James Pethokoukis

Politics and policy from inside Washington

Pawlenty’s 5 percent solution

Jun 8, 2011 01:26 UTC

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.

 

COMMENT

Mr. P: This ‘declinism’ you mention has infected Chrystia Freeland, among others, on the Reuters website. See her article about the ‘abandoned’ middle class. This whole overarching negativity echoes the 1970s and brings to mind Jimmy Carter’s speech about the American ‘malaise’. Times were perilous back then too – not that most readers of this site under 45 would know that, or care – but America tossed out Mr. Carter and the Democrats, embraced Ronald Reagan and did what needed to be done. Is Tim Pawlenty another another RR? The sentiments and ideas are right, but can he sell them?

Posted by Elektrobahn | Report as abusive

Pawlenty’s big economic speech

Jun 7, 2011 16:23 UTC

Just watched Tim Pawlenty outline his approach to reinvigorating the American economy during a speech at the University of Chicago. A few initial thoughts:

1) I would love for some candidate to endorse a flat consumption tax, but Pawlenty’s plan is pretty strong:

· Cut the corporate tax rate from 35% to 15% to spur investment and American competitiveness in the global economy

· End the era of crony capitalism by eliminating corporate tax loopholes, subsidies and giveaways to level the playing field

· Providing the option for small and medium sized businesses to pay the corporate rate

· Replace the individual tax system with two brackets creating a flatter and fairer tax structure

o Individuals making $50,000 or higher will be taxed at 25%

o Individuals making $50,000 or lower will be taxed at 10%

o Married couples making $50,000 or lower will have an effective 0% tax rate

· Eliminate capital gains tax and dividend tax to encourage investment and saving

· Eliminate estate tax and interest income tax

Good stuff all around, boosting both investment and possibly family formation. Also recognizes how the current code encourages an unholy alliance between Big Business and Big Government.  But I would like some more specifics on what tax breaks and loopholes he wants to eliminate.

2) Pawlenty posits a goals of growing the economy by 5% a year for the next decade, generating an additional $4 trillion in tax revenue. Now keep in mind, I don’t think the American economy ever managed that in the 20th century. Indeed, the only examples Pawlenty gave were over a shorter period of time:

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%. In each case millions of new jobs were created — incomes rose — and unemployment fell to historic lows. The same can happen again.

The economy also grew awfully fast in the mid-1960s after the JFK tax cuts.  I am glad he set a high goal, but in terms of getting the debt under control, I would prefer a more conservative forecast. But I am glad T-Paw rejects the declinist attitude that sees the U.S. only growing between 2-2.5%. We can certainly do better than that.

3) On cutting spending, more good ideas, especially the bits on reforming the federal government. But I can’t take spending caps too seriously without a specific plan on making them work. During the Q&A afterward, his answer on Medicare — about changing payment incentives for healthcare providers — shows his approach is still a work in progress. It seems unlikely he will be adopting the Ryan plan, but we’ll see.

· Pass a Constitutional amendment that requires a balanced federal budget and caps federal spending as a percentage of our economy around the historic average of 18% of GDP

· Propose that Congress grant the President temporary and emergency authority to freeze spending at current levels, and impound up to 5% of Federal spending until the budget is balanced if Congress fails to cut spending

· Apply the “Google Test” to government agencies. If you can find a good or service on the Internet, then the federal government probably doesn’t need to be doing it.

· Employ Lean Six Sigma throughout all federal agencies saving up to 20%

4) I should also note that Pawlenty said he wants to eliminate the Fed’s dual mandate and have the central bank focus only controlling inflation.

 

 

COMMENT

Mr. Pethokoukis, Sir.What exactly in Mr. Pawlenty’s plan do you find so wonderful, other than the tax cuts?
The only actual “facts” that T-Paw uses is the fact that growth was very high during the latter part of the Reagan and Clinton administrations, AFTER taxes had been RAISED!
Growth during the Bush II years was extremely anaemic, and such growth as there was was financed by a massive increase in deficit spending and increased private debt as well. There was actually a net LOSS of jobs in the private sector during those tax cut years, so I fail to see how lowering the tax rates provides any evidence at all for private sector growth.
This “plan” is, of course, total economic nonsense, and although it might sound delightful to those whose economic theories start and end with Ayn Rand, it is both a non-starter politically as well as totally indefensible when rigorous economic analysis is applied to it.
The saddest aspect of this though is when respected news organizations like yours allow for opinion pieces like this to be written that have absolutely no relationship with reality as we know it.

Posted by jimmywitz | Report as abusive

Supply-side Pawlenty?

Mar 29, 2011 16:08 UTC

My pal Larry Kudlow had a great chat with Tim Pawlenty last night on CNBC. And he pressed T-Paw hard on a lack, so far, of a detailed pro-growth agenda:

KUDLOW: Reagan had flatter tax rate reforms. … Let’s have new incentives.  Let’s stop the double tax on capital gains and dividends and estates and savings and investment. Where are the business tax cuts? We need specifics governor. You’ll turn people on with specific growth measures but you don’t have them yet.

PAWLENTY:  Larry, I think have been in the race for all of three business days now. Nonetheless, I agree with what you said. I’ve talked publicly and repeatedly … whether it’s corporate rates, whether it’s individual rates, whether it’s dividends, whether it’s capital gains, whether it’s the death tax, whether it’s capital equipment … we need to take all of those rates and reduce them as far as we can. We need to simplify the tax code, make it pro-growth, make it more transparent and make it friendlier for investment and the deployment of capital.

And then Larry asked him if he was in favor of a 15-17% flat tax. Pawlenty’s response: “Of course, I support a flatter tax rate. I don’t know if we can get to a flat tax in one leap, but moving in a flatter more transparent direction, absolutely.”

Me:  By not pushing bold reform on taxes from the outset, Pawlenty is in danger of negotiating against himself. Now is the time for big ideas. Beyond that, Pawlenty did talk coherently about a strong dollar — maybe creating some sort of commodity link — and applying Six Sigma to the federal government, which is an intriguing notion.

It’s still early, but it seems to me that with current and potential  GOP 2012 candidate all saying kind of the same thing about Obamacare and debt, taxes are a way for Pawlenty to distinguish himself. He’s not going to overwhelm people with his personality, so why not do it with bold ideas, as Kudlow suggests?

Would Tim Pawlenty be America’s Six Sigma president?

Mar 28, 2011 19:04 UTC

Much more of this, please:

Six Sigma dates back to 1986, when a Motorola engineer created the methodology to boost productivity and quality with as few errors in production as possible — fewer than 3.4 defects for every 1 million attempts, to be exact. The result was data-driven program that systematically measures, defines and analyzes all aspects of a business. Its name derives from a statistical term that calculates how far a process deviates from perfection.

Pawlenty was first introduced to Six Sigma during his tenure as governor. In 2003, the new commissioner of the Minnesota Pollution Control Agency brought in Six Sigma to train her staff. At the time, agency was only issuing about 9 percent of its permits every six months. But with Black Belts and Green Belts from Six Sigma on board, the agency greatly accelerated its work and began issuing 70 percent of the permits within that time frame — all without layoffs or relaxing environmental standards.

Pawlenty admitted he hasn’t taken the Six Sigma Six Sigma dates back to 1986, when a Motorola engineer created the methodology to boost productivity and quality with as few errors in production as possible — fewer than 3.4 defects for every 1 million attempts, to be exact. The result was data-driven program that systematically measures, defines and analyzes all aspects of a business. Its name derives from a statistical term that calculates how far a process deviates from perfection.

I repeat, voters would be more willing to accept cuts to favored programs if they felt government operated a bit more like FedEx or Wal-Mart.

2012 Watch: Pawlenty the tax cutter

Aug 31, 2009 17:15 UTC

How much Tim Pawlenty pay Walter Mondale to say this:

He brings an almost Jack Kemp-like fervor to cutting marginal tax rates; an important predicate for any presidential run may be how Pawlenty handles a recommendation from a task force he appointed that the state replace some corporate and individual taxes with consumption levies. His emphasis on taxes rankles many Minnesota Democrats. “There is a long line of progressive Republican governors in Minnesota who are big supporters of education,” says Walter Mondale, the former vice president and U.S. senator. “He is much more interested in tax-cutting and has broken with that tradition.”

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