Politics & Policy

The Magic of 1 Percent

Everything depends on economic growth.

In 1850 sub-Saharan Africa had about the same GDP per capita as America. The difference between America’s average standard of living today and that of Burundi is a mere 0.9 percent of extra growth a year. If Presidents Lincoln through Reagan had put in place policies, taxes, or regulations that slowed economic growth a mere 1 percent of what it actually was, 99 percent of us would now be living in soul-crushing poverty.

That is why America’s anemic 1.3 percent growth rate last quarter is worrying. Moreover, what was by comparison a sterling 1.8 percent growth rate in the first quarter has been revised almost out of existence, to a measly 0.4 percent. Despite a massive government stimulus program that added trillions of dollars to the nation’s liabilities, real GDP has risen just 0.7 percent over the 14 quarters since the recession began, compared to an average increase of 9.9 percent in past recession/recovery cycles.

Let’s be clear about something. If the United States does not restart its growth engine, everything else falls apart. Everything. We need to more than triple the current growth rate just to keep unemployment where it is. And where it is, is in a really bad place. If unemployment were properly measured so as to include those working part-time who wish to work full-time, along with those so discouraged that they gave up looking for work, then we would find that almost one in five Americans is out of work. This is Great Depression levels of unemployment.

By almost any measure one cares to look at, the economy is on life support. What is truly amazing is that the administration and much of Congress are apparently willing to pull the plug. Tax proposals continue to proliferate, while a tidal wave of regulations (taxes by another name) descends on American businesses. Every new tax or regulation serves to lower our growth rate by some small fraction. Unfortunately, those minute fractions rapidly add up to a really nasty number.

Some time back, I attended a conference on homeland security where it was pointed out that the accumulated cost of all the security measures then on the drawing board would reduce our future GDP growth by 1 percent a year. The senior government official present remarked, with an air of nonchalance, that “1 percent is a small price to pay for security, and I am sure Americans would not mind paying it.” Similarly, 1 percent annual GDP growth has been called a small price to pay if it wards off the mirage of global warming. Nor is forfeiting 1 percent too much of a burden if it acts to shackle our banks so they can never again make another mistake. Who cares if in the process of outlawing risk we also make banks incapable of accelerating economic growth?

One wonders if today’s policymakers and regulators would be so cavalier about enacting measures that will destroy 1 percent of annual growth if they had any idea of what that really meant. If the economy continues growing at its current annual rate, U.S. GDP will double in 90 years. If we cannot do any better than last quarter’s 0.4 percent, however, it will take almost two centuries to double. But if we added a mere 1 percent to our current annual growth rate we would double the size of the nation’s economy in 40 years. Of course, even that pales when compared to what will happen if we achieve higher growth rates. If we could realize just the normal post-recession growth and maintain it, we would more than double the size of the economy by the end of the decade.

As that may be too much to hope for, let’s cut that torrid pace in half and shoot for what we achieved during the Reagan years. Such a relatively modest rate of growth would double the size of the economy every 16 years. That would mean that when today’s newborn finishes high school our GDP would be $30 trillion. When his or her first child starts school the economy would be a whopping $60 trillion. Consider how much easier it becomes to pay for Medicare, Medicaid, Social Security, and a host of other government goodies if there is a $60 trillion pot to draw from, compared to approximately $15 trillion today.

Forgoing a mere 1 percent growth through needless regulations wipes out close to $150 billion in potential growth in a year. That is more than all the “tax the rich” proposals the administration has put forward during the debt crisis. Through compounding, that annual loss of 1 percent would cost the economy almost $2 trillion in forgone growth by the end of the decade. Even in Washington $2 trillion still counts as a lot of money. It is, for instance, enough to pay the average salary of 8 million unemployed Americans for the next half-dozen years.

Given the long-term cost of slowing economic growth by a mere 1 percent, it takes a special kind of idiot to advocate growth-destroying policies and needless regulations. One is therefore amazed to find so many of them concentrated in just a few square miles in Washington.

— Jim Lacey is professor of strategic studies at the Marine Corps War College. He is the author of the recently released The First Clash and Keep from All Thoughtful Men. The opinions in this article are entirely his own and do not represent those of the Department of Defense or any of its members.


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