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.
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.