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The Only Practical Way Out of Our Economic Doldrums

Monday, October 1, 2012

Both campaigns have one thing in common: They have not made the connection between their proposed policies and the robust growth rates we need.

In the forthcoming presidential debates, the issue of the federal debt and deficit is likely to come up. Just about everyone agrees that today’s trajectory is unsustainable, so the question is not whether the debt and deficit need to improve, but when, and by how much.  (For example, see a previous piece on this topic, "Why Growth Matters More Than Debt.")

America’s economic experiences during the presidencies of Eisenhower, Kennedy, Reagan, and Clinton demonstrate that growth is the most effective way to mitigate a debt burden, create jobs, and advance our standard of living. The current presidential campaign, however, lacks a clear growth message from either side.

Romney’s campaign highlights the truism that the deficit and the debt are unsustainable in the long run. Their solution is tax reform and spending cuts—but the campaign has not yet clarified the effect of tax reform or spending cuts on growth, let alone the positive effect growth would have on the deficit.

Obama’s campaign, on the other hand, says little about the deficit and debt, and instead blames income inequality for holding the economy back. Their solution is to revitalize the middle class by imposing higher taxes on the rich, and investing in infrastructure—but the campaign has yet to clarify how the income redistribution necessary for middle-class revitalization would subsequently fire up the economy’s private-sector growth engine, instead of triggering another recession.

conover_growthmessage

In short, the two sides are proposing starkly contrasting economic policies, but both campaigns have some explaining to do. Our debt trajectory is not sustainable for the long run, and solving that problem will require deficit-reducing growth rates. Both campaigns need to explain more clearly how their policies would generate the growth rate we’ll need (over 4 percent, more than double the current rate) to create the permanent jobs we need and to make the debt sustainable.

Deficit Reduction Arithmetic

What reduces the deficit? At first, the arithmetic looks straightforward: Because the federal deficit is the difference between spending and tax receipts, a smaller deficit, by definition, requires either less spending or more tax receipts. But the seeming simplicity is deceptive, because the arithmetic quickly gives way to partisan politics and loaded questions—such as "Less spending than what?" and "More tax receipts from whom?" Conservatives reject tax-rate hikes, focusing instead on tax reform and spending cuts (with exceptions for defense spending and near-term entitlements). Liberals, in contrast, avoid the inconvenient subject of long-run entitlement reform, focusing instead on hiking the top tax rates, investing in infrastructure, and cutting defense spending.

The current presidential campaign lacks a clear growth message from either side.

The deficit reduction debate has condensed around two lightning-rod categories: Tax rates and spending programs. In both categories, we have a partisan standoff. Sooner or later, the conversation will have to come around to the topic of growth. If we’re lucky, it will come up in the presidential debates. If we aren’t so lucky, we’ll have to hope that Capitol Hill will figure out the importance of growth-friendly policy in time to avoid the so-called fiscal cliff in January 2013.

The Growth Message

During his 1960 campaign for the presidency, John F. Kennedy famously summarized his preferred scenario for the nation’s economy: “A rising tide lifts all boats.”  A growing economy is a rising tide; it helps earners in every income class—low, middle, and high. A rising-tide economy creates more new, higher-skill jobs than the obsolete jobs it must replace or outsource; it requires not only more workers in total, but workers with rising skill levels; it yields not just more and better jobs, but larger paychecks for the workers filling those higher-skill jobs. The government, in turn, takes in growing tax revenue from the growing workforce and those growing paychecks—even when tax rates remain unchanged. Growth is a third way (besides spending cuts and tax-rate hikes) to ease our deficit problem.

In this year’s presidential campaign, both sides have hinted at growth, but have muddled the message. The Obama campaign proposes infrastructure investments, which presumably would enhance our growth rate if the projects were properly vetted and managed. But liberals detract from the growth message with their polarizing rhetoric about tax hikes for those who “can afford to pay more”—as if the government’s social engineers would spend the additional tax proceeds more wisely than the private sector’s mechanical, electrical, and computer engineers would otherwise invest it; or, as if valid infrastructure wouldn’t pay for itself in the long run; or, as if preventing a costly future war via effective defense spending doesn’t count as an “investment.”

The Romney campaign hints at growth by proposing revenue-neutral tax reform. But conservatives detract from the growth message with glib dismissals of infrastructure “investments” as “just code words for spending,” as if every dollar of federal spending is a dollar of government consumption, or as if there’s no such thing as lucrative “investing in our future” by government—not even in defense, education, infrastructure, or basic research.

Growth is a third way (besides spending cuts and tax-rate hikes) to ease our deficit problem.

Obama and the liberals need to clarify the growth effects of their proposals. If Obama is correct that “a strong and thriving middle class” is required before the economy can grow properly, then what besides redistribution could possibly deliver such a middle class? (Moreover, might our economic history suggest that liberals have reversed the cause-effect relationship; i.e., that a growing economy is what generates a thriving, prosperous middle class, and not the other way around?) And if Obama was correct to say in 2010 that raising anyone’s tax rates in a fragile economy “would be a mistake when the economy has not fully taken off,” how can it also be true that attempting to reduce income inequality by increasing taxes on a targeted group would enhance growth? The Obama campaign’s growth message is unclear at best.

Likewise for Romney and the conservatives: If increasing anyone’s tax rates is a dumb idea, how would tax reform reduce the deficit if it is “revenue-neutral”—instead of just leaving the deficit unchanged? In other words, if tax reform would increase the growth rate, wouldn’t it in fact be revenue-positive instead of revenue-neutral? Also, isn’t it possible that at least some spending by government is indeed growth-enhancing “investment” instead of “government consumption”—large-scale basic research, for example? The Romney campaign’s growth message should also be clarified.

Growth means more jobs and larger paychecks; it reduces the deficit and mitigates the debt burden. Growth is the only practical way out of our economic doldrums. If tax reform and spending cuts would lead to robust growth rates, Romney has a powerful message. But if infrastructure investments and inequality-reducing redistribution would better kick-start the economy, Obama has the winning message. Both campaigns have one thing in common: Neither side has made the connection between their proposed policies and the robust growth rates we need. If we’re lucky, the presidential debates will fix that problem.

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 “Missing in Action: Growth,” “‘Top-Down’ vs. ‘Bottom-Up,’” and “The New ‘Buffett Rule’ Everyone Is Ignoring.” Daniel Hanson contributes “Debt Burdens Choke Growth.” John A. Allison and John L. Chapman add “It’s Time for Pro-Growth Monetary Reform.” Michael R. Strain says “Yep, Obama's a Big Spender ... Just Like His Predecessors.”

Image by Dianna Ingram / Bergman Group

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