Section 7: Policies to Strengthen a Developed Country

Section 7: Policies to Strengthen a Developed Country

“Weekly Guide … Economic impact of Raising Wages and Benefits … Assistance Programs for Dislocated Workers … Support for Skill Acquisition for Employed … Workers … Workers Building Skills & Improving Their Incomes … Labor Market Issues in the EU … Is the US the Land of Upward Mobility? … Improving Competitiveness of US Firms … How to Pay for Programs to Cushion Globalization … Policy Simulations … Conclusion”
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Summaries

  • Policies to Strengthen a Developed Country (Week 7) > 1. Weekly Guide > Introduction: Policies to Strengthen a Developed Country
  • Policies to Strengthen a Developed Country (Week 7) > 1. Weekly Guide > Introduction: Compensatory Programs
  • Policies to Strengthen a Developed Country (Week 7) > 2. Economic impact of Raising Wages and Benefits > Adam Posen on the Economic Impact of MNCs Raising Wages and Benefits
  • Policies to Strengthen a Developed Country (Week 7) > 3. Assistance Programs for Dislocated Workers > Adjustment Assistance Programs Lecture
  • Policies to Strengthen a Developed Country (Week 7) > 3. Assistance Programs for Dislocated Workers > Wage Insurance and Health Care Support Lecture
  • Policies to Strengthen a Developed Country (Week 7) > 4. Support for Skill Acquisition for Employed Workers > Supporting Skill Acquisition for Employed Workers Lecture
  • Policies to Strengthen a Developed Country (Week 7) > 5. Workers Building Skills & Improving Their Incomes > Workers Building Skills - What are the Opportunity Costs? Lecture
  • Policies to Strengthen a Developed Country (Week 7) > 5. Workers Building Skills & Improving Their Incomes > Facilitating and Supporting Skill Building Lecture
  • Policies to Strengthen a Developed Country (Week 7) > 6. Labor Market Issues in the EU > Jacob Kirkegaard on Labor Market Inflexibility and Labor Market Reform in the EU
  • Policies to Strengthen a Developed Country (Week 7) > 6. Labor Market Issues in the EU > Jacob Kirkegaard on The Apprenticeship Model
  • Policies to Strengthen a Developed Country (Week 7) > 6. Labor Market Issues in the EU > Jacob Kirkegaard on Unemployment Insurance Reform
  • Policies to Strengthen a Developed Country (Week 7) > 7. Is the US the Land of Upward Mobility? > Equal Opportunity and Social Mobility in the US--An Ethical Dimension Lecture
  • Policies to Strengthen a Developed Country (Week 7) > 8. Improving Competitiveness of US Firms > Reinforcing US Competitiveness & Addressing the Trade Deficit Lecture
  • Policies to Strengthen a Developed Country (Week 7) > 9. How to Pay for Programs to Cushion Globalization > Funding Investment Initiatives in the US--Three Methods Lecture
  • Policies to Strengthen a Developed Country (Week 7) > 9. How to Pay for Programs to Cushion Globalization > Reforming Entitlement Programs Lecture
  • Policies to Strengthen a Developed Country (Week 7) > 9. How to Pay for Programs to Cushion Globalization > Guest Lecture: Professor Rod Ludema on the Political and Economic Realities of the US Budget Deficit Lecture
  • Policies to Strengthen a Developed Country (Week 7) > 9. How to Pay for Programs to Cushion Globalization > Guest Lecture: Professor Rod Ludema on Reforming Entitlements Lecture
  • Policies to Strengthen a Developed Country (Week 7) > 9. How to Pay for Programs to Cushion Globalization > Guest Lecture: Professor Rod Ludema on Addressing the US Balance of Payments and Global Imbalances Lecture
  • Policies to Strengthen a Developed Country (Week 7) > 10. Policy Simulations > The United States Budget Deficit and Social Security Simulation Activities
  • Policies to Strengthen a Developed Country (Week 7) > 11. Conclusion > Conclusion: Summary
  • Course Conclusion > Professor Moran's Concluding Remarks & End of Course Survey > Professor Moran's Concluding Remarks

Policies to Strengthen a Developed Country (Week 7) > 1. Weekly Guide > Introduction: Policies to Strengthen a Developed Country

  • So we are coming to the end of our journey together.
  • I wonder if you think it’s been a long journey or a short journey.
  • I’ll tell you, I think it’s been a short journey and, like every graduation, it makes me a little sad and wistful to come to an end.
  • I think we’ve accomplished what we set out to accomplish.
  • We understand that the benefits from globalization, the spread of trade, investment, and technology around the world, far outweigh the costs.

Policies to Strengthen a Developed Country (Week 7) > 1. Weekly Guide > Introduction: Compensatory Programs

  • The first is to make this system in the United States, Europe, Asia, or the developing world work more efficiently and effectively.
  • So we want compensatory policies, vocational training, other kinds of adjustment policies to make the economies and societies work more efficiently.
  • We want to head off the reaction of those who are hurt by globalization.
  • So the second rationale is to head off the objections and the reactions to globalization.
  • It seems fair to try and compensate those who are left out or not well trained to cope with globalization.
  • These are three reasons why we now have to address policies to try to cushion, help, the adjustment process and enable more and more citizens to take advantage of the process of globalization.

Policies to Strengthen a Developed Country (Week 7) > 2. Economic impact of Raising Wages and Benefits > Adam Posen on the Economic Impact of MNCs Raising Wages and Benefits

  • We are very pleased, today to have Dr. Adam Posen, who is the president of the Peterson Institute for International Economics, as our guest.
  • Could you give just a little background on the Peterson Institute for International Economics? Yes.
  • So I’m delighted that your students find so much value in the work we do.
  • Peterson Institute for International Economics is an independent, nonpartisan, research institute.
  • There’s another dozen or so distinguished people like yourself who have academic affiliations elsewhere, but are deeply engaged with our work.
  • Our goal is to try to make globalization as beneficial and as sustainable as possible for the people of the US and the people of the world.
  • One of the interesting things has been the way the Peterson Institute and you, yourself, have worked with Aetna and Aetna’s decision to unilaterally raise wages and benefits.
  • They’re not the only company in the world to do it, but they’re one of the largest and first in the US to take this initiative in recent years about raising wages for some of the lowest-skilled workers.
  • Not so much you should advise Aetna on whether or not to do this, but you should think about, A, does this make economic sense; and B, what would the world, or at least US, look like if lots of companies did this.
  • What was their exact proposal? Their exact proposal was essentially to create a minimum-wage floor for their lowest-paid workers and get it up to around $12 an hour, and to commensurately raise benefits.
  • What we assessed, as a general economic proposal, was not that every small tailor shop or housecleaning service should raise their minimum wage, but that every large company in the US that isn’t competing on just cheap labor would raise the wage for lower-skilled workers.
  • There’s a huge range of American multinationals, including service industries, like health insurers and call centers and the like, as well as manufacturers as well as media companies and so on, who can choose to get more out of their workers.
  • There is strong economic evidence, particularly at the low end of the wage scale, that if you give workers an adequate wage, they’re less likely to leave your business.
  • Generally, this is what was 20 years ago, 30 years ago, called the efficiently wage theory- that because there’s a cost of hiring and firing and replacing people, and because there’s benefits from having loyal workers who really get into what is needed for your business, and you can invest in them, and they won’t leave- it can be a win-win for workers and management.
  • Again, this isn’t for every worker in the US. But we think literally several million workers in the US could be affected by this in a positive way.
  • Again, not every company, but most large companies in the US, benefit from having reduced turnover of their workforce, particularly at the low-skilled level, benefit from having to do less monitoring and micromanagement of their workforce, benefit from having workers who are not worried about their paychecks, their health care, what’s going on at home.
  • The workers can say, if you put that in me, I’m more likely to stay, you’re not going to waste that.
  • There’s very strong evidence across economics this works.
  • One of the winners of the Nobel Prize a few years ago, Oliver Williamson, talked about these kinds of things and what he called transaction cost economics.
  • I can’t promise that every worker in the world will get a raise.
  • I can’t say that it’s great for every company.
  • Because our MOOC participants have read that if you raise minimum wages, you’re liable to get less employment.
  • Again, that’s why mom-and-pop shops may not work that way.
  • You’re getting more out of the workers by doing this.
  • They have a much lower- much higher floor, I should say, on what they pay workers at the low-scale end versus the high-scale end.
  • So I think they would come away from the South African example saying, it is possible to keep people out of the labor force.
  • There’s definitely things that can go wrong, and there are definitely policies that over-price workers.
  • There were unionized workers, mostly males of German origin, senior people, who got very high wages.
  • Because those wages were so high, there was very little incentive for German businesses to hire young people, to hire people weren’t as old, in seniority terms, to turn over jobs.
  • Obviously South Africa is a very different place than either Germany or the US in economic terms these days.
  • Well, again, Professor Moran, we’re very grateful that you’re one of our authors, and that’s why there’s so much to read. And we’re very grateful to you and to Georgetown University for helping us get out this kind of public education on economics.

Policies to Strengthen a Developed Country (Week 7) > 3. Assistance Programs for Dislocated Workers > Adjustment Assistance Programs Lecture

  • The first category of initiatives we want to focus on is assistance programs for those who are dislocated by the process of globalization.
  • So there is a major question of, does the United States or do other societies need a trade and investment adjustment assistance program, which would be relatively small, or a more generalized adjustment assistance program? Now what do we mean by adjustment assistance? This usually involves a combination of extended unemployment insurance, contingent upon being enrolled in some kind of a vocational training or job skills program.
  • The correct answer, it should be a adjustment assistance program that covers anybody who is dislocated.
  • I would prefer to start small and focus on trade and investment adjustment assistance, partly to manage cost, but partly because most of the reaction is against globalization.
  • What kind of assistance programs- adjustment assistance, trade adjustment assistance, what do you think should be done to address job relocation? Adjustment assistance combines extended unemployment insurance, which is dependent on enrollment in the qualified vocational training program, with help in a job search.
  • Trade adjustment assistance, specifically, albeit important, is just a small portion of this adjustment assistance.
  • So the real need is for more generalized adjustment assistance that covers job losses across the board and not just trade services.
  • These job assistance programs, or generalized assistance programs, will be more expensive.
  • So you’re saying that since we observed in the evidence, in the data, that trade and investment accounts for only 1% or 2% of the job dislocation problems, what we need is a much bigger program, a much bigger assistance program than just trade adjustment assistance.

Policies to Strengthen a Developed Country (Week 7) > 3. Assistance Programs for Dislocated Workers > Wage Insurance and Health Care Support Lecture

  • Wage insurance says, well, what we see in the data are that most people who lose their jobs just sit around and wait for the old job to come back, or they just sit around and wait for something comparable to the old job to come back.
  • Emily, is there some way of dealing with this stasis, this tendency to just sit, rather than to move to a different job? How would you come to grips with that phenomenon? Wage insurance is a program to pay workers a portion of the difference between a job that they lost and a new job that they’ll take.
  • Oftentimes, workers who got laid off or lost their job will feel discouraged and just sit around and wait for the job to come back, when realistically, it might not.
  • So the wage insurance program that you’re outlining says if you accept a new job that pays less than your former job, we- the state- will actually make up a fraction of the difference as a stimulus for you to actually change jobs and not just sit there waiting for the higher wage job to come back.
  • The wage insurance program is used to incentivize and motivate workers to look for these new jobs, and most importantly, take a new job, even if the wage is slightly less than the job that they lost.

Policies to Strengthen a Developed Country (Week 7) > 4. Support for Skill Acquisition for Employed Workers > Supporting Skill Acquisition for Employed Workers Lecture

  • Well, this should be easy because firms and organizations- here at Georgetown, Georgetown University, you in your job or your company- firms and organizations find that there is a big payoff to providing skill training.
  • So other firms and organizations will say, hey, people are pretty well trained here in the offices of Georgetown.
  • Why don’t we go in and recruit them away, and we don’t have to pay for their training? We’ll give them a transfer bonus.
  • They come and work at a university down the street, or they come and work at a company somewhere else in Virginia, and they get the benefit of the skills training because they have poached the best workers.
  • How can we address this market failure that somebody else may poach your workers and therefore, you don’t want to spend that much money in training them? Well, the best proposals center on a worker training fund that all employers have to pay into, and then to the extent that they do train, they get to withdraw from the fund.
  • An alternative version is to have a training tax credit.
  • ” That is to say, if you do do the training, you get your money back or you get a grant from the worker training fund.
  • What is it that’s causing their wages not to rise, and what kind of programs might we be able to fashion to help those as they stay in their jobs? One remedy, perhaps, is a worker training fund tax in which these firms have to pay a tax to a common fund that will train all workers, or, if they do provide on- the- job training, then they will receive a tax credit.
  • So there definitely are returns to on the job training.
  • There is a study done that looks at all US industries, and it concludes that training investment actually improves the productivity of a firm by 19% or more over three years.
  • So it would be expected that more firms would invest in these training programs.
  • So we have across the board sub-optimal levels of training investment.
  • One way to, perhaps, remedy this is a worker training fund tax in which firms would be required to pay into this common fund as a tax that trains all workers, or, on the other hand, receive a tax credit for training their own workers.
  • So you’re saying that the payoff to firms for providing on- the- job training is very high.
  • They’re reluctant to do it because they train their workers and then their workers may leave, or somebody- you used the word “poaching.
  • ” Another firm may come and entice their workers away.
  • So we still have a situation in which firms are not willing to invest properly into these training programs.

Policies to Strengthen a Developed Country (Week 7) > 5. Workers Building Skills & Improving Their Incomes > Workers Building Skills – What are the Opportunity Costs? Lecture

  • There are other proposals to cap the amount that any student has to pay each year at, let’s say, 10% of your income after your of basic living needs and health care have been covered.
  • The idea is that these are- dare we use the word, yes, subsidies- subsidies that the society is giving to help facilitate workers at all levels to acquire higher degrees of skill.
  • Finally, you will recall there is the Earned Income Tax Credit.
  • Now, we covered this before, and what we did was we called it a negative income tax.
  • If they don’t earn more than $30,000, $35,000 a year, let’s take that as an example, then society actually sends them a check at the end of the year to help augment their income.
  • OK, so Saakshi you led off by saying that one of the best ways to improve wages and benefits for a worker is to acquire skills.
  • Are there are the direct ways that society as a whole can help lower- skilled workers to obtain more income? The Earned Income Tax Credit program allows for a low and moderate income households to actually get refundable tax credits so that they have more money in their pocket.

Policies to Strengthen a Developed Country (Week 7) > 5. Workers Building Skills & Improving Their Incomes > Facilitating and Supporting Skill Building Lecture

  • There are other proposals to cap the amount that any student has to pay each year at, let’s say, 10% of your income after your of basic living needs and health care have been covered.
  • The idea is that these are- dare we use the word, yes, subsidies- subsidies that the society is giving to help facilitate workers at all levels to acquire higher degrees of skill.
  • Finally, you will recall there is the Earned Income Tax Credit.
  • Now, we covered this before, and what we did was we called it a negative income tax.
  • If they don’t earn more than $30,000, $35,000 a year, let’s take that as an example, then society actually sends them a check at the end of the year to help augment their income.
  • OK, so Saakshi you led off by saying that one of the best ways to improve wages and benefits for a worker is to acquire skills.
  • Are there are the direct ways that society as a whole can help lower- skilled workers to obtain more income? The Earned Income Tax Credit program allows for a low and moderate income households to actually get refundable tax credits so that they have more money in their pocket.

Policies to Strengthen a Developed Country (Week 7) > 6. Labor Market Issues in the EU > Jacob Kirkegaard on Labor Market Inflexibility and Labor Market Reform in the EU

  • The first one is what we call hiring and firing practices, and here the idea is that there are a number of countries in Europe in which it is very, very expensive and very legally difficult to fire workers.
  • Now, that may sound like a good idea for workers, because they feel they have a safe job, etc which is arguably true.
  • The problem is that, from a company perspective, when you know that potentially shedding or firing a worker is very difficult and the future is uncertain, you’re very, very unlikely to actually hire new workers in the first place.
  • So what it does, these types of regulations, the barrier for hiring new workers is very hard, so you create a lot fewer jobs.
  • Do you mean firing or do you also include laying off? No, the problem in Europe is that in a number countries it’s fundamentally- for some categories of workers- it’s actually illegal to fire a worker for economic reasons.
  • You cannot fire, in some countries, workers just because the economy’s bad. You actually have to have a legal cause, either they are disloyal, they have been found to be stealing from the company or some other disciplinary issue.
  • So what ultimately happens is that businesses in a number of European countries would much rather have existing workers run up huge overtime rather than hire a new worker.
  • The other one is what we call collective bargaining, and collective bargaining is by and large, in my opinion, a good idea, namely the idea that workers get together as a group to negotiate their wages and working conditions with employers.
  • It is very easy to hire or fire workers in Denmark and also collective bargaining is done at the firm level so that its workers at the individual firm that decide with the management there what should wages and working conditions be, which is a much more flexible way to do it.
  • Actually in most of Northern Europe and the UK, that’s kind of how it works.
  • So what you have done is rather than liberalize, or making it easier to hire and fire workers, you have made it much easier to hire new workers on temporary or part-time contracts.
  • So you basically created sort of multiple different types of labor contracts, some with very high levels of protection and some with very low levels of protection.
  • This has led to more job creation, but it has also led to what economists like to call insider-outsider problem, because what happens is that businesses, of course, if they are faced with a choice, you can either hire a worker on a type of contract that is very difficult and very expensive to potentially lay off, or you can hire a new worker on a temporary or part-time contract, most often they will say, OK, we’ll take the flexible and cheap option.
  • So people that get their first job will get those types of jobs, and this has been a particular problem during the big Euro crisis, because what happens, of course, is that when you have a generalized deep recession in an economy and businesses simply have to lay off some workers, who do they lay off? Well, they of course lay off those that are cheapest and easiest to lay off, which in these countries overwhelmingly has meant young people.
  • Of course, if you’re company, if you hire a worker on a temporary or part-time contract, you’re far less likely to invest in the education and re-training or up-skilling of workers.

Policies to Strengthen a Developed Country (Week 7) > 6. Labor Market Issues in the EU > Jacob Kirkegaard on The Apprenticeship Model

  • Well, this is a good segue into some of the reading that our MOOC participants have done about the apprenticeship system.
  • Could you describe what that is? And then let’s discuss the pros and cons and transferability of the apprenticeship system.
  • Yes, apprenticeship systems writ large- you can call them crafts schools or trades- basically, it means that rather than, say, we have the sort of university track.
  • You go to university, graduate with a major in XYZ, or you go to a craft school.
  • You will actually have a, say, two to three year combined school and apprenticeship process, where you spend perhaps a third of your time in school learning the theoretical and book basics of the trade you’re in.
  • Then do you automatically go to that company? Or are you pretty much assured of having a job once you get out of the apprenticeship program? I think the answer is that if you are a good student, basically, then I would regard it as highly likely that you would be offered a full-time position at the company, if they have a need for new people.
  • The basic issue here is that you have this apprenticeship, which is another track than the traditional university track towards an education.
  • Because typically, when you think about who finances this apprenticeship program- and it’s actually a mixture of government, the private sector or businesses and then the apprentice him or herself.
  • Because what happens is that the traditional school part of an apprenticeship is typically paid by the government, by the public sector.
  • You also have, in most countries, what is called apprenticeship wage levels, which is essentially a wage level for apprentices that are below minimum wages in that sector or in the country, even.
  • Are there are some downsides to the apprenticeship system? Our MOOC participants have read about tracking and being sorted out at a fairly early age.
  • One of them is this tracking issue, which basically is determined- because you enter into an apprenticeship potentially quite at an early age, after primary school, say 15, 16 years of age.
  • The problem with this tracking is, of course, also that if you have countries- and particularly in Germany, where this is probably the biggest problem, I would argue- there, you have the situation that apprenticeships programs tend to be increasingly dominated by immigrants and other minorities.
  • How transferable is this? For example, in the United States, we have the ideal- this is not the reality, but the ideal- that every high school graduate should go on to university.
  • Parents are saying, well, is liberal arts really what we want for our children? Could something like the apprenticeship system be transferred here? Yeah, I think it absolutely could.
  • Because I think we need to just be realistic- that 100% of the youth here can’t go to university.
  • I think the reality is that the United States should encourage the formation of apprenticeships.
  • It really is, shall we say, the core of what the entire apprenticeship model essentially dictates that you do.

Policies to Strengthen a Developed Country (Week 7) > 6. Labor Market Issues in the EU > Jacob Kirkegaard on Unemployment Insurance Reform

  • In return for that support, you are obliged, first of all, if a job becomes available somewhere, you are obliged to take the job.
  • Secondly, you will typically also be obliged to enter into a retraining or upskilling program so that you actually have a right, but also a duty, to improve your labor market skills, and therefore ultimately, of course, also improve your employment opportunities or employment chances of finding a new job.
  • Because if you’re in that situation, well then, what’s the incentive to finding a job? So this is an ongoing reform of the unemployment benefits systems in all across the European countries that really is aimed at, in many ways, of course, what we try to achieve here in the United States, is having as many people in jobs as possible.
  • Could you explain to our MOOC participants what is the concept behind the Earned Income Tax Credit? The point of an earned income tax is that you want to improve the incentives faced by prospective job-takers so that when an unemployed person decides whether or not he or she wishes to take up a job as opposed to continue on perhaps living on unemployment benefits or other types of support, you use the tax system to improve the level of- or increase after-tax earnings.
  • So you basically say that the more income you make in a new job, up to a certain level, you get a tax break for it.
  • So you basically can work and not pay any taxes on the first level of your income, which obviously would boost your after-tax earnings so that the incentive to take a job increases potentially quite dramatically.
  • If you earn below a certain level, do you actually get a check from the government? That is more- that is not so relevant in most European countries, because all of these countries have minimum wages at considerably higher levels than we have here in the United States, so that you would basically not find the sort of working poor problem that you arguably have at least in parts of the United States, where you can have a full-time job but you still don’t really earn enough to sustain yourself, or certainly not sustain a family.

Policies to Strengthen a Developed Country (Week 7) > 7. Is the US the Land of Upward Mobility? > Equal Opportunity and Social Mobility in the US–An Ethical Dimension Lecture

  • In the United States, if you’re born into the bottom 2/5 of the population, the likelihood is greater and greater you’re going to stay there.
  • Whereas, if you are born into the upper 2/5 of the US population, the likelihood is greater and greater that you will maintain your position there.
  • You make up your own mind as you think about programs for dislocated workers and programs for those who maintain their jobs but need more and more skills to be upwardly mobile.
  • So does this means that the United States is still a land of equal opportunity that workers who work hard can climb up the ladder and become middle class or even upper- middle class? What are some of the statistics on mobility in the United States, Julie Ann? Surprisingly, the US is looking like it’s no longer the land of equal opportunity.
  • There’s actually more upward mobility in other countries such as Canada and some of the European countries.
  • Right now in the United States, individuals that are born into the lower and lower- middle class tend to stay there, while individuals that are born into the upper and upper- middle classes tend to stay there too.
  • Well, according to statistics, that 62% of people that are born into the lower 1/5 of society stay in the lower 2/5 of society.

Policies to Strengthen a Developed Country (Week 7) > 8. Improving Competitiveness of US Firms > Reinforcing US Competitiveness & Addressing the Trade Deficit Lecture

  • The most efficient way to stimulate, to incentivize more R&D expenditures- which have spillovers and what we called externalities for the society at large- is to augment and make permanent the R&D tax credit for all companies who have operations within the United States.
  • What about corporate taxation? Well, I have given you some readings pointing out that corporate taxes at the federal, state, and municipal level in the United States are either highest or second highest in the world.
  • On the contrary, the readings that I have given to you uniformly suggest that corporate taxes in the United States should be made more competitive- that is to say, lowered- toward other countries that the United States competes with.
  • On the contrary, we want to encourage US multinationals and foreign multinationals and all-American companies to use the United States as the base from which they remain globally engaged through trade and investment and the globalization of R&D. We do not want to use the tax code- that’s to say, it is not in the US interest to use the tax code to penalize companies for becoming globally engaged and maintaining their global operations from sites in the United States.
  • So we have to come up with initiatives that help reduce the US government budget deficit and reward savings and investment in the United States.

Policies to Strengthen a Developed Country (Week 7) > 9. How to Pay for Programs to Cushion Globalization > Funding Investment Initiatives in the US–Three Methods Lecture

  • Well, the first progressive measure would be to use the income tax, and to have higher tax rates on the upper- middle class, upper class, or the billionaire’s tax, a tax levied on the 1/10 of 1% at the top.
  • I’ve given you some readings to suggest that it’s not possible to solve the budget deficit and to pay for all these initiatives simply by taxing the very rich.
  • Concern about the estate tax is, when an individual dies, his or her estate is taxed at a particular rate above a minimum level of estate.
  • Most small businesses and farms would not be susceptible to reform of the estate tax.
  • The suggestions are that the tax would be very small, but once again, this would be progressive with a bigger burden on the rich and the super rich.
  • This is a way to raise revenues, as well as promoting efficiency in the economy, through taxing carbon emissions.
  • Simultaneously with this could be a significant increase in the gasoline tax.
  • So there is great room in the United States to raise revenues, without hurting our competitiveness, by increasing the gasoline tax.
  • A national sales tax, let’s say an 8% sales tax, means that the federal government would collect a tax on all consumption.
  • Well, why is this regressive? Because, an 8% sales tax on a billionaire would raise money, but it wouldn’t affect his basic lifestyle.
  • An 8% sales tax on a mother of two who earns $35,000 a year, even if food and medicine were exempted, still, that would cut into her basic lifestyle and her ability to support her family or to save any money.
  • Similar to a sales tax is a value added tax, such as is used throughout Europe.
  • This is a tax on sales at every level, not just at the final retail stage.
  • Instead of having a progressive income tax, where the tax level varies depending on how much you earn.

Policies to Strengthen a Developed Country (Week 7) > 9. How to Pay for Programs to Cushion Globalization > Reforming Entitlement Programs Lecture

  • Now, there is no way that we can close the budget deficit and pay for the initiatives that we want to deal with globalization without reforming Medicare, Medicaid, and Social Security, our so-called entitlements system.
  • Have you been looking into that? How might we go about reforming Social Security and Medicaid? Well, one major recommendation that has been made by the leading experts of both the Republican and Democratic parties, namely, Glenn Hubbard, who was the chief tax adviser to George Bush, and Christine Romer, who is the chief economic adviser to President Obama, suggest that the United States needs to move away from a one-size-fits-all policy concerning Social Security and Medicare, and actually reduce subsidies for higher income participants of both programs.

Policies to Strengthen a Developed Country (Week 7) > 9. How to Pay for Programs to Cushion Globalization > Guest Lecture: Professor Rod Ludema on the Political and Economic Realities of the US Budget Deficit Lecture

  • At the same time, we’ve been concerned about the budget deficit.
  • So there’s a contradiction between wanting to spend more on social programs and yet bring the US budget deficit under control.
  • Could you help us think through this and how important it is to bring the US budget deficit under control? Thanks, Ted, good question.
  • That’s separate from the question of how to best go about financing the government budget.
  • They’re linked because many of the options for financing spending programs have been foreclosed by our political process.
  • Taxes are very difficult to raise to pay for a spending program right now.
  • Another option is to reduce existing spending expenditures to make room for new spending.
  • That’s very difficult to do, because there’s always one special interest or another who will vehemently defend an existing spending program.
  • So you’re really looking at a trade-off between new programs and deficit spending.
  • Deficit spending is a difficult thing for people to swallow at this particular moment in time.
  • Now, in answer to your question of why budget sustainability is important, the basic answer is, because large debts can create a drag on the economy.
  • So if you continually run deficits, it’s like borrowing in order to pay your bills.
  • Eventually you’re going to accumulate substantial debt.
  • On top of that, you also have interest to pay on that debt.
  • So if you keep falling short month after month, your debt is going to grow, simply because of the accumulated interest.
  • So eventually that debt can become so large that lenders won’t lend to you anymore.
  • Or at least if they do lend to you, they’ll demand that you pay a risk premium, that is a higher interest rate on your debt.
  • That’s what can happen when the government accumulates too much debt.
  • No matter who those investors are, they’re going to demand a risk premium if they think that the government is not going to be able to pay that debt back.
  • Greece’s economy is in shambles, in part because of the weight of the austerity program that has been put in place in order to make good on their debt.
  • Now, there’s a third option, and that is to monetize the debt, that is to have the Federal Reserve buy up the debt, print money.
  • The US is actually in a fairly good position to do this, in part because the debt that it holds is all in its own currency.
  • The point is that you can, through monetization, reduce the size of the debt.
  • What about the timeline for bringing the budget deficit under control? That’s a very good question.
  • Our debts, stand at around 75% of GDP, which is high but not real high, not nearly as high as in Greece.
  • Under current law, the deficit is projected to fall to around 2% of GDP in the next few years.
  • There still is, lurking out several years in the future, a real debt problem that we have to worry about and that’s associated with entitlements.
  • So from about 2020 to about 2040, the projections are that the deficits will rise.
  • The two main drivers for those rising deficits are increases in health care costs, which cause expenses to rise in Medicare and Medicaid programs, and the retirement of the baby boomers.
  • At the same time, we’ve been concerned about the budget deficit.
  • So there’s a contradiction between wanting to spend more on social programs and yet bring the US budget deficit under control.
  • Could you help us think through this and how important it is to bring the US budget deficit under control? Thanks, Ted, good question.
  • That’s separate from the question of how to best go about financing the government budget.
  • They’re linked because many of the options for financing spending programs have been foreclosed by our political process.
  • Taxes are very difficult to raise to pay for a spending program right now.
  • Another option is to reduce existing spending expenditures to make room for new spending.
  • That’s very difficult to do, because there’s always one special interest or another who will vehemently defend an existing spending program.
  • So you’re really looking at a trade-off between new programs and deficit spending.
  • Deficit spending is a difficult thing for people to swallow at this particular moment in time.
  • Now, in answer to your question of why budget sustainability is important, the basic answer is, because large debts can create a drag on the economy.
  • So if you continually run deficits, it’s like borrowing in order to pay your bills.
  • Eventually you’re going to accumulate substantial debt.
  • On top of that, you also have interest to pay on that debt.
  • So if you keep falling short month after month, your debt is going to grow, simply because of the accumulated interest.
  • So eventually that debt can become so large that lenders won’t lend to you anymore.
  • Or at least if they do lend to you, they’ll demand that you pay a risk premium, that is a higher interest rate on your debt.
  • That’s what can happen when the government accumulates too much debt.
  • No matter who those investors are, they’re going to demand a risk premium if they think that the government is not going to be able to pay that debt back.
  • Greece’s economy is in shambles, in part because of the weight of the austerity program that has been put in place in order to make good on their debt.
  • Now, there’s a third option, and that is to monetize the debt, that is to have the Federal Reserve buy up the debt, print money.
  • The US is actually in a fairly good position to do this, in part because the debt that it holds is all in its own currency.
  • The point is that you can, through monetization, reduce the size of the debt.
  • What about the timeline for bringing the budget deficit under control? That’s a very good question.
  • Our debts, stand at around 75% of GDP, which is high but not real high, not nearly as high as in Greece.
  • Under current law, the deficit is projected to fall to around 2% of GDP in the next few years.
  • There still is, lurking out several years in the future, a real debt problem that we have to worry about and that’s associated with entitlements.
  • So from about 2020 to about 2040, the projections are that the deficits will rise.
  • The two main drivers for those rising deficits are increases in health care costs, which cause expenses to rise in Medicare and Medicaid programs, and the retirement of the baby boomers.

Policies to Strengthen a Developed Country (Week 7) > 9. How to Pay for Programs to Cushion Globalization > Guest Lecture: Professor Rod Ludema on Reforming Entitlements Lecture

  • I think it gives an indication of the sort dysfunction of the current political situation The second thing we need to do is to address Social Security.
  • Current projections, under current law anyway, is that the Social Security Trust Fund, which is the fund set aside- folks, when they pay their social security taxes pay into the Social Security Trust Fund, out of which you draw benefits.
  • Now, what we’d like to do is try and address that Social Security, before we hit that wall.
  • The administration has proposed a method of computing cost of living increases in Social Security benefits that would be slower than the current one that we currently have.
  • This would slow the rate of growth of expenditures on Social Security.
  • Most of that cut in benefits comes at the expense of the lower end of the income distribution, because those are the folks who rely most heavily on Social Security for their retirement income.
  • One that I actually favor, but which a political nonstarter, is to reform the Social Security tax system.
  • So social security taxes are only collected on wage income.
  • They’re also only collected on the first $113,000 of income, which means that the highest income individuals pay a much lower tax rate for Social Security than lower income households do.
  • Consider other types of reforms that would make the Social Security tax more fair.

Policies to Strengthen a Developed Country (Week 7) > 9. How to Pay for Programs to Cushion Globalization > Guest Lecture: Professor Rod Ludema on Addressing the US Balance of Payments and Global Imbalances Lecture

  • Is cutting the government budget deficit, if we could manage to do it, going to help with the US balance of payments? Well, other things equal, the answer is yes.
  • When an economy spends more than it produces, it creates what is known as a current account deficit.
  • So a current account deficit is roughly the same as the trade deficit, which is the excess of imports over exports.
  • One of the components of that over-spending, if you will, is the government spending- the government deficit spending contributes to that gap between spending and production in the economy.
  • Now, there’s not a perfect correlation between the budget deficit and the current account, because another major factor is private spending.
  • The government budget deficit rose quite substantially because of government bailouts and reduction in tax revenue.
  • Private spending can offset or overwhelm government saving when it comes to its effect on the current account deficit.
  • As I say, other things equal, a reduction in the budget deficit is one thing that the government of the United States could do to reduce its current account deficit.
  • Now, another important point is that in order for the US to run a current account deficit, other countries must be running a current account surplus.
  • So not only do deficit countries have to reduce their deficits, but also surplus countries should be working hard to increase domestic spending so as to reduce their surpluses.

Policies to Strengthen a Developed Country (Week 7) > 10. Policy Simulations > The United States Budget Deficit and Social Security Simulation Activities

  • Unlike the US Congress, you get to figure out how to make the US budget deficit sustainable and how to reform entitlements- in particular, Social Security.
  • You get to choose how you would like to cut spending in the United States, and how you want to raise revenues.
  • Then I ask you to go to the Social Security game and figure out how you want to reform Social Security.
  • I encouraged you, when you look at the big programs- Medicare and Social Security- that you may want to take a lead from the bipartisan effort to change the one-size-fits-all way in which we subsidize all recipients of Medicare and Social Security and lessen the amount of subsidies for more wealthy Americans in our entitlement system.

Policies to Strengthen a Developed Country (Week 7) > 11. Conclusion > Conclusion: Summary

  • We conclude this course even more sensitive to the relationship between the vast benefits that come from globalization of trade, investment, and technology- and the pointed costs and burdens that come from globalization.
  • We look at how to make firms operating in the United States more competitive, with better infrastructure, doing more research and development in the United States.
  • We want to figure out how to pay for these initiatives without simply increasing the US budget deficit.
  • We want to try to identify the problems, launch initiatives, figure out how to pay for them- without increasing the borrowing from the Chinese, without increasing the burden on future generations.

Course Conclusion > Professor Moran’s Concluding Remarks & End of Course Survey > Professor Moran’s Concluding Remarks

  • I want to thank you for participating in this Massive Open Online Course at Georgetown.
  • This is the first MOOC for Georgetown and the first MOOC for the School of Foreign Service here on the Georgetown campus.
  • It requires a production crew, a production team, putting the course together, making all the segments fit.
  • So there is a broad array of individuals behind the production of this course.
  • We hope to perfect this course, perhaps give it again in a slightly revised version, and we value your inputs and your recommendations.
  • You have joined us here on the Georgetown campus, at least virtually.
  • In the years to come, may be able to join us in reality here on the Georgetown campus.

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