Present Trends and Future Indicators

A Conversation with Dr. Joshua Lewer, Bradley University

Dr. Joshua Lewer is the McCord Professor of Executive Management Development in the Department of Economics at Bradley University. He holds a PhD and master’s degree in economics from the University of Nebraska-Lincoln, as well as a bachelor’s degree in economics and business administration from Augustana College. He is also a research fellow for the Institute for the Study of Labor in Bonn, Germany, with interests in the fields of globalization and economic growth, and has published more than 40 refereed journal articles in those areas. iBi sat down with Dr. Lewer to discuss the state of the national and local economy, the rise of economic populism across the globe, income and wealth inequality, and the economic impact of tax policy and federal spending.

While the national unemployment rate is low, anxiety about the job market remains high. What is the current health and outlook for the U.S. labor market?
This is what the new “full employment” feels like. While there’s a lot of dynamics taking place in the labor market, there’s a lot to be excited about: namely, job growth has been solid and wages are finally starting to rise again.

According to the Bureau of Labor Statistics, over the last 12 months, the U.S. economy has added over 2.3 million jobs on net, and average wages for all workers has grown by 2.5 percent. At the same time, initial jobless claims have tumbled to their lowest rates since 1973, meaning we’re not observing anything near mass layoffs, and unemployment duration has also moderated. On the other hand, we’re also observing significant declines in prime-aged male labor force participation rates, and the U.S. now has a record 95 million Americans not participating in the labor market at all. Changes in desirable labor skillsets and aging demographics explain a large part of this phenomenon. This issue will be a headwind to economic growth going forward.

With the rise of Trump, Brexit and other populist movements, as well as increased geopolitical uncertainties all over the world, what has been the impact on emerging and developed markets? What are potential risks for the future?
The biggest risk associated with the current populist movement is deglobalization. I co-authored an article with local economist Janice Zagardo a few years ago on this topic, entitled “Backtracking from Globalization.” We ran a Monte Carlo simulation with a futures model and found that in a world with two-percent less trade annually, in 10 years out, there is a heightened chance of interstate conflict among countries, and slower economic growth for the U.S. and especially for export-oriented developing countries. For the U.S. specifically, we also found that income inequality slightly improves in a less-globalized world and manufacturing share of GDP increases, but the average living standards fall by nine percent 30 years into the future, primarily due to slower economic growth.

The administration has suggested reducing or even replacing the corporate income tax with a "border adjustment tax." What are the potential implications of this proposal for international trade, federal tax revenue, and the corporate bottom line?
Most economists would agree that the U.S. corporate tax code is in need of revision. According to KPMG, the average U.S. corporate tax rate in 2016 stood at 40 percent, compared to the OECD [Organisation for Economic Co-operation and Development] and global average of around 24 percent. At the same time, several of America’s largest corporations pay little or no income tax at all. How can this be?

One thing economics teaches us is that people, and in this case corporations, respond to incentives. When corporate tax rates are relatively high, as they are in the U.S., economic agents use resources to find ways to avoid paying the tax. This shows up today in a number of ways: (1) tax inversion, the movement of corporate headquarters out of the United States to lower-rate countries; (2) corporations keeping non-domestic earnings offshore. (For example, in 2014, the 50 largest U.S. companies had $1.4 trillion in cash overseas.); and (3) lobbying efforts by corporations to get favorable tax treatment.

The country would be better served by broadening out the tax base—lowering corporate income tax rates to somewhere near the OECD average and eliminating nearly all deductions. Tax revenues would improve, and they would also be more stable over the business cycle. Moreover, corporations would stop using resources in an attempt to avoid taxes; they could instead use those resources to improve their products or pass on the lower costs to customers.

The administration’s plans for significant tax cuts, along with increased infrastructure and military spending, is likely to increase the federal budget deficit. Would higher deficits spur faster economic growth? What would be the impact on interest rates and inflation?
Since January 2009, the federal government has racked up $11 trillion of new debt, with total U.S. obligations now reaching a whopping $20 trillion. These deficits have no doubt been a stimulatory prescription to our economy. John Maynard Keynes suggests we should “spend against the wind.” That is, during economic downturns, the government should run massive deficits to pull us out of recessions, but in times of economic expansion, the government should run surpluses and pay off some of its borrowing. As you know, we have trouble with the latter. If implemented, Trump’s tax cuts and spending increases would lead to a shot in the arm for economic growth, but they would also generate higher debt burdens for the taxpayer going forward, as well as higher inflation and interest rates, all things equal.

Some major U.S. companies (Boeing, 3M, etc.) have recently warned of potential economic damage from the strong dollar. What are the pros and cons of a strong dollar in the global economy?
Yes, there are two sides to the coin when the dollar strengthens relative to other currencies. The positive is that we all feel richer. Our dollar buys more, making the costs of that trip to Europe you’ve always wanted to take more affordable. On the flip side, U.S. exports decline as companies find that their products’ price just went up for international customers. There’s no doubt that our trade deficit worsens as the dollar strengthens, all things held equal.

Capital in the Twenty-First Century, the popular 2013 book by French economist Thomas Piketty, suggests that the unequal distribution of wealth causes social and economic instability. Do you believe, as he suggests, that growing wealth inequality could imperil the very future of capitalism?
Your question reminds me of this quote from founder James Madison, who stated: “The day will come when our Republic will be an impossibility because wealth will be concentrated in the hands of a few. When that day comes, we must rely upon the wisdom of the best elements of the country to readjust the laws of the nation.”

Yes, there is no doubt that both income and wealth distribution have become more unequal in the U.S. since the 1970s. Economic insecurity and income/wealth inequality are often cited by economists as primary contributors to the rise of economic populism. The reasons for worsening inequality are multifaceted, but this trend is not likely to improve without policy action.

There are many potential solutions to this problem. Piketty promotes a global tax on capital/assets. Another major initiative worth citing here is “The Equality of Opportunity Project,” which focuses on solutions to social mobility and inequality. The collaboration found several major factors that strongly correlate with improved economic outcomes within the U.S. and other countries. Factors that significantly improved economic outcomes include desegregation of communities by race and educational attainments, and K-12 school quality and funding. Improved social capital and community family structures also play a significant role in the study. [Editor’s note: Learn more about this project at equality-of-opportunity.org.]

How do you view the current state of the local economy and future outlook for Greater Peoria? In light of Caterpillar’s announcement to move its global headquarters to Chicago, what can the region expect to see in terms of impact?
I’ll be honest here: The move of Caterpillar’s global headquarters out of Peoria is terrible news for our community. There are both economic and psychological impacts which will be far-reaching for years to come.

That being said, I don’t think anyone can doubt the enduring strength of the people of this area. I’ve lived here 10 years now, and I’m amazed at how this community responds to life’s challenges from natural disasters (e.g. Washington’s 2013 tornado) to economic ups and downs (e.g. the Great Recession). I believe we will make it through this next challenge, just like we’ve made it through all the challenges of the past: together!

What do you believe is the most important indicator of economic growth in the coming year?
Yogi Berra once said, “Forecasting is very difficult, especially when it involves the future.” I’ve been known to say that “my crystal ball is cloudy today.” That being said, I like to use several leading economic indicators when determining the direction of economic activity.

When a great majority of the indicators suggest positive momentum like today, we can feel fairly confident that the economy will grow in the next three to six months. Alan Greenspan was known to follow over 30,000 different indicators when considering the health of the economy, but if you had to pick just one, I’d choose what’s known as the yield curve. The yield curve looks at the difference between long-run risk versus short-run risk. In this case, long-run risk is measured by the yield on a 10-year Treasury bond, and the short-run risk is proxied as the yield on three-month Treasury bills. The yield curve indicates a recession may be forthcoming when the short-run interest rates are greater than the long-run interest rates. Fortunately, today the yield curve is indicating future growth lies ahead. iBi

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