The Road to Freedom Page 13
•Growth today means a better life for the future. Every 1 percent of additional growth today will double real incomes seventy-two years from now.6
Figure 7.1. What would it take to grow our way out of our problems? Growth rates needed today to lower the 2035 projected budget deficit. (Source: Author’s calculations. Congressional Budget Office 2011 Long-Term Budget Outlook Alternative Fiscal Scenario, http://www.cbo.gov/doc.cfm?index=12212.)
There are two contradictory and irreconcilable strategies for achieving higher economic growth in the U.S., and Americans must choose which one they want to pursue.
According to the first, the key to restarting economic growth is the state. The policy prescription is therefore higher levels of government—more stimulus, more taxes, and more borrowing.
According to the second strategy, the source of economic growth is free enterprise. The policy prescription is to get government out of the way of entrepreneurs. That means tax reform, less government spending, and policies that make it easier for entrepreneurs to succeed.
If we choose the second strategy, there is just one basic principle to remember in making policy: Break down barriers to entrepreneurship. The president should wake up each morning and—before his feet hit the floor—ask, “What will I do today to get the government out of the way of entrepreneurs?”
WITH A MORAL IMPERATIVE firmly in mind, and armed with both the key facts and fundamental principle for economic growth, what specific policy measures should we advocate?
Fixing the tax code is a top priority—America’s tax system is a huge barrier to entrepreneurship. At a minimum, the U.S. should drop the top federal corporate income tax rate to no more than 25 percent, from the current 35 percent, which is internationally uncompetitive. As for individuals, the U.S. should replace the current income tax with a consumption tax to stop discouraging investment. These reforms would spur growth significantly, according to the best nonpartisan estimates available.7 More specifics on each of these policies will come a bit later in the chapter.
In addition to fixing the tax code, the U.S. should also lower regulatory barriers to business. Examples of onerous regulation have been easy to find for years. But most recently and prominently, the Obama Administration’s regulatory response to the financial crisis—the Dodd-Frank Act—created huge new sets of damaging rules for companies large and small. Yet no evidence suggests it will do anything to prevent another economic calamity.8
But shouldn’t we do something to prevent another housing and financial crisis? Yes, and that means facing up to what really went wrong in the American economy. The housing crisis occurred because people borrowed too much to buy houses, with down payments that were too low. Without a sufficient down payment, people had an incentive to walk away from their mortgages when their home values fell below what they owed—and millions walked away as a simple business decision during the 2008–2009 recession.
To mitigate the risk of another collapse of this sort, America doesn’t need 848 pages of legislation. It needs a government that stops encouraging people with subsidized mortgages and tax deductions to buy houses they cannot afford. And on the private sector side, lenders could simply require a 20 percent down payment on any residential housing loan. A 20 percent down payment requirement would ensure that every homeowner had enough invested to forbear most housing price downturns without walking away. It would do more to prevent the next collapse than the myriad regulations of the Dodd-Frank Act, and would do so without hindering growth.
In addition to tax cuts and regulatory reform, growth requires that government spending be capped and cut. The current administration argues that government spending can stimulate long-term growth, but this claim is inconsistent with the evidence. Chapter 5 showed that a 10 percent increase in government spending and taxation has the effect of reducing economic growth by up to 1 percentage point per year.9
There are three reasons government spending hampers growth. First, spending that is paid for with current taxes creates a drag on the private economy. Second, if spending is paid for by borrowing, this lowers the confidence of investors today who know that sooner or later it will have to be paid back. Third, when borrowed money is ultimately paid back, the taxes hurt growth in those future years.
Later in the chapter, I’ll single out specific areas of government spending that need to be cut: entitlements and the government payroll, in particular. But for now, it suffices to say that out-of-control government spending is hindering America’s lasting economic recovery.
If there’s one thing entrepreneurs hate most about government, it’s unpredictability. The complaint about the current administration I hear more than any other from businesspeople is that they cannot invest with confidence because they have no idea what policies they will face. Not surprisingly, then, research has shown that policy uncertainty harms growth and has hampered our nation’s economic recovery.10 Economists from Stanford University and the University of Chicago have calculated that between 2006 and 2011, entrepreneurs’ inability to predict government policy has lowered real GDP by about 1.4 percentage points per year and lowered employment by around 2.5 million jobs.11
Entrepreneurs say they are staying on the sidelines because they don’t know what the future holds in three principle areas: ObamaCare’s health reforms, the Dodd-Frank Act’s financial market regulations, and proposed tax increases. Repeal of ObamaCare and Dodd-Frank would help economic growth dramatically, as would extending the so-called “Bush tax cuts” while starting real tax reform efforts.
Finally, if we want to spur growth, the U.S. must get serious about immigration policy. America needs more talented people to come to our shores. Right now, the debate about immigration is completely misdirected. Most pundits and politicians continue to focus on illegal immigration. Meanwhile, they are ignoring the most destructive immigration policy of all: expelling foreign students and professionals after their student and temporary visas expire. Recent research shows that for every immigrant with education in science, technology, mathematics, or engineering, 2.62 new jobs are created for native-born Americans.12
To grow the economy, the U.S. needs to increase productivity, and in order to increase productivity, it needs a skilled and entrepreneurial labor force. Every student with a clean legal record who obtains a degree from an American university should automatically have the right to become a permanent resident. People who worry that those students will create unemployment for Americans are misguided. Skilled and talented immigrants create jobs, opportunity, and growth; they do not take them away.
One moral point on this last issue is worth making. We shouldn’t forget that for almost all of us, immigration is our own family story. If you are glad to be an American, thank the immigrants who risk it all to come to the U.S.
ISSUE 2: PUTTING AMERICA BACK TO WORK
Making the moral case for job creation is not hard: Jobs are not just a source of money for Americans; they are a ticket to earned success. High unemployment, especially when it is avoidable, is fundamentally unfair because it robs people of their potential fulfillment. It is especially harmful to the poor and the young, who have had fewer economic opportunities than others. As of November 2011, unemployment for the sixteen-to-nineteen age group is running at 23.7 percent, close to the highest teenage unemployment rate on record.13
Unemployment is also getting in the way of life’s greatest joys, such as marriage, starting a family, and pursuing education. When the young are hurt by persistent unemployment, they delay many of these decisions.
On the current policy path, America will face permanently higher levels of unemployment, just like its social democratic European allies. A return to free enterprise principles would allow America’s entrepreneurs to create private-sector jobs. The choice, for millions of fellow citizens, is between welfare checks and paychecks. That is the moral choice between earned success and learned helplessness.
Here are the depressing facts about unemployment in America t
oday that show the urgency of making better policy:
•Unemployment rose from 4.7 percent in January 2006 to 7.8 percent when President Obama took office in January 2009.14 By October 2009, unemployment reached to 10.1 percent, and hovered above 9 percent for a twenty-one-month stretch from May 2009 to January 2011—the longest such period since the Great Depression.15 As of December 2011, the unemployment rate was still 8.5 percent.16
•Fourteen million is the official jobless number, but it isn’t the one that matters. An additional 8.8 million people are involuntary part-time workers and another 2.6 million are “frustrated workers,” having quit searching for a job even though they would work if they could.17 Combined, these three groups total approximately 25.4 million people, or 16.5 percent of the labor force.
•A 2011 nationwide survey found that 18 percent of young people said they delayed marriage due to job worries or unemployment; 23 percent delayed starting a family; and 27 percent delayed furthering their educations.18
When talking about job creation, we need to stay focused on three core principles.
First, the government is terrible at “picking winners” in the economy. With the stimulus spending of the past several years the government has tried to dictate the parts of the economy that deserve public-sector support, and the parts that don’t. These policies usually lead to failure and hurt job growth.
Second, the government must guard against special interests, including organized labor and the crony corporations with disproportionate access to government power. When special interests set policy or embed themselves in the government itself, job creation suffers.
Finally, the government needs to keep its payroll to a minimum. Obviously, there is a need for a staffed public sector, but government jobs are not a good substitute for private-sector jobs when it comes to reducing unemployment.
AT THE OUTSET of the current recession, the Obama administration’s economists promised a swift decline in unemployment if only Americans would agree to large increases in the size and scope of government.19 We got only half the deal, though: government exploded, while unemployment stayed high. The government economists are scratching their heads, but there really is no mystery here. Businesses are not hiring precisely because of public-sector growth, excessive regulation, labor market interference, and tax complexity.
First, consider the massive growth in government regulation in the past three years. As we saw a moment ago, the Dodd-Frank Act has produced regulatory costs and uncertainty that are actively dissuading businesses from expanding, which means they are not hiring.20 The same is true of ObamaCare, which is discouraging firms from creating jobs because they do not know what the mandated cost of doing so will be in the coming years. Scrapping these programs is a primary job-growing priority, according to many economists.21
Government growth—even the creation of government jobs—also crowds out employment. This seems counterintuitive to a lot of people—a job created by government adds to total employment, right? Wrong. Economists have shown that the administration’s stimulus spending created or saved 450,000 government jobs but destroyed or forestalled 1 million private-sector jobs.22 We saw in Chapter 5 that every government job costs between 1 and 2.2 private-sector jobs. This is because of the detrimental tax and public debt effects on investment and confidence, as well as the fact that government tends to crowd out the more-productive private sector when engaged in the same basic activities.23 Downsizing the federal workforce will increase net American employment.
Another way the government destroys jobs while claiming to create them is by subsidizing favored industries. Take, for instance, the administration’s “green jobs” initiatives—to subsidize companies that develop sustainable energy and products. These initiatives actually destroy jobs by diverting profitable private investment into public subsidies to industries that are not financially viable. Consider the case of the solar company Solyndra, which received $535 million in federal government loan guarantees. The U.S. Energy Secretary called the guarantees “part of President Obama’s aggressive strategy to put Americans back to work.”24 Solyndra estimated that the complex covered by the government’s support would employ 3,000 people. Instead, Solyndra went belly-up in 2011 (meaning zero new jobs). There are dozens of Solyndra-like boondoggles that are not yet in the news. Government efforts such as this should be abandoned and replaced with a pledge to get rid of all subsidies.
Reasonable people disagree about whether labor unions are a good or bad thing for America, on balance. But almost everyone knows that they increase labor prices and thus drive down hiring. One of the worst things the government can do in periods of high unemployment, therefore, is to push the private economy toward greater unionization. Unfortunately, that is exactly what has happened. The administration’s $787 billion economic stimulus package in 2009 was preceded by an executive order from President Obama strongly encouraging—in effect mandating—that government agencies only use unionized firms for large-scale construction projects.25
The administration’s pro-union policies don’t stop with the economic stimulus. Consider the recent activities of the National Labor Relations Board (NLRB) toward the airplane manufacturer Boeing. The NLRB filed a complaint against the company, in an attempt to coerce Boeing to move airplane construction from non-union South Carolina to union-heavy Washington State.26 While the case was litigated, four thousand workers in South Carolina sat idle during the worst period of unemployment in decades. (The case was dropped in December 2011, but not until Boeing agreed not to build another plant in South Carolina.27) This sort of labor interference cripples job creation by making companies more hesitant to invest in new plants, keeping labor sidelined, and lowering productivity.
Tax reform is also essential to job creation. A simpler, more efficient tax code would allocate resources more effectively and stimulate economic growth. It would reward the most productive firms, not the cleverest accountants and the companies most closely tied to politicians. And it would draw investment to the United States. Employment markets would improve as a result.
In sum, the government is impeding the ability of entrepreneurs to create jobs. The solution is less government, not more. One practical way to do this, especially in the case of regulation, might be to require that the government issue an Employment Impact Statement for new policies before they are enacted. Few issues are more important to the American people than jobs—and the government should know exactly how many of them will be lost as a result of raising costs on employers.
ISSUE 3: GETTING THE UNITED STATES OUT OF DEBT
Most people see private debt as a moral issue. We’ve all known people who live beyond their means and fail to pay back their debts. We judge them harshly for being irresponsible and self-centered.
If debt is a moral issue at an individual level, it can be a moral issue at the national level, too. The U.S. is the world’s most successful nation. Yet years of profligate government spending and poor planning have left America in a huge debt crisis. Unless it reduces deficits and stabilizes its government spending relative to the size of the economy, it will have just three choices: steal from future generations, inflate the currency to lower the real value of the debt, or refuse to repay those to whom it owes money. All these options are immoral because they are unfair: They harm others who have done no harm to America.
Many European allies are in economic crisis and will face austerity for at least a decade. The reason is simple: They lived beyond their means for years by borrowing to pay for current consumption and government services. Today, the bills are due, and the rest of the world is increasingly unwilling to lend them money. Americans have to choose whether to accept that same future or not. What kind of country will we leave our children? One that offers the opportunity we have enjoyed—or one that leaves our kids to foot the bill for the current generation’s inability to curb government spending? In my view, the moral answer is obvious.
Here are a few facts that sho
w how urgent it is that America fix its debt problems:
•The CBO estimates that, at the end of fiscal 2011, the federal government’s gross debt is 100 percent of annual GDP.28 Economists find that countries rarely are able to recover from this crushing level of debt without falling into decline.29 America is at the edge of an economic abyss.
•The U.S. government’s deficit in 2010 alone was $1.3 trillion (8.9 percent of GDP), and the CBO estimates that the fiscal 2011 deficit will also reach this level.30 To put this into perspective, in 2011, the U.S. will borrow about $4,152 for every person in America,31 to pay for a government that 65 percent of Americans already believe is too large.32
•Servicing the national debt in 2011 cost an estimated $221 billion.33 Debt service costs will reach $1 trillion in 2023 under current policies. Considering the level of debt, this is actually a bargain because of historically low interest rates. If the interest rates the U.S. pays on its debt were to rise by just one percentage point, it would cost an extra $1.7 trillion over the coming decade.34
•Under current policies, federal spending will exceed revenue by 10.1 percent of GDP over the next twenty-five years. Even ignoring the existing debt, closing that gap completely with taxes would require an immediate and permanent 56 percent increase in all federal tax revenues.35
There are three core principles to keep in mind when addressing the debt crisis.
First, the debt problem has one fundamental cause that outweighs all others: out-of-control entitlement spending. The U.S. cannot fix the deficit and debt problems without taking on entitlement reform. Any politician who suggests otherwise is not telling the truth.
Second, debt crises are more successfully dealt with through spending reductions than with tax increases. This is just common sense. If you took over a private company that was failing because of out-of-control spending, you would focus first on spending, not raising prices. Only governments have the nerve to argue that profligate spending can be fixed with more confiscatory taxation.