A growth pact for Amer­ica

Financial Mirror (Cyprus) - - FRONT PAGE -

Amer­ica, once again, will have a di­vided gov­ern­ment, with the Democrats hold­ing the White House, and the Repub­li­cans con­trol­ling both houses of Congress. But that does not nec­es­sar­ily mean that the fi­nal two years of Barack Obama’s pres­i­dency need to be de­fined by stale­mate and mu­tual re­crim­i­na­tion.

The elec­torate’s de­sire for change and fear of con­tin­u­ing slow growth, which pushed the Repub­li­cans to their vic­tory in this week’s mid-term con­gres­sional elec­tion, will in­vari­ably prompt dis­cus­sion about new pol­icy op­tions de­signed to raise growth, em­ploy­ment, and in­comes. Of course, Amer­ica’s ex­pe­ri­ence with di­vided gov­ern­ment can leave one pes­simistic about the two par­ties’ abil­ity to com­pro­mise; but, as Mex­ico re­cently demon­strated when its three big par­ties agreed on a mar­ket-ori­ented “Pact for Mex­ico,” even bit­terly op­posed po­lit­i­cal par­ties can over­come their sus­pi­cions to embrace needed re­forms.

The list of po­ten­tial pol­icy ac­tions that could ben­e­fit the United States – trade lib­er­al­i­sa­tion, com­pre­hen­sive reg­u­la­tory re­form, and im­mi­gra­tion and ed­u­ca­tion re­form, among oth­ers – is long. But only two poli­cies are par­tic­u­larly promis­ing for such a “Pact for Amer­ica”: fed­eral in­fra­struc­ture spend­ing and cor­po­rate-tax re­form. En­act­ment of th­ese re­forms would gen­er­ate a win for each side – and for both.

But such a bi­par­ti­san con­sen­sus re­quires re­mov­ing both the left and the right’s ide­o­log­i­cal blin­ders, at least tem­po­rar­ily. On the left, a pre­oc­cu­pa­tion with Key­ne­sian stim­u­lus re­flects a mis­un­der­stand­ing of both the avail­abil­ity of mea­sures (shov­el­ready projects) and their de­sir­abil­ity (whether they will mean­ing­fully change the ex­pec­ta­tions of house­holds and busi­nesses). In­deed, to coun­ter­act the mind­set forged in the re­cent fi­nan­cial cri­sis, spend­ing mea­sures will need to be longer-last­ing if they are to raise ex­pec­ta­tions of fu­ture growth and thus stim­u­late cur­rent in­vest­ment and hir­ing.

The right, for its part, must re­think its ob­ses­sion with tem­po­rary tax cuts for house­holds or busi­nesses. The im­pact of such cuts on ag­gre­gate de­mand is almost al­ways mod­est, and they are poorly suited for shift­ing ex­pec­ta­tions for re­cov­ery and growth in the post-fi­nan­cial-cri­sis down­turn.

Pol­i­tics com­pli­cates mat­ters fur­ther, be­cause the ex­clu­sively short-term fo­cus on the fis­cal im­pact of spend­ing and rev­enues clashes with poli­cies whose ben­e­fits ac­cu­mu­late over time. While such ben­e­fits may not ap­pear to be “stim­u­lus,” their mount­ing ef­fect bet­ter serves the ob­jec­tive of rais­ing ex­pec­ta­tions of fu­ture de­mand and growth.

But the con­cerns of se­ri­ous peo­ple, whether on the left or the right, are not so dif­fer­ent. Will eco­nomic growth ac­cel­er­ate suf­fi­ciently to boost job and in­come growth? Can the bar­ri­ers that ex­clude many Americans from re­cov­ery and fu­ture pros­per­ity be re­moved?

Fed­eral in­fra­struc­ture spend­ing and cor­po­rate-tax re­form should top the list of poli­cies ca­pa­ble of at­tract­ing bi­par­ti­san agree­ment, be­cause they prom­ise sig­nif­i­cant long-term pro­duc­tiv­ity, in­come, and em­ploy­ment gains, while also sup­port­ing short-term growth. A com­mit­ment to a multi-year fed­eral in­fra­struc­ture-spend­ing pro­gramme, for ex­am­ple, could in­crease de­mand, pri­vate in­vest­ment, and em­ploy­ment, even though projects may not be im­me­di­ately avail­able. And such a pro­gramme, nor­mally pro­posed by Democrats, can and should be crafted to se­cure Repub­li­can support as well.

To that end, an in­fra­struc­ture pro­gramme should give states and lo­cal­i­ties a key role in se­lect­ing the projects to be funded, and th­ese gov­ern­men­tal units should have “skin in the game” by fund­ing part of the costs.

Pol­i­cy­mak­ers should also give se­ri­ous con­sid­er­a­tion to reg­u­la­tory re­forms that would re­duce the ex­pense of new projects and as­sure their timely com­ple­tion.

An in­fra­struc­ture pro­gramme ori­ented in this way – as op­posed to a grab bag of po­lit­i­cally ex­pe­di­ent shovel-ready projects – should be able to muster con­ser­va­tive support. And, done prop­erly, fed­er­ally funded in­fra­struc­ture projects should pro­vide sub­stan­tial ben­e­fits to lower-in­come Americans. Bet­ter trans­port in­fra­struc­ture, for ex­am­ple, would not only cre­ate jobs, but would also re­duce the costs of com­mut­ing to work.

Cor­po­rate-tax re­form also of­fers a good op­por­tu­nity for bi­par­ti­san agree­ment, es­pe­cially given that Obama and con­gres­sional lead­ers of both par­ties have ex­pressed in­ter­est. While gains from fun­da­men­tal tax re­form – say, re­plac­ing the cur­rent tax sys­tem with a broad-based con­sump­tion tax – are large, on the or­der of 0.5-1 per­cent­age point per year of eco­nomic growth for a decade, cor­po­rate-tax re­form would also boost growth.

Re­duc­ing the tax rate for com­pa­nies sub­stan­tially, while elim­i­nat­ing tar­geted business-tax pref­er­ences and broad­en­ing the cor­po­rate-tax base, would in­crease both in­vest­ment and work­ers’ wages. Al­low­ing multi­na­tional com­pa­nies to repa­tri­ate over­seas prof­its with­out pay­ing ad­di­tional US tax would also bol­ster in­vest­ment and job cre­ation at home.

Given that re­cent re­search shows that much of the bur­den of cor­po­rate tax­a­tion is borne by work­ers in the form of lower wages, Democrats should embrace tax re­form as a way to support in­come growth. One could add to such a re­form fur­ther support for low-in­come Americans by in­creas­ing the Earned In­come Tax Credit for sin­gle work­ers.

Given their pol­icy ob­jec­tives, con­ser­va­tives should support a well-crafted fed­eral in­fra­struc­ture pro­gramme, and lib­er­als should support cor­po­rate-tax re­form. But changes in the po­lit­i­cal process would help move mat­ters ahead. Be­cause the pay­offs from in­fra­struc­ture spend­ing and tax re­form do not fit neatly within the five-year or ten-year bud­get win­dow used by Amer­ica’s fis­cal score­keep­ers, mea­sur­ing more com­pletely the ben­e­fits from such poli­cies is vi­tal to at­tract­ing po­lit­i­cal support.

More­over, any in­crease in spend­ing on in­fra­struc­ture or any rev­enue loss from tax re­form should be off­set else­where. For ex­am­ple, fu­ture growth in So­cial Se­cu­rity ben­e­fits or the home­m­o­rt­gage-in­ter­est tax de­duc­tion could be scaled back for more af­flu­ent in­di­vid­u­als, as pro­gres­sive in­dex­a­tion, pro­posed by con­ser­va­tives in the US, and the adjustment of mort­gagein­ter­est tax de­duc­tions in the United King­dom, started dur­ing the Thatcher ad­min­is­tra­tion, at­test.

Clearly, the econ­omy is Americans’ top con­cern. Its lead­ers must re­spond with a pol­icy agenda fo­cused on re­viv­ing growth now and sus­tain­ing it in the fu­ture. But that can hap­pen only if enough legislators in both par­ties, and the pres­i­dent, re­move their in­tel­lec­tual and po­lit­i­cal blin­ders and reach the long-term com­pro­mises needed to cre­ate jobs and in­crease in­comes. The time for a Pact for Amer­ica has ar­rived.

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