Magazine | July 4, 2011, Issue

Growth Formulas

A symposium

Cut Taxes

Federal spending is scheduled to remain above 24 percent of GDP, five percentage points higher than the 19.2 percent average of 1997–2007. Pushing the highest tax rates higher could not begin to finance such a spree. The individual income tax has never brought in much more than 8 percent of GDP, whether the top tax rate was 28 percent or 91 percent.

Cutting the top corporate-tax rate from the current 35 percent to 25 percent offers a lot of bang for no bucks. Bruce Bartlett noticed that in the United States “corporate tax revenues as a share of GDP are the lowest among all major countries,” yet corporate-tax rates averaged only 26 percent among the six countries with the highest revenues. The Cato Institute’s Chris Edwards discovered that 19 major countries that cut corporate-tax rates from 45 to 29 percent between 1985 and 2005 saw corporate-tax revenues rise from an average of 2.6 percent of GDP to 3.7 percent. What’s good for business is good for the treasury.

I also like Edwards’s proposal to limit growth of government spending to 3 percent per year, with automatic, across-the-board cuts if spending gets off track. Exempting “mandatory” spending is inadvisable: It would be better to compel politicians to trim those programs incrementally than to rely on sweeping plans that might be undone, if ever actually enacted.

With a near-freeze on spending and a competitive corporate-tax rate to lift the economy, the ratio of spending to GDP would wind back down toward the affordable historical norm. Will that policy mix boost economic growth? Yes, of course.

– Mr. Reynolds, a senior fellow of the Cato Institute, was SMALLCAPSNational Review’s economics editor from 1972 to 1976.

Consolidate Finances

U.S. debt has climbed to a level not seen since the end of World War II, and this means that uncertainty about future policy is at a record high as well. Such uncertainty has a chilling effect on economic activity. Businesses are sitting on their money because they have no idea how high their taxes will be tomorrow and even less clarity about the rules of the game.

Reducing that uncertainty should be policymakers’ main objective. The easiest way to do it is for the federal government to pursue a sizable “fiscal consolidation,” a long-term economic plan for lowering the debt and deficits. Last year, I completed a survey of historical consolidations with my American Enterprise Institute colleagues Andrew Biggs and Matt Jensen. We reviewed fiscal reforms in 21 Organization for Economic Cooperation and Development nations over 37 years and found that only about one in five managed to reduce their debt-to-GDP ratio by 4.5 percent or more in three years. In order to maximize the chances that the United States will achieve such a reduction, Congress should copy the successful consolidations.

These nations, on average, drew 85 percent of their fiscal consolidation from spending reductions. Successful consolidators tend to find their cuts in longer-term obligations, with 38 percent coming from entitlement spending and 25 percent from government salaries. Reducing social transfers improves incentives to work and save. A reduction in government pay leaves more resources available to the private sector.

But perhaps more important, a focus on long-term austerity demonstrates a commitment to fiscal solvency that financial markets will find reassuring, and businesses will find liberating.

– Mr. Hassett is a resident scholar at the American Enterprise Institute.

#page#Open Trade

If we want to create thousands of jobs, increase economic growth, and make goods more affordable for consumers, we should pass the pending free-trade agreements with South Korea, Panama, and Colombia.

Economists often disagree on the macroeconomic effects of monetary and fiscal policies, but on trade they agree: When people are free to buy from, sell to, and invest with one another as they choose, they can achieve far more than when governments attempt to control economic decisions.

Free trade brings benefits to consumers in the form of lower prices and more choices. It brings benefits to businesses in the form of more opportunities for expansion and economies of scale. It is good economic policy, and even President Obama has indicated that he supports the trade agreements.

So what’s the hold-up?

As a favor to his friends in organized labor, President Obama is withholding support for the pending trade deals until Congress passes an extension of expanded “trade adjustment assistance” included in the stimulus bill that expired earlier this year. That program pays money, on top of unemployment benefits, to workers who can claim to have lost their jobs because of competition as a result of free trade. Much of that money is paid to union members, and it is on behalf of those unions that the president is holding up the trade deals that will contribute significantly to our nation’s economic growth.

– Mr. Chocola is president of the Club for Growth.

Ban Software Patents

If Thomas Edison was right that genius is 1 percent inspiration and 99 percent perspiration, one has to marvel at the perversity of our patent laws, which have become a serious drag on innovation and growth. As the economists Michele Boldrin and David K. Levine argue in Against Intellectual Monopoly, patents have, since the earliest days of the industrial revolution, proven a drag on economic progress, shielding sluggish incumbents from nimble competitors.

Most of the great enterprises of our time weren’t built on a great new idea; they were built on superior execution. Google borrowed heavily from, the pioneering social-network service, was buzzworthy years before Mark Zuckerberg dreamed up Facebook. Fortunately for us, failed to patent its core ideas, and the SixDegrees patents were owned by an early Facebook investor. Had patents gotten in the way, there’s an excellent chance that Google and Facebook would have been killed in the crib, leaving us with inferior alternatives swaddled in the warm embrace of Johnny Law.

Today’s leading technology firms invest vast sums in buying up software patents, almost entirely for the purpose of avoiding expensive (and usually meritless) litigation.

One good way to kick-start growth would be to ban software patents. This would, among other very good things, allow technology firms to compete on the basis of which of them does the best job of meeting the needs of customers, and not which of them has the most aggressive legal department.

– Mr. Salam is the author of National Review Onlines domestic-policy blog, The Agenda.

#page#Seven Questions

Economists have studied the effects of regulation on economic growth for many years. Their main conclusion is that a heavier regulatory burden — particularly in product and labor markets — reduces growth and promotes informal markets. The implications are clear: Regulatory reforms, especially those that liberalize market entry, are very likely to spur investment and growth.

I could give you a long list of regulations that need to be eliminated, such as the Securities and Exchange Commission’s Fair Disclosure Rule or any number of federal workplace-safety rules. But a long list of individual regulations would not focus proper attention on the problem that produces such a long list.

We have tried reforms before, but the results have been middling at best. Agency rulemaking too often yields poor analysis and more regulations rather than effective problem-solving, a fact visible in the 165,000 pages of rules in the Code of Federal Regulations, rules that are strangling U.S. businesses and making them less competitive.

Before adopting a single new regulation, we should ask: 1. Is there a significant systemic problem that is unlikely to resolve itself in the near future? 2. Is the federal government in the best position to solve this problem? 3. Does the regulation in fact address the identified systemic problem? 4. What is the range of potential solutions available? 5. Would a potential solution give rise to other significant problems (e.g., in risk-risk trade-offs)? 6. Would the preferred solution solve the problem at a reasonable cost? 7. Will the agencies be able to recognize when the problem is in fact solved and eliminate the regulation when it becomes obsolete?

Currently, government agencies are focused on checking the procedural boxes and pushing new regulations out the door. We want them focused on solving problems — which is not the same thing.

– Veronique de Rugy is a senior research fellow of the Mercatus Center at George Mason University.

Don’t Manage, Govern

Two years of twiddling the economic dials has not restored the U.S. economy to a path of strong growth. Policymakers should recognize that government’s role is not to create economic growth, but to create the conditions under which employers, workers, and consumers create growth.

Conditions are bleak in part because government finances are so out of whack. Short-term interest rates are low, but firm managers aren’t stupid. They know that once growth recovers, sharp interest-rate increases are likely to afflict a federal government that already owes 70 percent of GDP in debt and will borrow another 10 percent this year — a government that already has received warnings from the three major credit-rating agencies but so far has been unable to significantly slow the growth of spending.

And managers also fear that President Obama will insist that further big tax increases (on top of those enacted over the past two and a half years) be included in a deficit-reduction deal. They know that in the past policymakers have often combined temporary reductions in Social Security, Medicare, and Medicaid spending with permanent tax increases, repeating this process every decade or so.

Rather than try to “fix” the housing market or  goose short-term growth, policymakers should fix the problem that it is their job to fix. This means negotiating a short-term deficit-reduction deal, as is typically done every five to seven years, as well as enacting structural changes to the major entitlement programs. Incremental tweaks to Medicare and Medicaid, with no changes to Social Security or Obamacare, will buy America at most only another few years before fiscal trouble returns.

–Mr. Hennessey is a research fellow of the Hoover Institution.

#page#Mind the Money

To understand why the recovery has been so anemic, one need look no further than our nation’s balance sheets, particularly those of households. Since the third quarter of 2007, when household net worth was at its peak, households have lost around $7.6 trillion worth of assets. Despite these massive losses and the subsequent slump in personal-income growth, households have somehow increased their holdings of money and money-like assets by a staggering $1.4 trillion. Corporate balance sheets have added another $355 billion in money assets. In other words, households and businesses are sitting on their money. It is a key reason the recovery has been so weak.

One of the reasons for the elevated demand for money is uncertainty about future income. Another is uncertainty about monetary policy, owing to the ad hoc nature of the quantitative-easing programs. The Federal Reserve could change all of this by explicitly adopting a target for the growth of total current-dollar spending. For instance, the Fed could set a target of 5 percent nominal GDP growth, which probably would produce something like 3 percent real growth and 2 percent inflation. The mix might change as the Fed added or subtracted liquidity in response to economic conditions, but the target would stay the same. That would relieve uncertainty about future Fed actions while allowing for a brief period of catch-up spending to reverse the present elevated demand for money. Such a policy would not solve all our economic problems, but it would go a long way in fostering a more robust recovery. It would also provide a nice way for Congress to narrow the mandate of the Federal Reserve.

– Mr. Beckworth is a professor of economics at Texas State University.

Human Capital

In the short run, economic growth can be affected by programs such as stimulus spending and TARP. But in the long run, it is determined by a combination of institutions and human capital — the talents and habits of the population.

One practical thing we can do to improve human capital is to improve our schools. This should have two key parts. First, the federal government should establish a comprehensive national exam by grade level to be administered by all schools  that receive any federal money. We should require each school to publish all results, along with detailed data about school budgets, performance, and so on, each year. Second, continued federal funding should be contingent on states’ passing model-schools legislation that creates simple, uniform rules for establishing new charter schools and introduces the principle that funding follows students.

The primary role of the federal government would be to ensure consistent high-quality information, provide normal market regulation to allow education providers to achieve efficient scale, and sponsor rigorous basic research on educational practices. The role of education providers would be to compete entrepreneurially within this framework.

This will not be a panacea. In a nation in which about 40 percent of all births occur out of wedlock, many children will be left behind. But better schools will create material improvement. And this method is not theoretical: Versions have already been implemented successfully in Sweden and the Netherlands, and a similar program is being implemented in Britain now.

The United States is in a brutal international competition to raise productivity. We will improve our human capital, or we will sink into mediocrity.

– Mr. Manzi is a senior fellow of the Manhattan Institute and the chairman of an applied-artificial-intelligence software company.

#page# ‘Real Industrial Entrepreneurs’

Given America’s growing public debt, out-of-control federal and state deficits, and forthcoming health-care and Social Security bills, it is understandable that much of the focus for getting America’s economy back on track is upon reducing government overreach. That is an important first step, but in a sense it is a mere preliminary to the main game. In the long term, the only way for the economy to grow is through wealth creation. That means America needs to be thinking about entrepreneurship.

It’s difficult to overestimate how much entrepreneurship marks America’s economic culture as different from, for example, what we find in most of Western Europe. Survey after survey underscores that most Americans would prefer to work for themselves. Western Europeans, by contrast, crave security. Alexis de Tocqueville expressed his astonishment at “the spirit of enterprise” characterizing 19th-century America. “Almost all of them,” Tocqueville scribbled in one of his notebooks, “are real industrial entrepreneurs.”

We must rediscover the moral, legal, institutional, and cultural settings that allow entrepreneurship to flourish. We must also take practical steps, for instance liberalizing the labor-market regulations that bind large-scale entrepreneurs with inflexible union contracts. We should ease the process of hiring and firing employees, allowing entrepreneurs to take more and faster risks with new ideas, products, and services. An entrepreneur in the European Union must always think long and hard about hiring anyone, because once he has taken someone on, it is hard to remove that person, even for gross incompetence. With Obama’s National Labor Relations Board growing ever more aggressive, we are moving in precisely the wrong direction for entrepreneurs.

– Mr. Gregg is research director of the Acton Institute. His books include The Commercial Society and Wilhelm Röpke’s Political Economy.

Help Wanted

When Washington talks about Social Security’s funding, the problem is usually stated thus: “With the population aging, we have too few workers and too many retirees. The ratio of taxes paid in to benefits paid out is unsustainable.” Thinking like this is what gives Washington its reputation for obtuseness: Politicians think workers exist to pay taxes, but workers really exist to work — to build things, to create things, to provide useful products and services. If you look at the historical growth rate of the U.S. economy, you’ll see that GDP per capita has chugged along more or less steadily at 2 percent growth per year going all the way back to the Depression. But the real growth rate has averaged just over 3 percent; that additional growth has come from a growing work force. If you have an aging population and a relative decline in the number of people available to do productive work in the real economy, balancing the welfare books is not your biggest problem. You can cut those Social Security checks, but if that money is going to be exchanged for real goods and services, somebody has to provide them.

Immigration is not only an economic question, but to the extent that it is, our system is counterproductive: We send the Ph.D.s and engineers home to Taiwan and India but keep the illiterate Latin American farmhands, legal or illegal. At least one of those things should change, and probably both.

NR Staff — Members of the National Review editorial and operational teams are included under the umbrella “NR Staff.”

In This Issue


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Growth Formulas

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