"A Path to Growth, Part 2"

Sydney M. Williams

Thought of the Day

“A Path to Growth, Part 2”

August 1, 2011

President Obama’s economic policy is simply not working. That was made starkly clear when the second revision was made to first quarter GDP on Friday. Growth in that quarter was 0.4%, a number far below estimates, but one that surely did not surprise the 14.1 million unemployed, nor especially the 6.3 million Americans who have been out of work for six months or longer. (GDP growth in last year’s fourth quarter was also lowered from 3.1% to 2.3%.) The initial GDP number for the second quarter – 1.3% – suggests that the economy continues sluggish. This should be unacceptable to Americans.

The focus on debt and the deficit ceiling is critical. We live in a society that encourages people to live beyond their means, and we have a government that promises what it cannot honor. A cynic would argue that entitlements have been traded for votes and, with 51% of Americans paying no federal income tax and 70% of Americans receiving more from the government than they pay in, facts would seem to support the cynics’ view.

That there are 50 million recipients of Social Security and Medicare has frightened politicians who put personal re-election above country – keep in mind, only 130 million people voted in the 2008 election! (Also, remember President George Bush’s attempt at Social Security reform in 2005 – when neither he nor his Vice President were planning to run for office again – was defeated by members of his own Party and by a powerful campaign by AARP.) Nevertheless, the issue has to be debated. Other than Paul Ryan, Republicans have been too timid to broach the subject and Democrats get huffy and repeat ad nauseum that they will do nothing to damage the life style of the elderly; they won’t throw grandma off a cliff like their Republican opponents. But the reality is that changes have to be made, or else the problems we face today will seem innocuous compared to the ones we will face tomorrow. The people, in my opinion, are light years ahead of the politicians on this issue; what they want is an honest debate with the issues and alternatives laid clearly before them.

The issue of entitlements is directly linked to economic growth. We can envision the future of our country as at a crossroads. One direction leads to government playing a bigger role in all our lives – the ultimate end being some variation of Socialism. That path has seductive possibilities, for it suggests fairness and equality of output in a communal society, one where people should not have to worry about poverty or healthcare – where the needs of the many take precedence over the demands of the few. Such a trend, though, would have government be the final arbiter for the allocation of capital. Nevertheless, it is a legitimate political philosophy. However, proponents of such a path must be honest about the costs that will be incurred; frankly, an unlikely prospect. Those costs will not only be financial – higher taxes will have to be levied, as government would consume an even larger percentage of GDP – but the costs also entail increased regulation and restrictions and, more important, the curtailing of certain individual rights.

The other road could be labeled the free markets path, a route along which people would become more self-reliant, taking responsibility for their actions – rewarded for success and punished for failure. While equality of opportunity should be a requisite in any state, there never will be equality of outcomes. The former road has a soft and comfortable feel to it, while this path will seem harsher, and perhaps intimidating – a survival of the fittest environment. Along this path, the costs are far more obvious and we are constantly reminded of them by politicians on the left – an uncaring government, an ever-widening gap between rich and poor and a society that risks ignoring the needs of those most in want. On the other hand, it is the benefits of this path that are rarely enunciated, or at least well understood, the most important of which is that it provides an environment that allows entrepreneurs to thrive – and entrepreneurs drive economic growth. Additionally, personal liberties would take precedence over demands of the state.

Reality and common sense suggest, though, that the most optimum path is one nearer the center, and it is down that road that most people would like to travel. It is why Tom Friedman calls for a return of “Poppy” (G.H.W. Bush.) It is why the Wall Street Journal and John McCain have called the Tea Party “Hobbits” and why the Financial Times refers to the “implacability” of the Tea Party. But all these calls for civility and moderation (attributes I prefer) ignore the trajectory of the flight path we are on. Over the past fifty years or so, we have been tilting dangerously – from an economic perspective – to the left of center. It has been that tilt that has created these fabulous entitlements that we can no longer afford. It is the obligations that those entitlements entail that gave birth to the Tea Party movement.

America needn’t become a disciple of Ayn Rand, but it also cannot afford to persist in the direction it is going. President Obama, with Obamacare, Dodd-Frank and his enormous stimulus, has tilted the direction of the country even more meaningful toward becoming a full bodied welfare state, thereby ensuring that debt will continue to increase at a rate exceeding growth in GDP. The debt ceiling increase that is expected to pass this afternoon is an amazing example of government chutzpah. A $2.4 trillion add-on to the $14.3 trillion current ceiling represents a 16.7% increase – for two years! And that’s austerity!

There is no one so callous as to want to throw the elderly, the sick or the needy overboard. The question becomes simply: what can a caring society afford, yet grow meaningfully? What policies need be implemented to give the private sector the confidence it needs to invest and hire. Simple math explains that the faster the economy grows, the greater the revenue for the government. Faster economic growth, not higher tax rates, will feed government’s insatiable appetite.

Fiscal and monetary policy should have that end in mind. Recent GDP numbers suggest that thus far the Administration’s policies have been an abysmal failure. As mentioned above, there are 50 million Americans currently receiving Social Security and Medicare. Over the next twenty years an additional 75 million will become eligible. In 1835, Alexis de Tocqueville published, Democracy in America. In it he wrote “The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.” With more than half of working Americans paying no federal income tax and with almost three quarters receiving more from government than they pay in, have we not reached that point?

Many of our choices should not be difficult: the age for receiving Social Security benefits could be extended a year or two; a means test could be employed, and payroll taxes could be levied on incomes above $106,800. Similar changes will have to be made to Medicare. Henry Waxman and his ilk should no longer be able to keep expanding the numbers of people eligible for Medicaid. People have to be made to understand that in life there will always be those that do better than others, whatever the reason. A utopia of fairness cannot be legislated or mandated.

Tax reform should also be implemented, with nominal rates lowered, flattened and made more inclusive, so that every working man and woman pays something. Government should never be considered free. A tax code that encompasses over 7000 pages serves no one other than tax lawyers, accountants and the handful of individuals and corporations who can afford to scour its labyrinth for exclusions and exceptions.

Most of these recommendations are similar to the findings from the two bi-partisan debt/deficit commissions whose findings the President has thus far chosen to ignore, (and likely will accord to findings the new commission today’s agreement creates.).

Above all, policy should be about getting the economy back on a growth path. Policy should understand how the future will be different from the recent past – that, for example, our consumer and housing sectors will be relatively less important and that exports to the billion consumers in emerging nations will become relatively more important. It means passing trade agreements that labor unions may not like, but without which the economy will wither. A deleveraging consumer, who represents nearly 70% of the nation’s GDP, is tough to replace, but one obvious area is global trade, currently about 10% of GDP. That means improving our competitiveness, not by lowering the value of the dollar, but by working smarter and harder. Richard Rumelt, professor of business at the UCLA Anderson School of Management, wrote in last weekend’s Wall Street Journal, “…it would be wiser to focus on transitioning from credit driven economic growth to growth that is once again driven by new productive investments. The key policy aims should be removing the tangle of tax, policy, regulatory and human capital impediments to domestic private investments.”

The nation must become more open to immigration: at the low end for workers that will perform jobs that many Americans have come to believe is beneath their dignity, as well as the more obvious granting of paths to citizenship to all foreign students who graduate from our colleges and universities. It means reforming our schools, welcoming competition and rewarding teachers for success and firing those who fail. It means encouraging investment and providing visibility to small businesses, which in turn will evaporate uncertainty and encourage expansion, which will increase employment.

There is a path to growth and prosperity. But government must give the lead to the private sector.