“Once one starts thinking about [actions to accelerate economic growth], it is hard to think about anything else.” — Nobel Economic Laureate Robert Lucas
The Supercommittee, if rumor, speculation and common sense can be credited, now will shirk its role as political suicide bomber. The Supercommittee was created in a fit of ambiguous revulsion against the truly gargantuan, obnoxious, deficit. It got off on a macho, but false, premise: that the path out was by mutual pain: raising taxes and cutting entitlements.
Wrong premise. There is a way to balance the budget. Figure out how to get the economy growing at 4% (or even 5%) instead of its current stupefied 2% range? Extra growth compounds fast. Accepting stagnation — economic growth that barely keeps up with population growth — means that nobody prospers except at the expense of others. No wonder most Americans consider the country off track. Americans are committed to prosperity.
As economist Ike Brannon (and as has been here previously cited) observed: “The primacy of economic growth in generating tax revenue cannot be overstated: the fastest post-war increases in tax revenue growth occurred in 1997-2000 and 2004-2007, when revenues went up by nearly 50% in each instance. Tax rates did not go up at all during that time — the rapid increase in revenue occurred because we were in a sustained period of strong economic growth.”
There is a cornucopia of plausible, palatable, recipes for such growth. Economic growth has been addressed by many distinguished economists. In pondering economic growth dynamics future Nobel laureate Prof. Robert Lucas laid out the questions he was formulating on behalf of poorer countries struggling to achieve prosperity:
Is there some action a government … could take that would lead the … economy to grow …? If so, what, exactly? …. The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else. (Lucas, “On the Mechanics of Economic Development.” Journal of Monetary Economics 22: 3–42, p. 5; italics original.)
Similar questions apply to America’s current predicament. According to an article in The Concise Encyclopedia of Economics, Lucas also did important work on the optimal tax structure. His work led him to change a fundamental belief. In the early 1960s, he had believed that “the single most desirable change in the U.S. tax structure would be the taxation of capital gains as ordinary income.” By 1990 he believed that “neither capital gains nor any of the income from capital should be taxed at all.” He estimated that eliminating capital income taxation would increase the U.S. capital stock by about 35 percent. This belief in low or zero taxation of capital gains is often attributed to believers in so-called supply-side economics. Lucas wrote, “The supply side economists, if that is the right term for those whose research we have been discussing, have delivered the largest genuinely free lunch that I have seen in 25 years of this business, and I believe we would be a better society if we followed their advice.”
Washington need not reach as high as laureates such as Prof. Lucas or Prof. Robert Mundell to find credible growth recipes (although one hopes it will). There are growth proponents right here. And Washington need not look exclusively to the right. Economic growth is as compelling to the the populist, ethnic and labor left as it is to right wing “market fundamentalists.”
Republicans on the Supercommittee can look to the usual (and worthy) suspects: on tax policy, for instance, the Free Congress Foundation, led by former Virginia Governor Jim Gilmore (who should be on every Republican’s short list for the Vice Presidency), and to the Heritage Foundation and Cato Institute. On regulatory and civil law reform matters Republicans and centrist Democrats can look for solid thinking to the rising star Phoenix Center, the Manhattan Institute, and the Kauffman Foundation, among others.
On monetary policy both right and left can look to the American Principles Project and the Lehrman Institute (with both of which this writer is professionally associated) to the Atlas Economic Research Foundation’s Sound Money Project and to scholars such as George Mason’s Lawrence White. The gold standard, championed before it was cool by Forbes.com’s opinion editor John Tamny (not to mention former presidential candidate Steve Forbes himself), has recently been shown by pollster Scott Rasmussen as, properly configured, hugely popular with voters — particularly among African Americans and labor union members, two constituencies long wistfully coveted by most Republicans.
The parties honorably and ardently can compete for the better plans for economic growth, and should— as they did in the 1980s with competing income tax rate reduction proposals. The Democrats have solidly liberal growth-oriented thinkers. Strikingly intelligent proposals for economic growth are emerging from the center left. The former president of the SEIU, Andrew Stern, has called for the repatriation of over a trillion dollars of capital by a (temporary) repatriation tax rate of 5.25% (from 35%). MoveOn.org co-founder Joan Blades supported by this columnist) calls for policies to facilitate telecommuting which painlessly could add between $266 billion to over a trillion dollars to the GDP every year. Dr. Robert Atkinson at ITIF presents extensive, innovative and credible policy reforms designed to promote technological innovation dramatically to grow the economy. Bill Clinton‘s most authoritative source of successful economic policy, Will Marshall’s Progressive Policy Institute, advocates smart reforms to enhance productivity, among other things, in the medical services sector. This kind of competition will put America back on track.
Washington, from President Obama on up, largely has reverted to type in blame-shifting and name-calling. One hopes it is temporary. As Sylvia Nasar writes in The Story of Economic Genius … her newest tour de force, a compelling and defining retracing of the roots of economic growth thinking… in the mid-19th century: “Radicals claimed that (the cause of low wages and poverty) was the rapacity of employers, while Malthusians argued that it was the moral failings of the poor.” Sounds familiar.
Ms. Nasar traces the hopeful strain of economic growth thinking back to the dimly remembered Alfred Marshall.
Marshall proposed a different answer: low productivity. He cited as evidence the fact that, contrary to Marx’s claim that competition would cause the wages of skilled and unskilled workers to converge near substance level, skilled workers were earning ‘two, three, four times’ as much as unskilled laborers. … As technology, education and improvements in organization increased productivity over time, the income of the workers would rise in tandem. The fruits of better organization, knowledge and technology would, over time, eliminate the chief cause of poverty. Activity and initiative, not resignation, were called for.
Activity and initiative again are called for. Economic growth, not partisan bickering, was what brought Great Britain and the world to an unparalleled era of affluence for workers and investors both. Economic growth may, indeed is the only thing that can, propel us to new heights of prosperity with equity.
As Sir Winston Churchill famously never said “You can count on Americans to do the right thing — after they have tried everything else.” Having, now, earnestly, tried everything else the brighter lights of the Supercommittee — hello Jeb Hensarling and Chris Van Hollen—now are freed to do the right thing: enter into a serious competition for who can come up with the best planks of a world historical economic growth package. Hold firm, but do not cut, spending. Crunch the numbers; see how fast we reach surplus.
If Congress wishes to “go big” it will tell the Supercommittee to determine how fast it can push America’s real GDP to $20+ trillion. Time to grow up: balance the budget with economic growth fueled by real growth policies and spending restraint.