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The 4% Solution, Chapter 2: “Incentives”

July 17, 2012 3 minute Read by Michael McMahan

This guest blog was written by W. Michael Cox and Richard Alm, co-authors of Chapter 2 of The 4% Solution: Unleashing the Economic Growth America Needs, a blueprint for 4% GDP growth with new and innovative ideas on how to restart America’s economic engines. The macroeconomic side of growth is straightforward enough: Incentives shape individual choices, and good choices lead to productive activities. Economic growth accelerates when people choose to get an education in a field the economy values highly, when they choose to work full time and hone their productivity, when they choose to save, invest and take business risks, when they choose to start companies and hire workers, when they choose to innovate and create new products, and when they choose to seize the business opportunities around the world. Market signals steer individuals and companies toward the productive activities that grow an economy.  Markets tell us to get an education. Among 25-34 year olds, workers with bachelor’s degrees earned an average of $62,960, more than double the $28,202 for high school dropouts. Markets tell us to invest in private companies. Since 1925, average annual returns have been 8.8% for small company stocks and 6.7% for large company stocks, well above the 2.4% on long-term government bonds. Markets tell us to innovate and start new companies. Microchip-based economic activity expanded from $164 billion in 1977 to more than $1.6 trillion three decades later, adding nearly a half percentage point to the nation’s annual growth rate. Big government does a lot of damage when it interferes with markets’ orderly and consistent incentives. Higher income taxes, for example, erode the rewards for education, hard work, saving, investing, innovating and growing businesses. Government handouts frequently reduce the urgency to go to school and find a job. Onerous regulations divert money and manpower from productive activities. Big Government holds back the economy, slowing growth and making it difficult to create jobs and raise living standards. The U.S. economy has been in the doldrums for nearly five years. Market incentives are the key to getting out of the funk. The path to 4% growth lies in greater economic freedom. W. Michael Cox is the director of the William J. O’Neil Center for Global Markets and Freedom at SMU. Richard Alm is the writer-in-residence at the O’Neil Center. 


Author

Michael McMahan
Michael McMahan

Michael McMahan currently serves as Vice President of Corporate Planning and Development, overseeing all fundraising activities and events as well as integration of long-term revenue planning for Bush Institute and public programming work.

Previously, he worked as Vice President, Strategy and Planning. In this capacity he coordinated strategic planning and strategic partnerships across the Bush Center.  He also worked as Director, Institute Policy and Planning and as Program Manager for the Bush Institute’s economic growth initiative.

McMahan is a licensed member of the Texas Bar, and prior to joining the Bush Center he was an energy law litigator. He served in the George W. Bush Administration at the U.S. Department of Energy in the Office of Policy and International Affairs. He is a graduate of the University of Texas (B.A., Economics) and Southern Methodist University’s Dedman School of Law (J.D.).

McMahan serves on the board of the Dallas Urban Debate Alliance and is a founding board member of the Dallas chapter of America’s Future Foundation.

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In Search of Real Growth Amity Shlaes on July 17, 2012