I have a new column at City Journal Online about the economic policy address that Tim Pawlenty gave on Tuesday. Overall, I’m not impressed, either with his idea that we can achieve sustained real GDP growth of five percent, or with his proposal for a huge tax cut. An excerpt:
Using a back-of-the-envelope analysis, Pawlenty’s plan could be expected to raise federal tax revenues of somewhere between 13.5 and 14 percent of GDP in a non-recession year. This assumes, moreover, that Pawlenty, like Ryan, is prepared to broaden considerably the personal income-tax base by doing things like abolishing the home-mortgage interest deduction, which he hasn’t explicitly endorsed. Otherwise, revenues would be even lower.
As for federal spending, Pawlenty has set an ambitious target of capping it at 18 percent of GDP (the current CBO baseline would put us closer to 24 percent in 2020; the Ryan budget backed by most House Republicans is over 20 percent for that year). Even if we managed to hit that number, Pawlenty’s tax plan would leave us with an unacceptably large structural budget gap—over 3 percent a year. It’s hard to imagine any situation where a federal tax code that collects less than 15 percent of GDP is sustainable.
A few more thoughts on the speech, which did not all fit neatly in the column:
1) The cornerstone of Pawlenty’s pitch is the idea that his fiscal policy agenda would spark a massive economic boom—that we’d hit 5 percent real annual GDP growth for a decade, instead of the post-1970 average of 2.9 percent. There’s little reason to think we can hit that target.
Pawlenty harkens back to two periods where we hit growth of nearly 5 percent—4.9 percent from 1983 to 1987, and 4.7 percent from 1996 to 1999. But neither of those trends was sustainable; the former includes a bounceback from a steep recession in 1982, and the latter was inflated by the tech bubble. And of course, neither growth spurt ran for anywhere near ten years—as I noted at City Journal, the best 10-year period of American economic performance since 1970 was 1992-2001, with average growth of 3.54 percent.
Supply-siders often express a desire to re-create the growth environment of the Reagan era, which they attribute to major federal tax cuts. And indeed, the period from 1983 to 1992 was America’s second-best 10-year period of growth since 1970. But what that means is we were growing at 3.51 percent per year—still nowhere near the 5 percent target. Also, that strength can’t all be attributed to fiscal policy; the early 1980s brought significant improvements in American monetary policy, and of course growth is always impacted by non-policy factors.
Then there’s the inconvenient fact that the economic boom of the late 1990s came in the wake of two major federal tax increases, in 1990 and 1993. My point is not that tax increases grow the economy, but that we do not have reason to believe that big tax cuts are likely to lead to significantly higher GDP growth. Indeed, with the possible exception of some major changes to immigration policy that would be politically unpalatable, I doubt there is any available policy that would lead to sustained 5 percent GDP growth.
2) The tax cuts Pawlenty is proposing are really massive. The Congressional Budget Office projects that under the Alternative Fiscal Scenario—which is to say, full extension of the Bush Tax Cuts and continuation of the AMT patch—federal revenues would reach 19.3 percent of GDP by 2020. Under a generous take on Pawlenty’s plan, they would be 14.0 percent. That is to say, Pawlenty is proposing to cut federal revenues by somewhere between 25 and 30 percent.
3) Being in Ramesh’s camp on monetary policy (if you haven’t read his piece from the April 4 issue, you should), I was distressed to see Pawlenty lambaste the Fed for its “loose-money policies” and “debasement of the dollar.” The Fed’s problem since 2007 is that it has been too tight, not too loose. Unfortunately, there seems to be little market for a loose money candidate right now. I blame liberals, who are in a more natural position to argue forcefully for looser money, but have generally paid too little attention to the issue.
4) If I’m going to say something nice, it’s that I agree with Pawlenty that we should privatize the U.S. Postal Service. Pawlenty’s Google Test for privatization—really a knockoff of the Yellow Pages Test advanced by Steve Goldsmith, formerly Mayor of Indianapolis and currently Deputy Mayor of New York City—is somewhat less applicable to the federal government than to state and local governments, which have more direct operations of the sort that might be privatized. But the post office is the largest example of a federal organization that belongs in the private sector, and there are surely many small ones that we should look at bidding out, too.