Desperate times do not always call for desperate measures
This is a guest post by R. Glenn Hubbard, dean of the Columbia Business School and former Chairman of the Council of Economic Advisers under President George W. Bush, and Peter Navarro, a professor of economics at the Merage School of Business at the University of California-Irvine. They are the authors of “Seeds of Destruction: Why the Path to Economic Ruin Runs Through Washington, and How to Reclaim American Prosperity.”
These seem like desperate times, particularly for incumbent politicians facing re-election. Here, we have an economy slowing once more below a 2% annual growth rate, even as the unemployment remains persistently high.
In response, a beleaguered White House wants yet another fiscal stimulus, while the Federal Reserve wants more easy money. This desperate fiscal and monetary policy response is, however, the very definition of insanity — using the same stimuli over and over and expecting a different result.
The fundamental flaw in Washington’s stimulus logic is the incorrect assumption that America’s current economic woes began with the 2007 recession. In fact, the roots of our slow-growth problem date back at least a full decade.
From 1946 to 1999, GDP grew annually at 3.2 percent, but since then, we’ve only averaged about 2.5%. On a cumulative basis, this seemingly small difference adds up to about 10 million jobs we failed to create.
What these statistics add up to is not a short term cyclical downturn, but rather longer-term trouble driven by four major structural imbalances in America’s GDP “growth driver equation.”
From 1946 to 1999, consumption averaged 64 percent of GDP but over the last decade, that share jumped to 70 percent. This increase was fueled not by rising wages, but rather by a housing bubble and a mortgage refinancing wave that turned American homes into ATM machines. This overconsumption has been mirrored in a low saving rate and a second major structural imbalance – underinvestment.
Business investment in research and development, technological innovation, and the new productive capacity required for the job creation process has been the single most important missing ingredient in our economic recovery – and for renewed long-term prosperity. Yet the current administration seeks only to raise the regulatory and tax burdens of business.
Chronic trade deficits:
These have been equally destructive. During the 2000s, our current account deficit more than doubled and likely reduced our annual GDP growth rate by a half a percent or more.
Excessive government spending:
This spending has provided some short-term stimulus. However, an overfed Uncle Sam represents the ultimate seed of destruction through upward pressure on taxes and interest rates and a stark future of sharp cuts in defense, education, and infrastructure spending.
Given America’s four major structural imbalances, it should be clear there is no single “magic policy bullet” that can be fired to get America back on a robust and sustainable long term growth path. Instead, any policy blueprint must focus on longer-term structural reforms.
On the tax front, America’s complex income-based system discourages saving and investment. It handcuffs American exporters even as it promotes a cult of fiscal irresponsibility within the Beltway. Any real reform must broaden the tax base, reduce marginal tax rates, and remove tax biases against saving, investment, entrepreneurial risk-taking, and exports.
To reduce our trade deficit, we must increase national saving and constructively engage with the country that accounts for almost half of our deficit — China. The stark reality here is that America’s “Chinese import dependency” problem is rooted in both our own inadequate national saving, a set of protectionist and mercantilist Chinese practices that make it very difficult for American businesses to compete on a level, free trade playing field.
We must also wean ourselves from the idea that we can stimulate our way to prosperity. Accordingly, instead of more easy money, the Fed should turn its emphasis away from discretionary fine-tuning and firmly embrace a policy that has as its goals price stability and sustainable long-term growth.
Over the long — and short — term, in implementing any stimulus, we should favor tax cuts to stimulate business investment as the best way to stimulate job creation. Reducing the fiscal burden of entitlement programs is also essential to restoring prosperity.
These are realistic, sustainable policies we can and must pursue. To succeed, both parties need to broaden their positions: For Republicans, “tax cuts” can’t be the answer to every question. For Democrats, more short-term stimulus and a larger government can’t be the cure-all.
Photo caption: Automated teller machines at a Bank of America branch in Chicago’s Loop June 30, 2005, by John Gress.