Brendan Miniter, senior editorial director of the Bush Institute, is the editor of “The 4% Solution” and author of the book’s...
Brendan Miniter, senior editorial director of the Bush Institute, is the editor of “The 4% Solution” and author of the book’s first chapter, “Why We Grow.” We discussed the prospects for achieving sustained economic growth.
Asahina: At a time of slow growth, high unemployment, and modest economic projections, is it realistic to aim for 4% growth?
Miniter: Yes. Since the end of World War II, the United States has grown at 4% or greater for 23 out of the past 60 years. What’s more, the country typically grows at an accelerated rate after a recession and thereby makes up ground lost during the downturn. With the deep recession weathered by the United States in recent years, the country needs a sustained period of accelerated growth simply to catch up to its historic average of approximately 3% growth per year.
Asahina: Given where we are today, a recovery period of more than 4% growth would be required to sustain an average of 4%, or even 3%, over the long term. This kind of recovery after a recession has happened before. But as Robert E. Lucas Jr. points out in his chapter in the book, “Recovery from recession is typically something that governments permit to happen, not something governments need to make happen.” That is, it’s a political challenge, given government’s strong inclination to “do something” — usually with voters’ support. How can the kinds of policy proposals outlined in the book be implemented in the face of this challenge?
Miniter: One action the government can take is tax reform. Today, the United States has the highest corporate taxes among industrialized economies at 39.26%. Cutting corporate taxes is one way to put capital back into the hands of job creators.
Another action Congress can take is to create greater tax certainty. Many of the tax cuts passed over the past decade are set to expire at the end of this year. Few people believe that Congress will allow taxes to go up for all taxpaying Americans, but no one really knows for sure what their tax rate will be next year. This uncertainty has led many entrepreneurs and investors to park their capital on the sidelines.
As I note in my chapter, approximately $2 trillion is sitting idle. By creating tax certainty, Congress can remove one of the impediments to economic growth.
Asahina: As you note, 4% growth is not an end in itself, but shorthand for the better life that the contributors argue can be brought about through lower taxes and smaller debt, education and investment in human capital, fewer regulations in order to encourage entrepreneurship and innovation, and reform of immigration, trade, and energy policies. This is an ambitious agenda whose results are not easily captured by conventional metrics. And, as Myron Scholes notes in his chapter in the book, not all growth is good. But this is, again, as much a political issue as it is an economic issue. How do proponents of real growth combat the notion that government spending, “stimulus,” and loose monetary policy all contribute to “growth”?
Miniter: If government spending is the key to prosperity, why didn’t the $800 billion stimulus package passed in 2009 unlock significant and sustained economic growth in this country? Part of the reason is that government spending can put capital into the hands of some consumers, but government spending doesn’t tend to create wealth — it doesn’t lead to creating greater efficiencies in the economy.
Wealth is created, the economy grows, when someone figures out how to produce more of a given item while consuming less resources. So Microsoft creates wealth when its computer systems enable an individual to do work that once required dozens of people to perform. We don’t need government spending to grow. We need to create an incentive for individuals to find new and more efficient ways to produce goods and services in the economy. What Dr. Scholes gets at in his chapter is that we have to focus on growth that creates new efficiencies — not just “growth” that drives up one metric or another.
Asahina: You and other contributors note the problem of “rent seeking,” in which there is “a strong incentive for entrepreneurial people to spend their time figuring out how to profit off the government.” K Street is the epicenter of this behavior, with hundreds of millions of dollars spent annually on lobbying. In the long term, businesses should understand that advancing their interests depends on competition in a free market. But in the short term, how do you convince them to wean themselves from rent seeking?
Miniter: You don’t. There are strong and compelling reasons for individuals or corporations to find new ways to earn profits from government contracts. We can call them political entrepreneurs, but in the end they don’t have a strong incentive to find new efficiencies in the economy.
The best way to wean them off of government contracts is to push reforms through the political process. When the government spends less and passes fewer regulations, rent seekers will have less incentive to invest their time and money in lobbying to win a government contract or win the passage of a new government regulation.
Asahina: The distinguished contributors to this volume include five winners of the Nobel Memorial Prize. Yet there are Nobel Memorial Prize winners who would disagree with the analyses and policy prescriptions in this book — Paul Krugman comes to mind. Readers who are not specialists may wonder whom to believe. Is it fair to say that the views on taxation, debt, regulation, human capital, immigration, trade, and energy expressed in this book represent a broad consensus of the economic profession?
Miniter: There is a widely shared, but far from a uniform view, that reducing taxes and regulation is the best way to spark economic growth. But I’d encourage readers to step beyond the Nobel Prize hanging around the neck of one economist or another and instead make their own assessment about what’s best for them personally.
Are you more likely to save money for your children’s schooling, invest in a business that may provide you income, or pay off debts that are crushing you each month when federal taxes take more or less of your income? And if keeping more of your money is better for you personally, why wouldn’t society be better if more of us could keep more of our money to invest as we sit fit?
Asahina: In their chapter in the book, W. Michael Cox and Richard Alm address the incentives required to “encourage workers, companies, and investors to undertake productive activities.” But unemployed workers can’t afford an investment in education when they can’t pay their rent; small firms can’t invest in capital equipment or human capital when their sales volume has dropped. So, given how slowly political change occurs, what can individuals — people and small businesses — do in the meantime, which may last years?
Miniter: Education isn’t always prohibitively expensive, and it is often worth borrowing money for. But the broader point is worth considering. To give yourself the best chance to do well in the long term, you have to develop skills needed in the new economy. And the best way to do that is with education.
So what would I tell an unemployed worker? First we need to all acknowledge that what I describe above is the broader concept. It may be of cold comfort if your life circumstances are such that you can’t move for the next job, if there aren’t any new jobs available, or if the skill set needed is too costly to acquire before the next rent check is due.
One reason I am so focused on economic growth is because in a prosperous economy, there are new opportunities and more resources to help everyone better their situation. When the economy is growing, it is easier to focus not just on landing the next job, but on landing a job that will help you gain skills that will be sought after for years to come.
Asahina: The problem of incentives boils down to individual behavior. And, as you and Michael Novak note, this is at bottom a moral question about how people lead their lives. In the run-up to an election that may turn out to be a referendum on economic policy, how can the abstract goal of 4% growth be translated into a message about freedom and prosperity for voters spooked by the specter of austerity?
Miniter: If the economy grows at a sustained rate of 4%, unemployment will fall, Americans will have more capital to pay their bills, and the federal government will be better able to pay its debts. If the economy grows at 4%, the lawmakers in Washington won’t feel the need to hike taxes, and business owners will have greater freedoms to expand their businesses. When the economy grows at a significant rate, it is a lot easier to find solutions to nearly every problem facing the nation.
