The good eco­nomic news for 2017

Amer­ica can have four per­cent or higher GDP growth in the com­ing years

The Washington Times Daily - - OPIN­ION - By Richard W. Rahn Richard W. Rahn is chair­man of Im­prob­a­ble Suc­cess Pro­duc­tions and serves on the board of the Amer­i­can Coun­cil for Cap­i­tal For­ma­tion.

The good news for 2017 is we can have four per­cent or higher real eco­nomic growth per year over the next few years — and here is how. Some of the crit­ics of Pres­i­dent-elect Trump have in­sisted that the ap­prox­i­mately two-per­cent an­nual av­er­age GDP growth the U.S. has ex­pe­ri­enced over the last seven years is the “new nor­mal,” and we just need to get used to it. It has led to stag­nant in­comes and tens of mil­lions of in­vol­un­tar­ily un­em­ployed or un­der-em­ployed work­ers. The present slow-growth path is also un­sus­tain­able, with ever-ris­ing debt lev­els of a share of GDP which will even­tu­ally lead to a fi­nan­cial col­lapse.

Some econ­o­mists have ar­gued that the ag­ing of the work force and the slow­ing of pro­duc­tiv­ity growth means that get­ting back on the high-growth path is nearly im­pos­si­ble. Most peo­ple, in­clud­ing many econ­o­mists, can­not imag­ine the huge gains in pro­duc­tiv­ity that can arise from an in­crease in in­cen­tives and un­seen in­no­va­tions. As an ex­am­ple, back in the 1920s there were se­ri­ous pro­jec­tions that an ever-grow­ing per­cent­age of the work force would be em­ployed as tele­phone op­er­a­tors — be­cause au­to­matic elec­tronic switch­ing, let alone the cell phone, had not been in­vented. Bil­lions of peo­ple around the world now have smart phones which give them ac­cess to all of the world’s knowl­edge, al­most for free. It would have cost ev­ery­one mil­lions of dol­lars only two decades ago for all of the smart phone apps pro­vided for pen­nies — per­haps giv­ing mankind the big­gest (and al­most un­mea­sured) in­crease in stan­dards of liv­ing in so short a pe­riod of time.

For­tu­nately, get­ting Amer­ica back on the high-growth track only in­volves things that we know how to do and have done at times in the last four decades. Specif­i­cally: Elim­i­nat­ing reg­u­la­tions that do not meet a real and ob­jec­tive cost-ben­e­fit test; Re­duc­ing tax rates to lev­els where they are in­ter­na­tion­ally com­pet­i­tive and no longer in­cen­tive de­stroy­ing (e.g. cor­po­rate and cap­i­tal gains tax rates no higher than 15 per­cent); and Restrict­ing govern­ment spend­ing to only those things that are clearly Con­sti­tu­tional and meet a se­ri­ous cost-ben­e­fit test. Real­is­ti­cally, not all of this will be done, given the na­ture of our po­lit­i­cal sys­tem and the com­pe­tence of even the most well-in­ten­tioned govern­ment elected of­fi­cial or bu­reau­crat — but even go­ing part of the way on each of these items will pro­vide enor­mous div­i­dends for the Amer­i­can peo­ple.

Back in 1980, pres­i­den­tial can­di­date Rea­gan pro­posed do­ing al­most ex­actly the above, be­cause, at the time, the U.S. was in­cur­ring a bout of eco­nomic stag­na­tion, with very high in­fla­tion. In 1981, I was one of the econ­o­mists who de­fended the Rea­gan pro­gram be­fore the House Ways and Means Com­mit­tee against Demo­cratic Key­ne­sian econ­o­mists who were claim­ing that such growth rates were not pos­si­ble or com­pat­i­ble with a lower rate of in­fla­tion. Mr. Rea­gan fell some­what short of ful­fill­ing his pol­icy goals, but he made enough progress on each, so that by 1983, the first full year of the im­ple­men­ta­tion of “Reaganomics,” the econ­omy grew rapidly (more than 4 per­cent on av­er­age) for the next seven years — even more than the Rea­gan team had pro­jected.

In 1996, Pres­i­dent Clin­ton com­pro­mised with the Repub­li­can Congress, led by House Speaker Newt Gin­grich, to en­act both a lower cap­i­tal gains tax rate and a flex­i­ble freeze which kept the real (in­fla­tion ad­justed) rate of govern­ment spend­ing al­most flat, en­abling the econ­omy to again grow an av­er­age rate of more than four per­cent per year for the next five years.

What needs to be done to re­vive the econ­omy is well known — but it takes a huge amount of po­lit­i­cal will to re­sist all of those forces that have caused our ex­ist­ing reg­u­la­tory, tax, and spend­ing bloat. Pres­i­dent-elect Trump’s Cabi­net con­tains a num­ber of peo­ple, in­clud­ing Mr. Trump, who have ad­mit­tedly acted as crony cap­i­tal­ists in the past, whereby they legally used their in­flu­ence with govern­ment of­fi­cials to get spe­cial sub­si­dies, tax or reg­u­la­tory breaks for their com­pa­nies. Mr. Trump claims that since they know how the game is played, they are the best ones to end it — we shall see.

Some will try to sab­o­tage the pro­posed tax rate re­duc­tions by over-ex­ag­ger­at­ing how much they will in­crease the deficit. (Mr. Trump should add well known growth ori­ented econ­o­mists like Larry Kud­low, and David Mal­pass to off­set these neg­a­tive voices.) Yes, tax rate re­duc­tions will in­crease the deficit in the short run, but if prop­erly struc­tured, and if govern­ment spend­ing is held to less than the real in­crease in eco­nomic growth, the deficits will de­crease as a per­cent­age of GNP (the rel­e­vant mea­sure) in the long run. The govern­ment rev­enue es­ti­ma­tors have been hope­lessly wrong for decades be­cause they fail to cor­rectly an­tic­i­pate the in­crease in in­cen­tives for pro­duc­tive work and in­vest­ment from tax rate re­duc­tions — and thus their pro­jec­tions should be dis­counted. It took the Rea­gan tax cuts about seven years for them to “pay for them­selves” — the amount of time that it took the eco­nomic pie to get big enough so the govern­ment was ac­tu­ally re­ceiv­ing more tax rev­enue, even though its slice of the pie was smaller. But, they re­sulted in much greater em­ploy­ment at higher real wages — and most im­por­tantly, more lib­erty.


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