The current economic debate in Washington has focused on how to constrain the federal debt through fiscal policy — that is, finding the right level of spending and taxes. But that discussion is far too limited. While holding down the debt would be a worthy accomplishment, it’s the wrong ultimate goal. The right goal is growth. We should be thinking about better fiscal policy as one means — among many — to increase growth, and we should be thinking about growth itself as the way to have less debt and unemployment and more opportunity and prosperity.
Specifically, America’s new economic organizing principle should be finding policies — both public and private — that can achieve a sustainable GDP growth rate, after inflation, of 4 percent annually. The United States has grown at 4 percent or more in 14 of the past 40 years, and the average growth rate since World War II has been 3.3 percent. Currently, however, the Congressional Budget Office projects that long-term annual growth — after a brief recovery blip for the next few years — will be only 2.4 percent. Some economists are even less optimistic, and Bill Gross of PIMCO, head of the world’s largest mutual fund, has used the term “New Normal” to describe what he sees a persistent low-growth state.
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Even if 4 percent is aspirational, it is, in the words of James Owens, the former CEO of Caterpillar, a “realistic aspiration.” Owens was one of the three dozen business leaders, policymakers, and academics, including four winners of the Nobel Memorial Prize in Economic Science, who gathered in Dallas recently to launch what the George W. Bush Institute is calling the “4% Project” — a program to develop and promote a blueprint for brisk, sustained growth.
The lower growth rates that economists now expect are mainly the result of demographic imbalance (too many non-workers, mainly retirees, supported by too few workers), the drag of a legacy welfare state, and the burden of debt taken on in recent years to fund stimulus programs and make up for revenues reduced by the recession and its aftermath. The ratio of debt owed to the public to GDP averaged just 35 percent from 2001 to 2007. It rose to 40 percent in 2008, then 62 percent in 2010 and an estimated 77 percent in 2021.
Government spending has jumped from an average of less than 20 percent of GDP between 2000 and 2008 to 25 percent today, and reducing it is a high priority. But spending reductions will be excruciatingly difficult with divided government — and almost certainly insufficient. A more effective way to cut debt is to grow your way out. Alex Brill of the American Enterprise Institute has calculated that if the U.S. starts growing at 4 percent, rather than the anticipated 2.4 percent, in 2017, then by 2021, the forecast level of debt will drop by more than $3 trillion, and the debt-to-GDP ratio will drop by 19 points, to 58 percent.
Government’s role in the economy is to create a benign environment for private enterprise to thrive. There’s no other formula for 4 percent growth. In the realm of corporate taxation, that means lowering the income tax from the highest in the developed world, moving to the same territorial system that other nations use (and away from a universal tax that serves to keep business activity and profits offshore), and ending preferences for favored industries. For personal taxation, it means enacting the consumption tax favored by economists of the Left and the Right, with a broad base and a low rate.
The experience of the past two years has shown, once again, that government spending doesn’t produce long-term growth; in fact, its effect is the opposite. But significant tax reform, along with the cuts that will bring the ratio of federal spending to GDP below 20 percent, will take time — and may never happen at all. More quickly, the U.S. can move to increase its stock of human capital, which is just as important a source of growth generation as physical and financial capital. Eric Hanushek of Stanford has shown that boosting U.S. student achievement to the level of a leader like Finland could add a full point to GDP annually. Gary Becker of the University of Chicago, who won a Nobel Memorial Prize in 1992 for his work in human capital, says that a faster route to growth lies in better immigration policies. America needs more young, skilled workers, and the best way to augment the homegrown variety is with foreigners — many thousands of whom we currently educate and then force to go back home.
Freer trade, spurs to entrepreneurship, enhanced basic research and corporate R&D, reform of entitlements, elimination of obstacles to domestic energy production, more sensible regulation . . . Pardon me if this sounds like an inexhaustible laundry list, but the exhilarating truth is that there are many ways to get America growing. The point is that we need a single, shining beacon, not diffuse radiation, to guide our policy efforts. That beacon is 4 percent growth.
— James K. Glassman, a former under secretary of state, is founding executive director of the George W. Bush Institute in Dallas.
The focus should be on growth. However, reductions in government spending are not "painful" nor are they counter to growth. And the idea that federal spending in the Bush era was some kind of economic golden age is laughable.
I agree with cutting corporate tax, expanding our workforce through talent recruitment, and replacing personal income tax with a consumption tax.
But if you want to optimize sustainable growth, you must reduce government spending.
There are two key points to consider.
The first is that our country was a global superpower and a much stronger country without all the government oversight. While federal spending is 25 percent of GDP now, it was 15 percent in 1950. And it was 5 percent before the Great Depression.
This expansion of federal sending has been largely mirrored by an expansion of state and local spending, especially in liberal havens like California, which is nearly bankrupt.
Second, this spending is hogging too many resources and producing very little that anyone would ever choose to buy.
Worse, this spending has weakened America in unexpected ways. Because of this federal spending, our expectations of the individual, the family, our religion, and our own neighborhood have all been diminished.
In the early 1960's, almost all kids were born into marriages and most parents stayed married, at least until the kids were grown. Today, over 40 percent of children are born out of wedlock.
For the first 150 years of our history as a nation, people were proud to be Americans. And they valued hard work. Today, our schools teach us to be ashamed to be Americans, that we unjustly stole land from Native Americans and from Mexico, that we enslaved blacks and discriminated against them.
For the first 150 years of our history, everyone called a person who refused to work a "bum." Now we call them "homeless" and give them help to buy booze and drugs.
Our government offices are filled with lazy bureaucrats who have made an art of looking busy but not doing anything. Do we really need to pay for that?
Worse, all of this government involvement makes everything cost more and hampers innovation. There is no greater example than health care.
You want to see economic growth? Make every able-bodied adult in this country get a job and work for a living, like the rest of us. Get rid of entitlements and other welfare programs and entire departments of federal and state government. In short, get federal and state spending levels back to the levels of 1925.
We didn't need much government while we were growing to become a superpower and we would benefit greatly from a real reduction in government now. Government does far more harm than good. Our founding fathers well understood this and it's a lesson we obviously need to relearn.
You want growth? Imagine no income tax at all, personal or federal. Imagine no capital gains taxes at all, ever. Imagine total taxation of 10 percent for federal and state government, and all derived from consumption taxes. Imagine taxing rich foreigners for an expedited citizenship, one that required someone to be fluent in English and learned about his great history.
If you're wondering who may well lead the charge in undermining the Tea Party's efforts to rein in the Leviathan state, you might not need look any further than the progressive George W. Bush and his proxies.
If you want growth, a new tax -- in this case, a consumption tax, with no reference to any offsetting tax cuts in other areas -- isn't the way to go.
Making it easier for highly educated foreign students to stay, to work, and to apply for citizenship probably would be a boon, but any nation that requires immigration to sustain economic growth is suffering from self-inflicted structural issues, mostly stemming from a welfare state. And there is no real doubt (is there?) that the only way this policy would be enacted with the current politicians in charge is with a "comprehensive" reform that we all know is essentially amnesty for untold millions who we would not quickly assimilate and who would become an even bigger drain on public services.
And education reform is a fine idea, but unless your idea is the ineffective increase of government spending, you're going to face the same issues that are going to make Ryan's plan politically impossible until 2012: a political party so beholden to public-sector unions (including teachers' unions) that they are willing to engage in the worst sort of tactics to protect their wards at our expense and to the detriment of our children.
You want growth? Cut spending, to the degree that we can begin to reduce our monstrous debt; reform the federal entitlement programs that threaten to dominate the budget in the very near future; make the tax code less burdensome and less incomprehensible; break the back of a public-sector union bohemoth that should have never been allowed to exist in the first place; stop the subsidies and other forms of market-distorting corporate welfare; send GM back to the private sector and dismantle Fannie Mae; open domestic energy sources to drilling and mining; and take a machete to regulations, leaving only what's actually needed for a well-functioning society.
The biggest problem with Glassman's plan is that, to the small degree that it could work, it's going to suck the air out of the room for the real work that is to be done.
Don't forget regulations. Re-designing the tax codes is a pretty daunting task while we're already forced to overhaul the major social programs, and it would likely require a constitutional amendment to replace the current 16th. But we could make a similar impact with a major reduction in employment and environmental regulations.
My capchta for this post was "many wishes" which is what this article reminded me of. It is true that getting to 4% growth would be hugely helpful but the way to get as outlined in this article are a bit looney to be kind.
Better and more immigration is not a real solution for us by any means and immigration is not a proven driver of growth.
Reforms to education, nothing like what W. did, would help if we got schools back to teaching basics away from union control and given to more parental responsibility. That however takes time.
Cutting spending to reasonable levels can happen fairly quickly, we can get on the right track with tax reform of various kinds, and reduce taxes on investments and small businesses. Local representatives can encourage a reduction in paper work on the county level as well that would help out thousands of small businesses across the country.
All of these things could help growth a lot. We reduce spending, implement tax reform and long term education reform and we than see 4% growth katie bar the door we are going to be doing very well. Glassman's proposal however doesn't really get us there. Almost surprised to see the article here on NRO.
Although 4% would be a very enjoyable growth rate I'd say we need to go even higher if we wish to truly compete with the rapidly expanding Pacific Rim economies. Right now though we aren't poised to do so per our fiscal, economic, and monetary policies.
Some easy fixes:
- Exempt US companies from paying taxes on products they export overseas. Germany does this and this is why/how German manufacturing dominates many economic sectors around the world. (Keep in mind, Germany is a relatively small nation). The reason you see Mercedes passenger buses everywhere from Madrid to Dubai to Singapore to Mexico City is because Mercedes exports these without paying a domestic tax for example.
- Eliminate corporate taxes completely. No corporation pays taxes anyway - we the consumers pay it at the checkout counter. Cut those rates from 35% to 0%. If that appears to radical then drop it 10% to 25% so that we can at least match the EU's corporate tax rate.
- Reduce energy prices and strengthen the dollar. As long as the former are high and the latter weak we don't stand a chance.
Growth in necessary but not sufficient. The appetites of those who hold the levers of power in government grow at a pace to outstrip any achievable economic growth rate. It is mandatory that we recognize there is a zero sum game between ourselves and government. The more there is of government the less there is of us as individuals, as economic actors. The more there is of government the less there is of a private economy.
Growth is necessary, and it is also necessary that we demand and enforce a government constrained to a modest scope and some sense of humility toward its citizens. Consequently, it is incumbent upon we citizens to have limited expectations of government, and far more rigorous expectations of ourselves. That last part cannot be achieved by any government program or public pronouncement - it must originate with US.
In contemplating Glassman's "exhilirating truth" here, it is worthwhile to consider that Glassman was co-author, with Kevin Hassett, of an article in the September, 1999 Atlantic with the title "Dow 36,000." Here are the first two paragraphs from that article:
"Throughout the 1980s and 1990s, as the Dow Jones Industrial Average rose from below 800 to above 11,000, Wall Street analysts and financial journalists were warned that stocks were dangerously overvalued and that investors were caught up in an insane euphoria. They were wrong.
"Stocks were undervalued in the 1980s and early 1990s, and they are undervalued now. Stock prices could double, triple, or even quadruple tomorrow and still not be too high."
Regarding that consumption Tax ... ADOPT THE FAIR TAX ... sigh ... I know I know ... It is not politically correct for you establishment types to speak of it.
You want growth.
In 1950, Manufacturing accounted for 29.3% of our GDP. Financial services accounted for 10.9%.
In 2005, Manufacturing accounted for 12% of our GDP, and financial services accounted for 20.4%.
Do you see a pattern?
Deregulation - the repeal of Glass-Steagall is the one act that sealed our financial doom. Unless it is re-enacted, you can hope all you want for growth, but it won't happen. We don't have any manufacturing in the United States anymore -- and that was our strength!
This kind of small government, hands off the economy, anti-Keynesian thinking is what primarily prevailed in the Bush Administration in 2007 and the first 9 months of 2008. The result was by far the deepest recession since the Great Depression.
We lost 8.8 million private sector jobs in the downturn that started in late 2007. We lost 2.7 million private sector jobs in the recession in the early 1980's when the Fed raised interest rates to slay the inflation dragon, fewer than 1/3 the total of the current downturn. That early 1980's recession was the worst recession in my memory.
How did we recover from the recession of the early 1980's? We set post WW II records for spending as a % of GDP in FY's 1981, 1982 and 1983. We did not stop setting new records until ALL the lost jobs had been recovered. Further fiscal stimulus came from tax cuts and in 1983 from easing by the Fed. The result was a robust recovery. Keynesian stimulus worked in the early 1980's.
I have not found one deep US recession of the last 80 years where the recovery didn't involve substantial Keynesian stimulus. WW II was Keynes on steroids.
Regarding the current downturn. although we have added private sector jobs for 13 straight months totalling 1.8 million jobs, we are still down over 7 million private sector jobs versus before the downturn. Now is too soon to be making cuts in the deficit. Let's follow the example of President Reagan and continue stimulus until the lost jobs are recovered. Then address the deficit through spending cuts and revenue enhancements.
About a year ago I remember reading that each one million lost jobs had a fiscal cost of about $30-40 billion in lost payroll and income taxes and increased spending for unemployment comp, food and housing assistance, etc. Thus 7 million lost jobs increases the deficit by $210-280 billion.
Yes we need to reduce the deficit once we have recovered the lost jobs. And by more in the 5-10 year time horizon than either the Obama or House budgets. But trying to reduce it too soon is counter-productive.
You want real growth? Get the government out of the way. Remove impediments to investment in manufacturing jobs, and bring back the ones lost. Reform entitlements to give people greater flexibility and reduce unfunded mandates - want to retire at 65? Take responsibility for your future - don't ask the American taxpayer to do it for you. Eliminate both corporate and personal income taxes and implement the Fair Tax (H. R. 25). And find a way to revalue and strengthen the dollar. Otherwise, this slippery slope we're on will become a sheer cliff, and we'll never recover.
I have a question ? If industry is so important to the growth of this nation, why are all the big corps like catapillar, etc are all gaining big money in OTHER NATIONS, mainly africa? Why are we investing in that country instead of our own? Why are the feds buying ALOT of land in America? Why isn't the RICH americans investing in their own country instead of sending BILLIONS to 3rd world countries. Why is big corporation poisoning the air and food we eat? Why are powerful people trying to dump the dollar for a universal currency?
IN my view unless all these are CHANGED, this country is doomed.
I am NOT repub or dem. I just don't understand what the problem is if we address and CHANGE the above issues I mentioned.
In 1950, the United States had most of the world's surviving manufacturing capacity. That's because Europe and Japan were smoking ruins. They aren't anymore.
>"America needs more young, skilled workers, and the best way to augment the homegrown variety is with foreigners — many thousands of whom we currently educate and then force to go back home."
Wow, talk about your one trick pony ...
What's that saying, "In Gods name, go!" If everybody associated with George W Bush slunk off into the darkness the country would be so much better off.
