Richard Vedder, the eclectic Ohio University economist, was a standout panelist at the Bush Institute’s Immigration and 4% Growth...
Richard Vedder, the eclectic Ohio University economist, was a standout panelist at the Bush Institute’s Immigration and 4% Growth conference at the Federal Reserve Bank of Dallas in December 2012, and he’s working on a book on the subject to be published by the Institute later this year. But today in the Wall Street Journal, his op-ed tackles another part of the growth-slowdown conundrum: government policies that discourage people from working. Vedder’s piece brought to mind Edward Prescott, the Nobel Prize-winning economist who contributed a chapter to our book, The 4% Solution. Prescott has done ground-breaking research that shows how high marginal tax rates account for the fact that Americans work about one-third more than Europeans. The result is GDP growth in the range of a sickly 1.5 percent. But now, as Vedder points out, the U.S. has been growing for the past 12 years at an average of 1.8 percent, or about half our historic average. Have we caught the European disease? Vedder’s piece does not tackle the question of tax rates. Instead, he points to more direct causes: food stamps, Social Security disability payments, extended unemployment benefits, and Pell grants as incentives to stay out of the work force – or leave it. He makes a powerful case. For example, in 1990, only 3 million Americans received work-related disability checks from Social Security; today, 8.6 million get such support. And, not coincidentally, such generous policies on food stamps, disability, unemployment benefits, and subsidized education are where Europe excels. What makes Vedder’s piece important is the way he frames the argument. He starts with the GDP growth rate and tries to solve the mystery of why it has fallen. This is precisely the direction that research and policy must go. First define the problem (slow growth, which limits opportunity and prosperity); come up with solutions (constraints on disability payments, more smart immigration, better tax policy, etc.); and promote those solutions far and wide. As the Congress and the President head for a showdown on fiscal policy, with the debt limit looming, the essential question, again, must be: what should government do in the realm of taxing and spending that will encourage growth? There is powerful research, including Prescott’s, that shows that higher tax rates discourage investment and work. But what about the spending side? Recent experience has shown that higher government spending might have a short-term effect on growth, but such spending generally amounts to empty calories. The case needs to be made that, by cutting unnecessary spending the U.S. will, in the long run, grow faster, not slower – because money will be left in the hands of the private sector, which uses it more efficiently. Not always, but certainly most of the time. At any rate, the first principle is growth. We don’t have it, so how are we going to get it? Not by emulating Europe, which, more and more, we seem to find irresistible, but instead by being more like us.
This post was written by James K. Glassman, Founding Executive Director of the George W. Bush Institute.
