"Room To Grow" Blind To The Most Important Issue For The Middle Class -- Economic Growth

"Room To Grow" Blind To The Most Important Issue For The Middle Class -- Economic Growth
July 3, 2014

Peter Ferrara

Peter Ferrara is senior fellow for entitlement and budget policy at The Heartland Institute, a... (read full bio)

In 1900, we had no airplanes, no computers, no cellphones, no internet. We had only rudimentary versions of cars, trucks, telephones, even cameras. As Stephen Moore and Julian L. Simon report in their underappreciated work, It’s Getting Better All the Time: 100 Greatest Trends of the Last 100 Years,

“It is hard for us to imagine, for example, that in 1900 less than one in five homes had running water, flush toilets, a vacuum cleaner, or gas or electric heat. As of 1950 fewer than 20 percent of homes had air conditioning, a dishwasher, or a microwave oven. Today between 80 and 100 percent of American homes have all of these modern conveniences.”

Indeed, in 1900 only 2% of U.S. homes enjoyed electricity.

Moore and Simon explain that the real difference between 1900 and today is that real per capita GDP in the U.S. grew by nearly 7 times during that period, meaning the American standard of living grew by that much as well. Such continued, sustained economic growth would solve every real problem America faces today.

 

An Often Overlooked Math Lesson

If total real compensation, wages and benefits, grow at just 2% a year, after just 20 years the real incomes and living standards of working people would be nearly 50% greater, and after 40 years they would be 120% greater, more than doubled. At sustained 3% growth in wages and benefits, after 20 years the living standards of working people will have almost doubled, and after 40 years they will have more than tripled.

The U.S. economy sustained a real rate of economic growth of 3.3% from 1945 to 1973, and achieved the same 3.3% sustained real growth from 1982 to 2007. (Note that this 3.3% growth rate for the entire economy includes population growth. Real wages and benefits discussed above is a per worker concept). It was only during the stagflation decade of 1973 to 1982, reflecting the same Keynesian economics that President Obama is pursuing today, that real growth fell to only half long term trends. And Obama is falling short of even that, now in our sixth year of his misleadership and misrule, way too long to wait for now long overdue true recovery.

If we could revive and sustain that same 3.3% real growth for 20 years, our total economic production (GDP) would double in that time. After 30 years, our economic output would grow by 2 and two-thirds. After 40 years, our prosperity bounty would grow by 3 and two-thirds. If we are truly following growth maximizing policies, we could conceivably do even better than we have in the past world dominant (though actually declining) 40 years. At sustained real growth of 4% per year, our economic production would more than double after 20 years. After 30 years, GDP would more than triple. After 40 years, a generation, total U.S. economic output would nearly quadruple. America would by then have leapfrogged further generations ahead of the rest of the world.

Such restored, sustained, economic growth would rebuild the rapidly rising living standards that today’s middle class so anxiously wants to see again. It is also the ultimate solution to poverty, as after a couple of decades or so of such growth, the poor would climb to the same living standards as the middle class of today.

Such renewed, booming growth would empower the middle class to the prosperous retirement to which they still aspire, or at least still dream about. It would greatly ease the way to assuring health care for all, and privately finance the rapid medical advances and breakthroughs that modern medical science now increasingly offers in prospect. Families could more readily fund and finance higher education, and new, expansive homes for growing children.

Booming economic growth would produce surging revenues that would make balancing the budget, while still maintaining funding for essential needs, so much more feasible. Surging GDP would reduce the national debt as a percent of GDP relatively quickly, particularly with balanced budgets not adding any further to the debt.

With sustained, robust, economic growth, maintaining the most powerful military in the world, and thereby ensuring our nation’s security and national defense, will require a smaller and smaller percentage of GDP over time. That security itself will promote capital investment and economic growth in America. The booming economy will produce new technological marvels that will make our defenses all the more advanced. With the economy rapidly advancing, there will be more than enough funds to clean up and maintain a healthy environment. America’s previous prosperity is what has enabled us to do so much to clean up the environment already.

As my colleague Louis Woodhill has observed, “There is nothing that the federal government could possibly do for the middle class (or any other class, for that matter) that having 30% more income would not do much, much better.” That is where we would be today if we had just kept the bipartisan economic growth of the Reagan and Clinton years going. But there is so much more that can be done now to spark a 21st Century economic breakout today. For all of the above reasons, this is the top policy priority of today, by far.

English: Historical GDP per capita for the Uni...

English: Historical GDP per capita for the United States (Photo credit: Wikipedia)

 

Lead, Follow, or Get Out of the Way

The short book Room to Grow, published on May 22 by an outfit calling itself the “Young Guns Network,” is a collection of essays by known, recognized, younger policy intellectuals, purporting to offer new ideas for the Republican Party. An untimely outgrowth of a project of former House Majority Leader Eric Cantor (Tea Party wags used to call him “CantorWont”), the essays can remind readers of why there is such a strong feeling of unease about the current Republican leadership (counterproductively cautious and afraid of truly pathbreaking new ideas, without the courage of their convictions demanded by the times and circumstances).

The real problem with the book intellectually is that after the third word of the title, what should be Job 1 for the Republican opposition, restoring traditional, American, booming economic growth, and the American Dream, is basically entirely overlooked. Woodhill’s further commentary on it bears repeating here for emphasis,

“The Republican Party is either the party of economic growth, or it is nothing, and it loses elections. Not only does Room to Grow not emphasize economic growth, it scarcely mentions it….The phrase ‘economic growth’ appears only four times in total….Only twice…in the context of calling for increasing it, and in those cases, no specifics are given about how this might be accomplished.”

The first introduction by former Bush speech writer Peter Wehner reflects this problem. It says the aim of the book is “to offer a concrete, conservative, governing agenda that is equal to this moment.” But the book clearly fails to do that, offering not only no agenda for economic growth, but no inspiring, strategic, big ideas for liberating the American people from high taxes, excessive government spending, deficits and debt, runaway overregulation, and our debauched currency. In other words, there is no focus either on liberty or making government smaller. It ignores rather than draws upon the good work done by others and successful precedents and strategies. It is all air brushed, sharply circumscribed, overly cautious and complex, dull colors, rather than the bright flag of bold pastels that inspired a generation of conservative Republican governance. In other words, the book reflects the spirit of McCain and Romney, or Boehner and Cantor, rather than Reagan and Kemp.

Even some of the authors included in the book have written better elsewhere. Even Boehner has been more inspiring, canny and effective at times than this book. Woodhill again captures it when he writes, “The ideas that Room to Grow contains are not the ones upon which Republicans must campaign to win in 2014 and 2016. Room to Grow is largely irrelevant to solving America’s most important problems.”

Wehner’s chapter accurately reflects a country dominated by anxiety, insecurity, unease, and economic and social pessimism. But he fails to accurately tie that to the failed policies of the Obama Democrats who currently have the throat of the nation under their boots. He fails to identify how the spreading family breakup caused by the welfare state policies of the Left are at the root of the increasing inequality and declining social mobility that he echoes the Left in decrying. He cites statistics of longer term economic stagnation often cited by the Left, but fails to recognize the great work of Steve Moore and Alan Reynolds debunking those statistics and demonstrating much brighter longer term perspectives.

Worst of all, he fails to see that the exact answer to the anxiety, insecurity, stagnation, and economic and social pessimism he identifies is precisely a promising agenda for restoring traditional, booming, American economic growth and prosperity. Instead, he tells us, “There’s no simple answer to what ails America’s economy,” and then actually cites Obama’s excuses for his economic failures “as President Obama frequently reminds us,” he writes. The real truth that this intellectual abdication reveals is that Peter Wehner does not know what policies would restore traditional, booming, American economic growth and prosperity, and which lead to the stagnation, pessimism, and despair of today.

It is not a crime that he does not sufficiently understand economics to provide the necessary leadership in this regard. But it does mean he is better qualified to serve as a speech writer for the ideas of others than the intellectual leader with the vision and understanding conservatives and Republicans need right now.

 

Tax and Social Security Reform

The most troubling is the book’s chapter on tax reform, by Robert Stein, a former Deputy Assistant Secretary of Treasury. Stein recognizes that Reagan’s dramatic marginal income tax rate cuts were enormously successful in promoting economic growth and prosperity. While marginal income tax rates are lower now, he doesn’t seem to recognize that with Obama’s rate increases, and high state rates, top marginal tax rates are near or even above 50% today. Moreover, the book’s authors show no recognition of the negative economic effects of the multiple taxation of capital.

Stein says that today, “Cutting marginal tax rates is not, however, an effective tool for delivering tax relief to the middle class. It does very little to lower their tax bills or improve their work incentives.” That is because Republicans, from Reagan to Gingrich to Bush II, already delivered dramatic tax relief to the middle class. The latest data shows that the middle 20% of income earners pay just 2.9% of federal income taxes, while earning 14.2% of before tax income. The book’s authors fail to show any recognition of that.

Moreover, economic studies and models show that tax reform reducing rates similarly to the proposal by the next Ways and Means Chairman Paul Ryan, with a rate of 10% on family income up to $100,000 a year, and 25% above that, and a corporate rate of 25%, would strongly boost economic growth, jobs, and incomes, for everyone, including the middle class. That is why such tax reform is a crucial, central component of the economic growth policies so badly needed today.

But Stein says, “Instead, tax cuts for the middle class should be designed to offset the greatest fiscal-policy distortion that affects middle class Americans: the disincentive to raise children caused by Social Security and Medicare. Tax cuts should reduce the cost of raising children, making it easier for parents to pursue the family size they would desire in the absence of federal interference.” That is because Social Security and Medicare benefits “have crowded out the traditional incentive to raise children as a protection against poverty in old age.”

To correct for that supposed effect, Stein favors a tax reform proposal to raise the current $1,000 per child tax credit to $2,500 per child, which could be taken against both income tax and payroll taxes (recognizing that the actual middle class does not pay significant income taxes). To make that revenue neutral, Stein would actually favor raising the current 25% income tax rate to 35%. He says this is “a better pro-growth tax cut.”

But while that increase in the child tax credit may increase the number of children, the proposed tax reform would not be clearly pro-growth at all. Moreover, I dispute that in modern America today, without Social Security and Medicare, people would bear children because they think those children would support them in old-age. That is a rural 19th century notion. In today’s wealthy society, most Americans think they don’t want to be a burden to their children.

While Stein cites a couple of economic studies purporting to show that Social Security and Medicare does reduce fertility, much more evidence shows that Social Security and Medicare reduce savings and investment, as the programs displace the need for people to save for their retirement. That is decidedly anti-growth, and correcting for that distortion would be decidedly pro-growth, as increased savings and investment is the foundation of increased economic growth and prosperity, as long time Harvard Economics Professor, and Reagan’s former Chairman of the President’s Council of Economic Advisors, Martin Feldstein has long argued.

But we can best resolve this argument with a market test. Similarly to what was so famously and successfully done in Chile over 30 years ago, allow people the freedom to choose to shift the employee share of the Social Security payroll tax to a personal savings and investment account. For every year they choose to do that, their retirement age would be delayed by 4 months, which Social Security actuaries estimate would be actuarially neutral. Doing that every year from age 22 to 67 would delay the normal Social Security retirement age for that worker by 15 years, to age 82. The personal account could then provide vastly better benefits than Social Security even promises, let alone what it could pay, during those years age 67 to 82. And Social Security benefits would then kick in at age 82, still providing a safety net against living too long. The same could be applied to the Medicare payroll tax as well. The resulting enormous influx of capital into the economy would be enormously pro-growth.

But also allow every worker with a child 21 or below the same freedom to choose to forego the employee share of payroll taxes every year, using the money to raise his or her children, with their retirement age delayed by 4 months for every year they chose this option. Then when they reach retirement, they would look to their children to support them, until the delayed Social Security benefits kick in. Then we could see which people would choose to provide for retirement, and how much. They could even choose some of each during their careers. Because ultimately, liberty and freedom of choice is the most fundamental.

Next week, I will discuss a complete policy reform strategy to achieve maximum economic growth (or maybe that will take a series of columns). That will include tax reform, regulatory reform, monetary reform, and thorough entitlement reform including every entitlement program, resulting in the largest reductions in government spending, taxes, deficits and debt in world history, resulting actually in better incomes and benefits for the poor and seniors, and better health care for the sick. These would all be positive, populist, win win reforms, all of which are currently in various stages of drafting in Congress, and all of which have already been tried and proven enormously successful in the real world. They are consequently all politically feasible, indeed, quite politically appealing and winning, not a wish list, dream agenda. I expect some leading GOP Presidential candidates to actually campaign on this entire agenda in 2016.

Indeed, I expect one of them to win. That would be the next generation advance of Reaganism, with the next President effectively serving politically as the free market conservative analogue of Franklin Roosevelt to Reagan’s Woodrow Wilson (in other words, fascism in reverse). The free market’s New New Deal would then have arrived (with the fall effectively of Progressivism’s “Berlin Wall”).

Call it the Tea Party War on Poverty (this time it actually works), or Swedish capitalism (the opposite of Swedish socialism), at long last ending the centuries old bitter conflict between labor and capital that has burdened western civilization, indeed, the entire world, since the industrial revolution.

 

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Peter Ferrara

Peter Ferrara is senior fellow for entitlement and budget policy at The Heartland Institute, a... (read full bio)