new benefit promises on an expedited basis. In either case, under the language that was included in the Senate bill, the current unfunded pension promises could be funded over 17 years using a much higher interest rate (8.85 percent) than the rate that other pension plans would be required to use. As a result, airline pension plans not only would have much longer to pay for the benefits, but also would have to contribute less money to be considered fully funded....

On top of that, even if airline pension plans do freeze their benefits, they will continue to pay out full promised benefits to current retirees and close to full promised benefits to employees who retire early within that 17-year period. However, their pension plans’ underfunding would not be significantly reduced for many years. Thus, if an airline filed for bankruptcy again—and many of them have filed for bankruptcy a number of times—its pension plan could be even more severely underfunded than it is now.

And even if the worst is avoided, the new law won't completely fill the PBGC's funding gap. This story isn't over yet.

Posted by Andrew Grossman at 02:00 PM in Retirement | Permalink | TrackBacks (0)

Once again, Congress waited until the end of the year to rush through a pile of appropriations bills. And once again, those bills are loaded with pork barrel spending.

Heritage's Brian Rield counts upwards of 10,000 earmarked projects in the 11 remaining appropriations bills, which is about the same amount of pork as last year. After getting throttled at the ballot box for their fiscal largess, the Republican Congress apparently hasn't taken voters' disgust to heart. Riedl's list of the worst pork projects in the bills contains a few howlers like there:

• $1,000,000 for Mormon Cricket & Grasshopper Activities in Utah
• $575,000 for Detroit Renaissance (Good luck!)
• $6,371,000 for Wood Utilization Research (!?)
• $175,000 for the Andre Agassi College Preparatory Academy (Agassi has $31 million in career earnings, plus probably more in endorsement fees)

So it's business as usual, in other words.

Except not exactly. Sen. Tom Coburn, a true fiscal conservative, plans to offer up to 40 amendments to strip some of the worst pork out of the Ag appropriations bill.

The Senate needs more like Coburn.

And perhaps the Democrats will have better luck controlling spending. Heritage's Ron Utt thinks that House Speaker-to-be Pelosi has a chance to put an end to this earmarking madness.

So will appropriations next year be any different? At the least, with his party-mates out of power, Sen. Coburn should have a few more allies.

Posted by Andrew Grossman at 01:14 PM in Federal Spending | Permalink | TrackBacks (0)

Pundits have agreed that one of the big casualties of the flip in congressional leadership will likely be U.S. trade policy. Under the new leadership, President Bush, whose Trade Promotion Authority expires midway through next year, will face a very serious challenge in trying to enact free trade agreements.

Today's Detroit News reports on the protectionist impulse of some of the Michigan delegation. These lawmakers have urged Ford, GM, and DaimlerChrysler to "be blunt" with the Bush administration when discussing the struggles of Michigan's auto industry.

"There have been no steps taken by this administration to support manufacturing. They need to understand, and I hope the Big Three will be blunt and direct with the administration, that their competitors are not companies overseas. Their competitors are countries overseas," Carl Levin said.

Levin's statement represents the all-too-common protectionist argument that, when it comes to international trade, it's an us-against-them affair. But, as Daniella Markheim and Anthony Kim explained recently, that's not the case:

Because today’s global economy offers unparalleled opportunities for the U.S., it is in America's economic interest to continue to expand trade by lowering barriers to trade in goods and services....

Trade has been a driving force behind America’s high living standards and promises even more if trade barriers can be broken down further. Gary Clyde Hufbauer of the Institute for International Economics estimates that trade liberalization over the last fifty years has brought an additional $10,000 per year to the typical American household. If all trade barriers were eliminated and global trade and investment became truly free, Hufbauer estimates that American households would gain an additional $5,000 per year. According to a University of Michigan study, if today’s international trade barriers were reduced by just a third, the average American family of four would enjoy $2,500 per year in additional income.

Freer trade enables more goods and services to reach American consumers at lower prices, giving families more income to save or spend on other goods and services. Moreover, the benefits of free trade extend well beyond American households. Free trade helps spread freedom globally, reinforces the rule of law, and fosters economic development in poor countries.

Markheim and Kim's analysis should be kept in mind during the tough battles of trade that will ensue during this Congress.

Posted by J. Lawrence Scholer at 11:29 AM in Economy | Permalink | TrackBacks (0)

The bipartisan Concord Coalition today reacts to some of the rhetoric that has spewed forth in recent days on Social Security Reform. It's a problem, the Concord Coalition notes, on both sides of the aisle.

The worrisome rhetoric is that which dismisses a idea for reform outright. Lawmakers may have to consider ideas they don't particularly like if they want to do something about Social Security. As the saying goes, everything must be "on the table." The Concord Coalition's Ed Lorenzen and Tori Gorman write,

While it is easy for critics to attack specific proposals for reform and make promises about preserving benefit promises or opposing taxes, it is difficult to put together a plan that puts Social Security on a sound financial footing. Finding a solution will require legislators from both parties to come together and consider all possible solutions.

Posted by J. Lawrence Scholer at 04:51 PM in Retirement | Permalink | TrackBacks (0)

Well, no, it isn't, but we still wouldn't be surprised to see some accusing the President and others of somehow manipulating labor markets to wind up with this impressive result:

Unemployment rate lowest in nearly 5-1/2 years

WASHINGTON (Reuters) - The U.S. unemployment rate dropped to its lowest in nearly 5-1/2 years during October as 92,000 more jobs were added and hiring in each of the two prior months was revised up, a government report on Friday showed....

The unemployment rate fell in October to 4.4 percent from 4.6 percent in September. It was the lowest unemployment rate since 4.3 percent in May 2001 and was likely to fan concerns that labor markets are growing tight and could contribute to inflation pressures.

Average hourly earnings rose 0.4 percent to $16.91 - higher than the 0.3 percent that analysts had anticipated - while the average work week edged up to 33.9 hours from 33.8. Over the year, average hourly earnings have risen by 3.9 percent, the department said.

We will have a paper out looking at earnings later in the day.

Posted by Andrew Grossman at 09:41 AM in Economy | Permalink | TrackBacks (0)

"You know education, if you make the most of it, you study hard, you do your homework, and you make an effort to be smart, you can do well, and if you don’t you get stuck in Iraq." So said Senator John Kerry (D-MA) on Monday (video), and the response from those who less inclined to take potshots at U.S. troops has been swift.

We do not wade into purely political matters, but here there is a policy dimension. The composition of our armed forces is an issue of great interest to Americans and an integral part of America's overall defense strategy.

For several years, Heritage economist Tim Kane has been researching the characteristics of the men and women who join the U.S. armed services. And he released his latest, most comprehensive report on Friday. Convenient, with respect to the current contretemps, no?

Apparently, Sen. Kerry did not read Tim's report over the weekend. If he had, he would have learned that America's troops aren't the dimwits and dullards he painted them to be. Here's a bit of what the data show (with emphasis added):

[I]n the most recent edition of Population Representation in the Military Services, the Department of Defense reported that the mean reading level of 2004 recruits is a full grade level higher than that of the comparable youth population. Fewer than 2 percent of wartime recruits have no high school creden­tials....

The military defines a “high quality” recruit as one who has scored above the 50th percentile on the [Armed Forces Qualifying Test] and has a high school diploma. The percentage of high-quality recruits has increased from 57 percent in 2001 to 64 percent in 2005 (67 percent in 2004), indicating not only that the military is accepting intelligent and well-educated recruits, but also that the representa­tion of these recruits has increased strongly since the 9/11 terrorist attacks.

This table presents a useful summary of the data. Note that the high school graduation rate among recruits exceeded 96 percent, compared to about 80 percent in the general population.

American men and women out in the field have gotten wind of Sen. Kerry's remarks, and they are not happy. A friend and colleague of ours who is now serving in Iraq sends this:

A number of us here at the U.S. Embassy in Baghdad take great exception to these comments. There are many highly successful people here who have left their "comfortable jobs" and families back in the U.S. to be a part of something important.

As for education, just in my office there are three Ph.D.s, a Harvard MBA, and a junior staffer who will be heading to Harvard or Stanford next year to start an MBA program once done here. Down the hall from me is a highly successful oil geologist (and former prof. of geology), an electricity economist, a former investment banker, and a broad range of international economic, financial, and utilities consultants. We're all here to help rebuild Iraq, not take cheap shots from those who just want to score political points a week before the election.

Our friend asked that we write in response to Kerry's rhetoric to present the facts and correct Sen. Kerry's errors. Well, Kirk, we hope this does it.

Posted by Andrew Grossman at 09:25 AM in Defense | Permalink | TrackBacks (0)