Why Growth Is an Economic Grand Slam
Monday, July 9, 2012
The Pew Research Center recently updated a study that should remove any lingering doubts about which topics the presidential campaigns will be covering—or perhaps evading, as the case may be—over the next four months. Their research reveals which policy areas the general public considers “top priority” for the president and Congress in 2012. The top ten priorities are shown in Figure 1 below.
Besides confirming the obvious—that the public’s number one priority is to get the economy back on track—these results reveal something less obvious. The four items highlighted in yellow in Figure 1—jobs, the budget deficit, Social Security, and Medicare—have something significant in common: Each one automatically improves when the economy does. Today’s anemic growth rate is 1.9 percent; for the private sector’s economic engine to achieve and sustain a real growth rate of 3.5 percent or more would require an expanding workforce, which in turn yields cascading benefits: More revenue from income taxes, more revenue for the social insurance funds, and federal receipts that grow faster than outlays—even if there is no increase in tax rates.
In other words, the current fiscal imbalance, shown in Figure 2 below, would automatically improve due to rising receipts, just as it did from 1996 to 1998, when the economy grew at an unanticipated 3.7 percent rate.
The lesson we should have learned from our 1998 experience is that the deficit-reduction debate should not be confined to the difficult and polarizing topic of spending cuts; economic growth is a more powerful way to achieve better fiscal balance. A good reminder of that is on page 6 of the 1998 Financial Report of the U.S. Government:
The expanding economy over the course of the year brought a surge in tax revenue in 1998, which far outpaced modest gains in Federal outlays.
Employment growth in other sectors of the economy was very strong in fiscal 1998, and labor markets continued to be very tight. About 3.1 million jobs were added during the year.
Even though spending increased in 1998, the deficit improved because of a private-sector gusher of tax revenue driven by a surge in the economy. The lesson we should have learned: Getting the economy back on track is a fiscal parallel to hitting a grand slam home run, because it drives improvement in at least five of the public’s top ten policy priorities. Getting back to robust private-sector growth means more and better jobs, which yield an increase in tax receipts without requiring the pain of an increase in tax rates.
The lesson we should have learned from our 1998 experience is that the deficit-reduction debate should not be confined to the difficult and polarizing topic of spending cuts; economic growth is a more powerful way to achieve better fiscal balance.
The Pew article goes on to say that Republicans tend to be more focused on the deficit. But a single-minded focus on the deficit per se can be a cart-before-horse mistake. True, a deficit that is too large for too long would almost certainly be detrimental to the nation’s creditworthiness as judged by the world’s bond markets. But not only have we not reached that point yet, as illustrated in a previous article, the deficit is just one symptom of the major problem: The sluggish economy. Improving the deficit won’t necessarily improve the economy, but an improving economy will almost certainly improve the deficit.
It all comes back to private-sector growth, which is ultimately the only sustainable way to fund growing commitments in national security, Social Security, and Medicare—and also the only sustainable way to maintain the world’s confidence in U.S. Treasury securities. The public correctly ranks the economy as the number one priority; the crowd, in its wisdom, apparently understands that fixing the economy would be a grand slam home run.
In four months, the public will decide which presidential ticket would provide a more favorable climate for enabling the private sector to hit that much-needed grand slam. In the time between now and then, can Republicans get behind the idea that the economy, not the deficit, is the top priority? Can Republicans see that focusing on the deficit per se can actually be detrimental to private-sector growth? Can Democrats get behind the notion that focusing on a climate favorable to the private sector, not on government management of the private sector, is a top priority? Can Democrats see that more government intervention can be detrimental to private-sector growth?
Whichever party makes the necessary adjustments will be in a better position to enable the economic grand slam the public correctly says we need.
Steve Conover retired recently from a 35-year career in corporate America. He has a BS in engineering, an MBA in finance, and a PhD in political economy. His website is www.optimist123.com.
FURTHER READING: Conover also writes “Is Government Really 'The Solution'?” “What Our Grandkids Actually Want,” and “Austerity or Growth: A False Dilemma.” Arthur C. Brooks asks “Does a Country's Economic Prosperity Lead to Happiness?”
Image by Darren Wamboldt / Bergman Group