Pawlenty’s 5 percent solution
Tim Pawlenty should be praised for decisively rejecting the declinism that has infected much of the Washington and New York elite. His speech Tuesday at the University of Chicago was a robust reminder of all that once was good in America and could be again.
We settled the west and went to the moon. We liberated billions of good people from communism, fascism, and jihadism. We’ve lit the lamp of freedom for the entire world to see. The strength of our country is our people, not our government. Americans believe our country is exceptional. And they deserve a President who does too. We can fix our economy. Our people are ready to get back to work. We just need to give them to tools to get there. And get the government out of the way.
In his call for a national goal of 5 percent GDP growth for a decade (and, presumably, between 3 and 4 percent thereafter), Pawlenty seems to be echoing JFK rather than Ronald Reagan. But both presidents recognized that deep tax cuts were critical to unleashing the private sector and reinvigorating a flaccid economy.
Is 5 percent GDP growth a realistic goal? It’s certainly a great aspirational one, but many mainstream economists would say it’s not doable. Here’s the challenge: The U.S economy hasn’t grown so fast for so long since the late 1800s. More recently, the economy expanded at a pace just shy of 6 percent from 1962-1966. And as Pawlenty mentioned in his speech, “Between 1983 and 1987, the Reagan recovery grew at 4.9%. Between 1996 and 1999 – under President Bill Clinton and a Republican Congress– the economy grew at more than 4.7%.”
Overall, U.S. GDP growth has averaged 3.3 percent over the past 50 years, with roughly half coming from a growing labor force (1.6 percent) and half coming from higher productivity (1.7 percent). But with America aging, annual labor force growth is expected to slow dramatically to just 0.5 percent. The McKinsey Global Institute thinks a higher retirement age and smarter immigration policy could boost that rate to 1 percent or so. But even then, productivity growth would have to increase to 2.3 percent long term just to maintain that historic growth rate.
The good news is that McKinsey thinks that’s possible, too. One move it recommends is enhancing the U.S regulatory environment. Another is reducing marginal tax rates. Both actions are in line with the Pawlenty agenda. Pawlenty’s proposal to eliminate capital gains taxes would create a de facto consumption tax, which many economist think good for growth. He would also lower the top individual tax rate to 25 percent and the top corporate rate to 15 percent. And like McKinsey, Pawlenty thinks the federal government and healthcare sectors can made be much more efficient and productive. He also wants to sunset federal regulations.
The better news is that GDP growth of, say, 3.5 percent would take a huge chunk out of America’s long-term debt problem since the government’s long-range forecast assumes growth of just 2 percent. So Pawlenty is squarely on the right track. Higher growth is key to avoiding a debt crisis, not to mention improving the American standard of living. With the right policies, America can grow a lot faster than what the pessimists in the Congressional Budget Office and center-left think tanks believe.
But is 5 percent possible, or even 4 percent? That really depends on the pace of innovation. Advances in genetics, robotics, artificial intelligence and nanotechnology could bring about another Industrial Revolution. Innovation expert and computer scientist Irving Wladawsky-Berger think the simultaneous advance of information technology and globalization and entrepreneurial capitalism worldwide is ushering in a “golden age of innovation.” And the faster the world grows, the faster American will grow. And vice versa.
And government’s role is all about creating a fertile environment for growth and innovation through smart tax, regulation and (limited) spending policies. Pawlenty’s “Better Deal” would do that.