The 4% Growth Project
How could the United States double economic growth from its recent rate of 2% to 4%? That's the goal of the George W. Bush Institute's 4% Growth Project, launched at a conference in New York on Tuesday.
Named for former President George W. Bush, the Institute has tapped Amity Shlaes, a prominent conservative intellectual, to be director of the project. She is a Bloomberg columnist and the author of Coolidge, coming out later this year.
Some might call such a growth rate ambitious. But that just shows how expectations have diminished. In the 1950s and 1960s, no one would have thought that 4% was a worthy target.
Economic evidence from Nobel prizewinning economist Edward Prescott and others has shown that higher tax rates discourage work, and states with lower taxes have higher growth rates. Globally, smaller governments exhibit higher growth rates. As director of the 4% Growth Project, Ms. Shlaes's mission is to marshal the evidence, present it to the public, and collect data to make cross-country comparisons.
The George W. Bush Institute is based in Dallas, Texas, and is dedicated to education reform, global health, human freedom, and economic prosperity. Its executive director is James K. Glassman, a long time writer, publisher, and investment guru.
The conference program featured a line-up of prominent Republicans, including the 43rd president and the GOP's present fiscal leader, House Budget Committee Paul Ryan of Wisconsin, who campaigned in his home state with Governor Romney last month.
Others participating included Stanford University economics professors John Taylor and Edward Lazear; presidential advisors Lawrence Lindsey and Karl Rove; the governors of New Jersey, Kansas, Oklahoma, Tennessee, and Maine; and the former governor of Michigan.
The conference message is that tax competition is beneficial, and, when it comes to taxes, less is more. Many examples were given of how lower taxes have resulted in a thriving private sector.
Governor Chris Christie talked about the success he'd had in cutting spending in New Jersey and balancing the budget without raising taxes. He recounted that he inherited a deficit of $1.2 billion and had to make cuts of 9 percent in his first weeks in office, after having been assured in 2010 by his predecessor, Governor Jon Corzine, that the state's economy was doing just fine. (Mr. Corzine's math challenges also extended to his former investment firm, MF Global, now in bankruptcy and under investigation for tapping into clients' accounts.)
Mr. Christie made the cuts, and has seen New Jersey create 39,000 new nonfarm payroll jobs over the past year. He told the audience, "If you can do it in New Jersey, you can do it in Tennessee and Oklahoma. You can do it anywhere."
A speaker from north of the border, James Flaherty, Minister of Finance in Canada's conservative party government, recounted how he and Prime Minister Stephen Harper had cut taxes, increased foreign investment, and made more effective use of Canada's huge trove of natural resources, including tar sands oil. Now, Canada's unemployment rate, measured on a comparable basis with ours, is one percentage point lower at 7.3%. It used to be higher.
Chairman Ryan, whom Wall Street Journal editor Paul Gigot praised in his introduction as one of the most "dangerous" men in America because of his propensity to tackle tough issues, said that America is facing two tipping points. One is debt. "If the bond markets turn on us, we're into austerity," he said.
The other is a moral tipping point, with Americans becoming increasingly dependent on government services and lulled into a life of complacency. Already, he said, 70% of Americans get more out of federal government services than their tax contributions, leading to an increasingly government-centered society.
Mr. Ryan was certain that America could be turned around, just as Canada and New Jersey had turned around, by cutting the rate of growth of spending and lowering taxes.
Larry Lindsey, former Federal Reserve Governor and director of the National Economic Council in the George W. Bush White House, saw Washington as eventually replacing both the corporate and individual income taxes with a value-added tax, a national sales tax.
This approach to financing the federal budget is one that divides proponents of growth.
I, for one, have never been a fan of value-added taxes, having experienced them first-hand in Britain as a supplement to the income tax. Mr. Lindsey has a different conception of the value-added tax, portraying it as a substitute for the income tax. He said that the federal government is going to be so strapped for cash in five years that Congress will have to go with the most efficient way of raising revenue, and that is a value-added tax.
What also troubles many advocates of tax reform, including this writer, is that the VAT may be too efficient a revenue engine. Inching it up a notch or two from time to time is temptingly easy for legislators.
And what is to stop Congress from restoring personal and corporate income taxes later, while keeping the VAT? According to Mr. Lindsey, if these taxes are eliminated, they would be politically difficult to reinstate. Just as there is political resistance to introducing a new VAT now, so there would be pushback from adding back an income tax once it has been eliminated, Mr. Lindsey argued. If Mr. Lindsey is correct, perhaps it's time to give the VAT a second look.
A less radical proposal to reform the tax code, endorsed by Stanford professor Edward Lazear, would be to allow immediate, first-year write offs of plant and equipment for corporations and small businesses. This would bring our current tax system closer to a consumption tax and generate new investment in plant and equipment, he said.
The personal side of our income tax effectively is a consumption tax, Lazear reasoned, because most households have not exhausted their opportunities for tax-free savings, such as individual retirement accounts and college savings accounts. In other words, the income that people do not spend they can save free of income tax if they choose qualifying assets.
These changes would likely result in the doubling of the growth rate to 4%. This is vital because over the past five years America has, unfortunately, traded places with Canada and Germany. Our unemployment rate is higher than theirs, whereas it used to be lower. Our deficits are bigger. Our economic growth rate is weaker.
But what could change once could change back in a positive direction. We can implement new policies for economic growth-and we don't even have to stop at 4%.