Economic Growth Is Simple: Do the GOP Candidates Know This?
Tonight on CNBC, Republican presidential candidates will gather in Boulder, Colorado for a debate that will focus on how to induce sustainable economic growth - that is, an enduring prosperity with rising employment, incomes, and output. Taxes, regulation, trade, entitlements and other government spending, and perhaps monetary policy as well will all be discussed, and the economy is likely to be the focus on November 10 in Milwaukee, too, when Fox Business Network and the Wall Street Journal host the next debate.
At last there will now be substantive focus on what voters care about most, as numerous recent surveys have shown pocketbook concerns dominate Americans' list of worries now. For example, a Gallup Poll earlier this month showed nearly 60% of voters' top worries are related to the economy (with immigration, health care, education, and the environment included alongside jobs and incomes). Further, a recent Fox News poll revealed that six years into a recovery, 59% of the American people think we are still in or near a recession, and Rasmussen's poll out Monday evinced pessimism more generally, with only 27% thinking the country is heading in the right direction - near a yearly low for this regular survey. Worst of all was the Wall Street Journal/NBC finding from last fall that 76% of Americans did not feel confident that "life for our children's generation will be better than it has been for us," which was ten percentage points worse than this periodic poll question had ever recorded.
Such deeply-entrenched pessimism is anathema to a uniquely American culture of enterprise that has long embodied the can-do spirit that has always meant children here did better than their parents. Indeed, ever-rising living standards are the expected norm in a free market economy where wants are insatiable and the institutions of liberty (e.g., property rights, rule of law, entrepreneurship, sound money) permit productive commerce toward their fulfillment. Given this natural tendency to human flourishing that is the singular greatest hallmark in a free society, what has led to such pervasive fearfulness about this country's prospects? And what can be done to return to the high-octane growth of former times?
These two questions form the twin book-ends of the coming debates' discussions, and a brief look at recent historical trends in the economy suggests that they should be the central focus of all policy debate and discussion throughout 2016:
Economic growth. The cardinal metric for macroeconomic performance is the GDP growth rate. Like all aggregate statistical measures, GDP growth is imperfect in some ways, in that it misses much in the way of output (e.g., household labor is not counted), or, includes government spending in its calculation. Or more recently, output numbers are clouded by disruptive technological change: the smart phone, for example, is now a complex information/utility appliance that has decreased demand for a whole host of goods, from flashlights to calculators to encyclopedias (and hence, life is better as people are more productive in this new era, even as some encyclopedia salesmen or flashlight assemblers are now newly unemployed). Nonetheless, over the long haul, GDP growth is a solid indicator of economic health, and people do notice, in a pervasive sense, the difference in an economy growing sluggishly (at, say, 1-2%) versus one growing at 3-4% or more.
And here the data for the U.S. economy reveal a startling fact: U.S. economic growth, which had averaged close to 3.5% per annum after World War II up through 2000, 3.35% across the 20th century, and about 3.7% since the Founding of the Republic, has averaged 1.8% annual growth in the fifteen years of the Bush 43 and Obama presidencies (assuming 2.25% growth for the current year in full). This is as astonishing an historic turn as it is bad - to see this, envision the U.S. economy, with its 2015 GDP of $17.8 trillion, growing at 1.8% (last 15 years) and then 3.3% (post-World War II) over the next 20 years. The Bush 43/Obama growth rate yields a $28 trillion economy in 2035, whereas return to the higher post-war growth trajectory would mean a $40 trillion economy two decades out. The $12 trillion difference is the equivalent of an "extra bonus" of the current British, German, and Japanese economies added in, with the tens of millions of extra jobs that the larger economy implies.
Jobs and wages. The causes and consequences of this turn to a long-term sclerotic economy emblematic of European welfare states ought to animate the coming candidate forums, and indeed be central to all of 2016's policy debates. But one very stark result of a permanently-lowered growth rate is concomitant stagnation in both real wage and job growth.
To see the magnitude of this, consider that in the 40 years spanning the inaugurations of John F. Kennedy and George W. Bush, more than 165,000 jobs were created each month - for 480 months. Yet in the near 15 years of the Bush 43/Obama era, monthly job growth is less than one-third this job creation rate. And in the same fashion, household incomes peaked in the U.S. in 1999 and have trended mostly downward ever since, currently more than 7% lower than 16 years ago.
Again, how and why has this happened? And what can be done now to return to the high-octane growth that made the American economy the world's richest?
Entitlements and government obligations. When Ludlow, Vermont's Ida May Fuller, the first recipient of a Social Security check in the United States, began paying into the government-run insurance scheme in 1937, there were 16 workers for every recipient. Today there are slightly more than 3 workers per recipient, and this trends toward 2.1 by the year 2040. This portends negative cash flows (and de facto bankruptcy) for the Social Security program in the immediate years ahead, and similar grim mathematics threatens to overwhelm the government's health insurance schemes.
This is best scene in the work of Boston University economist Laurence Kotlikoff, who has, via projections of the Congressional Budget Office (CBO), calculated the "fiscal gap" in government spending and receipts out to an infinite horizon, in present value terms. In plain English, Mr. Kotlikoff looks at all government cash flows, both those received via taxes and those spent on entitlements and discretionary government programs, out to infinity. He therefore develops a window into both the current debt that has already been incurred ($18.4 trillion) as well as all future debt incurrence. Assuming the CBO's long-run projected growth rate for the U.S. economy of 2.3% per annum, the current "fiscal gap" stands at $199 trillion. This is a staggering amount that, as a practical matter, can never be covered, and hence implies an eventual national economic collapse and bankruptcy.
Of interest, happily, if a 3.1% growth rate is substituted for the CBO's 2.3% growth, holding obligations and spending constant, the fiscal gap disappears entirely - a "fact" implicitly "known" to global bond markets, which have continued to show long term health in spite of recent years' gyrations in the U.S. and other major countries' economies, out of control spending, bankrupt entitlements, and ongoing military conflicts and instability in the world's oil-producing regions.
But there are no guarantees, and the policy changes necessary to induce strong and durable economic growth in the U.S. must per force ensue in the near future, lest global bond investors withdraw their confidence in America's political class to finally choose the sustainable prosperity such changes imply.
And what, specifically, are the needed policy changes to ensure a return to strong economic growth, with the jobs and rising incomes this implies? Stated more prosaically, what policies will re-ignite the optimism and confidence that drove our ancestors to create the wealthiest society the world has ever seen, where bricklayers and barbers live in a luxury unknown to European royalty of just the recent past? Discussion of the needed policy changes should dominate the coming debates, but they are the self-same items enunciated long ago in comprehensive fashion by Adam Smith: in the language of today, low tax rates, minimized government spending, a light regulatory footprint, sound money, and unrestricted trade. All of which, happily, conduce to an outpouring of capital accumulation, investment, and risk-bearing entrepreneurship that will mean ever-rising employment and output levels, incomes, and living standards. Let's hope that starting tonight, the CNBC interlocutors focus on these and little else, in deference to the imperative to return to the prosperity that has always fueled the aspirational dreams of a free people, and the uniquely American confidence in an ever-better future that in turn sustained our past prosperity - and could once again.