Here’s a supplement to our previous post on economic growth scenarios, another way to look at the past decade.
Here’s a supplement to our previous post on economic growth scenarios, another way to look at the past decade.
The Congressional Budget Office yesterday published its annual 10-year economic outlook. It says, essentially, the economy will continue expanding for the coming decade at the tepid pace of the last decade. It predicts a slow-growth “new normal” of 1.9% annual expansion extending through 2027. If nothing changed, CBO might very well be correct. Yet it’s possible, even likely, that economic policy will change more in the next few years than any time since the early 1980s, maybe even since the 1930s.
CBO projects growth of 2.3% this year, then 2.0% in 2018, 1.7% in 2019, 1.5% in 2020, 1.8% in 2021, and 1.9% from 2022-2027. It’s a tragic outcome if it comes to pass. We see below what a 1.9% economy got us over the last decade: a gigantic growth gap of around $2.8 trillion in lost output, compared to what we might have expected.
A continuation of the new normal would only compound this shortfall, compared to our economy’s likely potential. In fact, CBO also includes in its latest report an appendix showing the potential effects of productivity growth *even slower* than its central estimate. To be fair, CBO is not predicting slower productivity, just offering useful heuristics to estimate the economic and budgetary effects of slower productivity growth. I think, however, that variance from the baseline scenario will be just the opposite — that productivity growth will surprise to the *upside* over the next 10 years.
The chart above illustrates these scenarios over the coming decade. The gray line is actual real GDP. The light blue dotted line is what the economy would have looked like had the U.S. continued growing at its historical rate after 2007. The growth gap today, at the start of 2017, stands at something like $2.8 trillion (the difference between the gray line and the blue dotted line). Others, using more conservative assumptions, find a gap of around $2 trillion, still a huge shortfall.
The dark blue line is roughly CBO’s projection for the next 10 years — around 2.0% annual growth — which is a continuation of the roughly 2% we’ve experienced in the current expansion. If CBO is correct, the U.S. economy will be something like $6.2 trillion smaller in 2027 compared to what we might have expected in 2007.
The green line shows 2.5% growth, and yellow shows 3.0%, which was about the U.S. average between 1965 and 2007.
The red line shows 3.5%, which many analysts believe is too ambitious a scenario. They think, with some reason, the U.S. economy is maturing and is on a permanently lower growth path than before. Perhaps in the very long term 3.5% is too optimistic. Who knows? But I think the U.S. can grow at 4% or more for the next few years before returning to the longterm average of 3%, which could sum to around 3.5% over the next decade. I say this for three reasons:
(1) The U.S. economy never really recovered from the financial panic and Great Recession. Investment has been weak, job growth was steady but very slow, and entrepreneurship has been wanting. The overall policy environment — on taxes, regulation, and monetary management — has discouraged growth. There’s lots of room to make up.
(2) The policy environment could improve dramatically over the coming years. Big reforms of the tax code and regulatory approaches across dozens of agencies could unleash investment and innovation that’s been pent up for years. Such huge potential policy changes will not only allow us to “catch up” some lost growth from the last decade but can also boost our top-line frontier of innovation and thus growth potential. (There are also of course policy risks, such as rising protectionism, and global risks, such as China’s fragile economy. Yet I think the balance tilts toward growth.)
(3) The productivity plunge of the last decade is nearly over. I believe, based on what I’m seeing across the technology landscape, we are the cusp of a productivity boom. I will have much more to say about this in a forthcoming paper. But if it happens, the productivity increases I’m estimating could lift annual economic growth by nearly a percentage point over the coming decade.
Combining these three factors, I think the red 3.5% growth scenario through 2027 is possible. It would represent a $3.6 trillion GDP improvement over CBO’s estimate for the 2027 economy.
— Bret Swanson
A new policy direction in 2017 could substantially boost the economy. Last week I commented on the 15-year IPO winter and the possibilities for a revival of public equity financing of growing firms.
More broadly, my research for the last 10 years at the U.S. Chamber Foundation has focused on the collapse of economic growth, summarized in the chart below. (See also, for example, The Growth Imperative, Beyond the New Normal, The Growth Agenda, etc.)
This $2.8-trillion “miss” translates into millions of lost job-years and stagnant incomes for most occupations in much of the country.
I’ll have lots more to say about the sources of — and potential solutions to — this growth gap in the coming weeks and months. For now, we highlight these severe shortfalls to reinforce just how crucial a new growth agenda is.
On Sunday, Ross Douthat of the New York Times questioned the courage of Speaker Paul Ryan, asking why he hasn’t stood up more forcefully against Donald Trump. I, too, wish Ryan and other GOP leaders would (or could) explicitly denounce or otherwise frustrate the Trump candidacy. The complexity and delicacy of Ryan’s task, however, should not be underestimated. In today’s environment, might denunciations from the Speaker of the Establishment actually fuel Trump’s fire?
If I sympathize with Douthat’s frustration at GOP “paralysis,” however, I confess befuddlement at Douthat’s key takeaway: that the GOP should consider abandoning a growth-oriented agenda in favor of more Trump-like policy pandering.
One reasonable response to this kind of stark challenge, this incipient revolution, would be soul-searching and a course correction. Trump would not have gotten this far, would not have won so many votes — especially working class votes — if the Kempian vision had delivered fully on its promises, if mass immigration, free trade, deregulation and upper-bracket tax cuts had really been the prescription for all economic ills.
This is baffling. Douthat’s premise is that Ryan’s pro-growth agenda was enacted, and failed. Where has he been for the last 15 years?
Deregulation? The last two administrations, but especially the Obama administration, have built new mountains of regulation in finance (Sarbox, Dodd-Frank), energy (Clean Power Plan, ad infinitum), health care (Obamacare), education, the Internet (Title II), and a host of executive actions.
Tax cuts? The George W. Bush administration mildly cut dividend and capital gains rates the top individual rate, but Obama has mostly reversed those actions and added new taxes as well. The top tax rate is thus 15 points higher than the Reagan-“Kempian” 28% (more like 20% when accounting for state taxes), and much of the rest of the world has in the interim leapfrogged the U.S. in corporate and individual tax policy.
Trade? The Bush administration ran a weak dollar policy explicitly to help U.S. manufacturers and counter the China “threat,” just as Trump might have advised. But the effect was to inflate energy and home prices and contribute to the financial crisis.
Douthat is also worried about Ryan’s proposed entitlement stinginess. But the George W. Bush administration substantially expanded Medicare through the Part D dug benefit, and other safety net programs like food stamps have exploded.
The idea that the ambitious agenda of Ryan, who has been Speaker for a couple months, has not worked is just weird. We’ve been doing just the opposite for the last decade and a half, and the economic results show it.
Douthat has written thoughtfully for many years on the plight of the middle class and, with his coauthor Reihan Salam, presciently urged the GOP to focus on the growing ranks of citizens, invisible to Washington, who now appear to be voting for Trump. For the last several years, conservatives have engaged in a polite debate over the best way to help. Douthat and a host of very smart and admirable policy thinkers have advocated something they call reform conservatism, earning the name Reformicons. The theoretical case, most powerfully explicated by Yuval Levin, emphasizes the importance of human capital – fertility, family, education – and the civic institutions needed to support these things. The cost of raising productive children is rising (I know, I’ve got four between the ages of 8 and 14), and the experiences of Japan, Italy, and other aging societies should be a warning. The resulting policy agenda, however, has proved less inspiring. The basic idea is to more narrowly focus various subsidies, entitlements, and tax benefits on the invisible low- and middle-income groups and explicitly renounce “tax cuts for the rich.”
The Reformicons like to needle growth advocates that they are nostalgic for Ronald Reagan and the 1980s, that we need to modernize our economic program. But I think they have it backwards. Reform conservatism appears to be mostly a rebranding of George W. Bush’s compassionate conservatism – big spending, more entitlements, a focus on targeted tax cuts and benefits, trade protectionism to help blue collar manufacturing, such as the weak dollar policy and Chinese steel tariffs, and efforts to improve human capital, such as No Child Left Behind. It was all well-intentioned, but not so successful. Especially for the Americans those programs sought to help.
I think the Reformicons should be commended for their focus on the middle class in “real America” and especially for their emphasis on human capital. But their attacks on a 21st century growth agenda these last few years may be endangering the very people for whom they are fighting. No doubt, the decline of cultural capital that Charles Murray warned of in Coming Apart is crucial and ever more apparent. But tax credits are unlikely to bring the type of cultural renewal that’s needed. And adopting Democratic tax policy and tax rhetoric isn’t going to win economically or politically. Another substantive problem is that as we build up means-tested credits and benefits for lower and middle income workers, we also impose high marginal tax rates on them due to phase outs. Economics isn’t everything. But the biggest drivers of well-being for moderate income Americans, including the opportunity to escape the cultural vortex and form robust civic connections, are still innovation, productivity, and economic growth.
“Sclerotic growth is the overriding issue of our time,” writes economist John Cochrane.
From 1950 to 2000 the US economy grew at an average rate of 3.5% per year. Since 2000, it has grown at half that rate, 1.7%. From the bottom of the great recession in 2009, usually a time of super-fast catch-up growth, it has only grown at two percent per year2. Two percent, or less, is starting to look like the new normal.
Small percentages hide a large reality. The average American is more than three times better off than his or her counterpart in 1950. Real GDP per person has risen from $16,000 in 1952 to over $50,000 today, both measured in 2009 dollars. Many pundits seem to remember the 1950s fondly, but $16,000 per person is a lot less than $50,000!
If the US economy had grown at 2% rather than 3.5% since 1950, income per person by 2000 would have been $23,000 not $50,000. That’s a huge difference. Nowhere in economic policy are we even talking about events that will double, or halve, the average American’s living standards in the next generation.
I’ve been shouting these ideas from the rooftops for the last five years (see The Growth Imperative, The Growth Agenda, and many more). Although I had no idea Donald Trump would run for office, let alone gain any following, I wrote a memo in 2014 warning of the social implications of an underperforming economy.
“The consequences for human welfare involved in questions like these,” the Nobel laureate economist Bob Lucas wrote in 1988, referring to the topic of economic growth, “are simply staggering: once one starts to think about them, it is hard to think about anything else.” As Lucas explored what made some nations wealthy and others less so, he looked at a number of developing countries and reported the stark differences in growth rates and thus standards of living. Between 1960 and 1980, India, for example, grew 1.4 percent per year, while South Korea grew at an annual rate of 7.0 percent. At those rates, Lucas concluded, “Indian incomes will double every 50 years; Korean every 10. An Indian will, on average, be twice as well off as his grandfather; a Korean 32 times.”
Einstein referred to the same idea when he quipped — apocryphally, it turns out — that compound interest is the most powerful force in the universe. Whoever put those words in Einstein’s mouth was smart. The same idea is behind Moore’s law of microchips. Compound growth is transformative. It trumps all — maybe even a poisonous political environment.
The slow recovery from the Great Recession, on the other hand, is capping middle class incomes, driving Americans out of the workforce, piling up debt, and straining our social fabric. The politics of “inequality” and resentment are a natural outgrowth of such a malaise and can lead to a downward policy spiral if leaders do not offer an optimistic, compelling alternative.
The economy has not reached 3% growth, our historical average, in any of the last 10 years. Not because Paul Ryan’s growth agenda has failed but because in too many cases we did just the opposite.
There is of course no guarantee of 3% growth. It is merely an historical average. And yet there’s lots of evidence that our economy is operating well below potential. Yes, some structural factors like demographics are weighing on growth, but all the more reason to address the policy obstacles holding us back. Cochrane and John Taylor both think with better tax and regulatory policy we could grow at 4% for several years before returning to the long-run path around 3%. By all means, if we improve tax and regulatory policy to unleash the economy and we find pockets of Americans still struggling because of structural defects, let’s work to help those citizens in targeted ways. But it makes little sense to insist on, as the centerpiece of your program, and at the expense of a broader growth agenda, a host of complicated programs, credits, and subsidies seeking to ameliorate the very real effects of a stagnant economy: joblessness, underemployment, a stall in wages, and many resulting social problems.
Some of the Reformicons say its really regulation that’s holding the economy back, so we shouldn’t address taxes. Over-regulation is indeed a massive problem. But we don’t have to choose one or the other. We need to both downsize and modernize the Administrative State and reform the tax code.
And on language: The goal is tax reform — not tax cuts for this group or that. The objective is a new tax code — radically simpler, fairer, and pro-growth. Insisting that Republicans match the Democrats in a pledge against any tax reductions for anyone making $250,000 or more is self-defeating. It adopts the framing of big government advocates. And it makes tax reform impossible. Even corporate tax reform, which the Reformicons support, will reduce taxes for those making more than $250,000. So it appears to be little more than political capitulation that will do nothing to help the invisible Americans they so admirably would like to lift up. The Tax Foundation shows that tax reforms proposed in this campaign would deliver big benefits in jobs and wage growth while boosting GDP and delivering needed government revenues. Let’s not give up before we’ve begun.
“Sclerotic growth is the overriding economic issue of our time.”
– John Cochrane
Lots of people think innovation is over. Robert Gordon, the author of a grand new book called The Rise and Fall of American Growth, thinks the Information Age may be finished. We disagree.
On Thursday, my colleagues in the American Enterprise Institute’s technology program offered views on “Cyberspace policy at home and abroad,” covering the increasingly contentious realms of hacking, encryption, IP, and global Internet governance and the domestic effects of FCC regulation. I spoke for 10 minutes on technology’s broader impact on the economy and addressed the Great Stagnation question. Has a four-decade dearth of technology caused slow growth and inequality, with more disappointment to come? Or could better policy quickly encourage new bursts of innovation and resurgent economic growth? Watch here (with my segment beginning at 3:20:30, if it doesn’t jump there automatically).
Here’s a longer talk covering many of the same topics, from Purdue’s Dawn or Doom 2 tech conference in September.
Here’s a short list of analyses of Jeb Bush’s new tax reform plan, which focuses on reviving economic growth.
The political fights of the last decade have distracted us from what should be, in my view, the central issue of our policy debates—reviving economic growth. First quarter 2015 growth of just 0.2% comes on the heels of a lackluster 2014, when the economy grew just 2.4%. The financial crisis surely took its toll, but for how long can we blame a seven-year-old event, while millions of Americans are denied the opportunities that attend a faster growing economy?
There are many excuses for the first quarter reading. Yes, it was cold. Yes, there might be some statistical aberration—first quarter growth has been conspicuously low for the last few years. But this is not a single-quarter problem. Over the last nine full years, the economy has not achieved 3% growth.
The stock market has recovered nicely, but middle-class Americans and small businesses are struggling with the anxieties of slower growth. If, after the last recession, the U.S. had kept moving ahead at its historical 3% growth rate, the American economy would be $2.3 trillion larger today. (The Congressional Budget Office, using a slightly more conservative analysis, says the economy would be $1.7 trillion larger—still an astounding shortfall.) No, 3% growth is not a law of nature. It is no guarantee. But the failure to clear away self-defeating policies is simply unacceptable. continue reading . . .
On February 28, the Bureau of Economic Analysis revised fourth quarter U.S. GDP growth downward to just 2.4% from an initial estimate of 3.2%. For 2013, the economy expanded just 1.9%, nearly a point lower than the lackluster 2.8% growth of 2012. Five years after the sharp downturn of 2008-09, we are still just limping along.
Granted, the stock market keeps making all-time highs. That is not insignificant, and in the past rising stocks often signaled growth ahead. Another important consideration weighing against depressingly slow growth is a critique of our economic measures themselves. Does gross domestic product (GDP), for example, accurately capture output, let alone value, technical progress, and overall wellbeing? A new book GDP: A Brief But Affectionate History, by Diane Coyle, examines some of the shortcomings of GDP-the-measure. And lots of smart commentary has been written on the ways that technologies that improve standards of living often don’t show up on official ledgers — from anesthesia to the massive consumer surpluses afforded by information technology. In addition, although income inequality is said by many to have grown, consumption inequality has, by many measures, substantially fallen. All true and interesting and important, and worthy of much further discussion at a later date.
For now, however, we still must pay the butcher, the baker, and the aircraft carrier maker — with real dollars. And the dollar economy is not growing nearly fast enough. We’ve sliced and diced the poor employment data a thousand ways these last few years, but one of the most striking recent figures is the fall in the portion of American men 25-54 who are working. Looking at this cohort tends to minimize the possible retirement and schooling factors that could skew the analysis. We simply presume that most able-bodied men in this range should be working. And the numbers are bad. As Binyamin Appelbaum of the New York Times Economix blog writes:
In February 2008, 87.4 percent of men in that demographic had jobs. Six years later, only 83.2 percent of men in that bracket are working.
Are these working-age men not working because they are staying home with children? Because they don’t have the right skills for today’s economy? Because the economy is not growing fast enough and creating enough opportunities? Because they are discouraged? Because policies have actively discouraged work in favor of leisure, or at least non-work?
The polymathic thinker Herman Kahn, back in the 1970s book The Next 200 Years, suggested another possibility. Kahn first recounted the standard phases of economic history: a primary economy that focused on extraction — agriculture, mining, forestry; a secondary economy focused on construction and manufacturing; and a tertiary economy, primarily composed of services, management, and knowledge work. But Kahn went further, pointing toward a “quaternary society,” where work would be beside the point and various types of personal fulfillment would rise in importance. Where the primary society conducted games against nature, the secondary society conducted games against materials, and the tertiary society pitted organizations against other organizations, people in the quaternary society would play “games with and against themselves, . . . each other, and . . . communities.” He said much of this activity, from obsessions with gourmet cooking and interior design to hunting, hiking, and fishing, to exercise, adventures, and public campaigns and causes. He said quaternary activities would look a lot like leisure, or hobbies. He predicted many of us in the future would see this as “stagnation.”
If any of you have checked out twitch.tv, you might think Kahn was on to something. Twitch.tv is a website that broadcasts other people playing and commentating on video games in real-time. It appears to be an entirely “meta” activity. But twitch.tv is no tiny fringe curiosity. It is the fourth largest consumer of bandwidth on the Internet.
Is twitch.tv responsible for millions of American men dropping out of the labor force? No. But the Kahn hypothesis is, nevertheless, provocative and worth thinking about.
The possibility of a quaternary economy, however, depends in some measure on substantial wealth. And here one could make a case either way. Is it possible the large consumer surpluses of the modern knowledge economy allow us to provide for our basic needs quite easily and, if we are not driven by other ambitions or internal drives, live somewhat comfortably without sustained effort in a conventional job? Perhaps some of this is going on. Is America really so wealthy, however, that large portions of society — not merely the super wealthy — can drop out of work and pursue hobbies full time? Unlikely. There is evidence that many Baby Boomers near retirement, or even those who had retired, are working more than they’d planned to make up for lost savings. Kahn’s quaternary economy will have to wait.
I say we won’t know the answers to many of these questions until we remove the shackles around the economy’s neck and see what happens. If we start fresh with a simple tax code, substantially deregulate health, education, energy, and communications, and remove other barriers to work, investment, and entrepreneurship, will just 83% of working-age men continue choosing to work? And will GDP, as imperfect a measure as it is, limp along around 2%? (Charles Murray, presenting a new paper at a recent Hudson Institute roundtable on the future of American innovation, hit us with some seriously pessimistic cultural indicators. More on that next time.)
I doubt it. I don’t think human kind has permanently sloughed off its internal ambition toward improvement, growth, and (indirectly) GDP generation. I think new policy and new optimism could unleash an enormous boom.
On Tuesday this week, the American Enterprise Institute launched an exciting new project — the Center for Internet, Communications, and Technology. I was happy to participate in the inaugural event, which included talks by CEA chairman Jason Furman and Rep. Greg Walden (R-OR). We discussed broadband’s potential to boost economic productivity and focused on the importance and key questions of wireless spectrum policy. See the video below:
A critique of Carmen Reinhart and Ken Rogoff’s paper examining debt’s effect on growth dominated the economic news over the last week. Reinhart and Rogoff’s 2010 offering, Growth in a Time of Debt, compiled lots of data on debt-to-GDP ratios from nations around the globe and found that higher debt ratios, especially those at 90% or above, tended to be associated with slower growth. Three UMass-Amherst economists, however, noticed an error in R&R’s spreadsheet and argued that it (along with two other statistical choices) significantly altered the results. R&R acknowledged the spreadsheet error in a reply but defended the thrust of their work and its conclusions.
Champions of government spending jumped on the critique, charging that the R&R paper had given aid and comfort to widespread “austerity” policies and that their now-discredited ideas had sunk the world economy. They dubbed it “The Excel Depression.”
The coding error in Reinhart and Rogoff has gotten a lot more media attention than it deserves.
Then there is the entertaining contrarian Nassim Nicholas Taleb, who, in a tweet, goes further:
The coding error, I agree, is not remotely dispositive in this very big debate. So where does that leave us? We’ve still got these enormous debts, slow growth, and a still-yawning intellectual chasm on all the big public finance and monetary policy issues. As some have pointed out, a problem with this type of research is causation. Even if R&R are correct about the correlation, in other words, does high debt cause slow growth, or does slow growth cause high debt? These questions really get to the heart of economics and, like Taleb, I’m skeptical conventional macro is very enlightening.
We’ve been debating these very topics for centuries, or millennia. In The History of England, for example, Thomas Babington Macaulay reminded us of his nation’s apparently insurmountable debts following the interminable wars of the seventeenth and eighteenth centuries.*
When the great contest with Lewis the Fourteenth was finally terminated by the Peace of Utrecht the nation owed about fifty million; and that debt was considered not merely by the rude multitude, not merely by fox hunting squires and coffee-house orators, but by acute and profound thinkers, as an encumbrance which would permanently cripple the body politic . . . .
Soon war again broke forth; and under the energetic and prodigal administration of the first William Pitt, the debt rapidly swelled to a hundred and forty million. As soon as the first intoxication of victory was over, men of theory and men of business almost unanimously pronounced that the fatal day had now really arrived.
David Hume said the nation’s madness exceeded that of the Crusades. Among the intellectuals, only Edmund Burke demurred. “Adam Smith,” Macaulay continued,
saw a little, and but a little further. He admitted that, immense as the pressure was, the nation did actually sustain it and thrive. . . . But he warned his countrymen even a small increase [in debt] might be fatal.
Thus Britain’s attempt to tax its American colonies to pay down its debts. And thus another war — the Revolutionary — and thus another 100 million in new debts. More wars stemming from the French Revolution pushed Britain’s debts to 800 million, surely beyond any possibility of repayment.
Yet like Addison’s valetudinarian, who continued to whimper that he was dying of consumption till he became sofat that he was shamed into silence, [England] went on complaining that she was sunk in poverty till her wealth showed itself by tokens which made her complaints ridiculous . . . .
The beggared, the bankrupt society not only proved able to meet all its obligations, but while meeting these obligations, grew richer and richer so fast that the growth could almost be discerned by the eye . . . . While shallow politicians were repeating that the energies of the people were borne down by the weight of public burdens, the first journey was performed by steam on a railway. Soon the island was intersected by railways. A sum exceeding the whole amount of he national debt at the end of the American war was, in a few years, voluntarily expended by this ruined people on viaducts, tunnels, embankments, bridges, stations, engines. Meanwhile, taxation was almost constantly becoming lighter and lighter, yet still the Exchequer was full . . . .
Macaulay pinpointed the chief defect in the thinking of the alarmists.
They made no allowance for the effect produced by the incessant progress of every experimental science, and by the incessant effort of every man to get on in life. They saw that the debt grew and they forgot that other things grew as well as the debt.
Does this mean the spendthrifts are right? That we can — indeed, should — spend our way out of our predicaments, without much regard for the growing debt?
A defect of the debt alarmists may be their curmudgeonly suspicion that budget imbalances always drive the economy downward. An even more egregious defect of the debt apologists, however, is their assumption that budget imbalances lift the economy upward and that spending is equal to growth, rather than a result of growth. The debt alarmists too often forget the possibilities of human achievement that are the basis for wealth. The debt apologists, however, assume wealth is inevitable, that it can be redistributed, and that their policies will have no harmful impact on wealth creation. The crucial point in Macaulay is not that any nation can sustain growing debts but that vibrantly growing economies (like that of the scientifically-advanced, exploratory, industrial British Empire) can sustain debts in larger amounts than is commonly assumed.
The debt alarmists, moreover, play into the hands of the spendthrifts. By making budget balance their sine qua non of policy, they equate spending restraint with tax increases. The spendthrifts say “fine, if budget balance is so important, let’s raise taxes.” Never mind the possible negative growth effects of higher tax rates (and regulations and the like). This is what has happened in much of Europe and now to some extent in the U.S. An obsession with debt too often impels policies that slow economic growth — real economic growth, based on productivity and innovation, not spending — thus greatly exacerbating the burden of debt. And make no mistake, the burdens of debt are real. Defaults, inflations, and bankruptcies happen. If interest rates rise several percentage points, the U.S. might be paying hundreds of billions more in interest. And this is why the shortened term structure of our debt is an even bigger concern. We should have been locking in very long terms at these historically low rates.
Like the British Empire, with its pound sterling, the U.S. has a great advantage in the dollar’s status as world reserve currency. We are probably able to sustain higher debts than would otherwise be the case because our debts are in our own currency and the safe haven status of Treasurys. Yet, how did the pound sterling or the dollar achieve reserve status? Through powerful economic growth of the currencies’ issuers.
In the current growth and policy environment, America’s debts are a substantial worry. Yet no policy should focus first on debt. We should ask whether each policy encourages or discourages entrepreneurship and real productivity enhancements. And whether each spending program is legitimate, effective, and efficient. If policy were driven, more often than not, by thoughtful answers to these questions, then the debt question would answer itself. Our debt ratio would likely decline, yet the amount of debt our economy could sustain would rise.
Here is David Malpass concisely making the point on CNBC:
— Bret Swanson
* Macaulay quotes from George Gilder’s book Wealth & Poverty.
Brink Lindsey of the Kauffman Foundation summarizes a new paper on the imperative of constantly exploring the economic frontier:
This tax-and-budget analysis from Bruce Bartlett is wrong on many levels — in both its particulars and its overall sweep.
Bartlett claims the famous supply-side tax-cutters at The Wall Street Journal editorial page have, in a major reversal, opened the door to a Value Added Tax and thus a major expansion of overall taxation and American government. He thinks a new Journal opinion article from Columbia Business School dean Glenn Hubbard represents a big shift in the thinking of economic conservatives. I don’t see it that way at all. (more…)
What is the optimal economic arrangement to produce innovation and growth? And what is the optimal political arrangement needed to encourage and sustain such an economic order? I spend a lot of time thinking about these questions (as here in a paper on the rise of China). And so I’d recommend this thoughtful blog post by economist Scott Sumner. Sumner’s been blogging a lot on his recent trip to China and on the macroeconomics of the financial crisis/recession/rebound.
I disagree with a number of Sumner’s conclusions on the macro and political-economy fronts, but it’s insights like the one below that keep me reading Sumner.
Switzerland’s high level of democracy doesn’t just come from referenda, it also comes from its extreme decentralization. This makes it a highly successful multiethnic society, and not just when compared to places like Yugoslavia and Iraq, but even in comparison to Belgium or Canada. Another advantage of decentralization is that small places are less likely to be protectionist, as the gains from trade are much more obvious. In addition, it is much easier to monitor and root out rent seekers in a community where most people know each other.
Stanford economist Paul Romer has had lots of good ideas over the years. Particularly his ideas about the importance of ideas in the economy. But his “Charter City” idea explored at the recent TED conference is one of the best yet.
Maybe I like it so much because it so closely tracks the concepts offered in my long paper of last August called “Entrepreneurship and Innovation in China – 1978-2008 – Thirty Years of Decentralized Economic Growth”, a follow-on article in The Wall Street Journal, and a previous essay “Breaking Metcalfe’s Law” on the economic importance of the exchange of ideas.
Romer uses China’s “free zones” envisioned by Deng Xiaoping and initially implemented by one Jiang Zemin as the chief example of how his charter cities would work in practice. He explains how they might cut the political-economic Gordian knot of societies too stuck in the past to make obviously needed rule changes that open the floodgates of ideas and entrepreneurship. These were the key themes of my paper.
federal deficits may average a stunning $1 trillion annually over the next 10 years. This worsened outlook is stirring unease on Main Street and beginning to reorder priorities for President Barack Obama . . . .
The burst of spending in recent years and the growing likelihood of a weak economic recovery. The latter would mean considerably lower federal revenues, the compiling of more interest on our growing debt, and thus higher deficits. . . . the latest data suggests that we’re on a much slower path. Probably along the lines of the most recent Goldman Sachs and International Monetary Fund forecasts, whose growth rates average about 2% for 2010-2011.
A speedy recovery is highly unlikely . . . .
. . . but unlike Malpass’s pro-growth strategy, Altman proposes to make matters worse:
we’ll have to raise taxes.
Today, the U.S. ranks next to last among the 28 Organization for Economic Cooperation and Development nations in total federal revenue as a share of GDP. Our federal revenues represent 18% of national output, down from 20% just 10 years ago. That makes the mismatch between our spending and our revenue very large, producing the huge deficits we face.
We all know the recent and bitter history of tax struggles in Washington, let alone Mr. Obama’s pledge to exempt those earning less than $250,000 from higher income taxes. This suggests that, possibly next year, Congress will seriously consider a value-added tax (VAT). A bipartisan deficit reduction commission, structured like the one on Social Security headed by Alan Greenspan in 1982, may be necessary to create sufficient support for a VAT or other new taxes.
. . . it is no longer a matter of whether tax revenues must increase, but how.