How to Get Our Economy Back On Track II. Entrepreneurship!


As many commentators, including myself, have pointed out, we need faster economic growth in order to create more and better paying jobs and also to bring in more tax revenue to shrink our huge budget deficits.
The rate of economic growth equals the growth of labor productivity plus the growth of employment.  The problem is that both productivity growth and the labor force participation rate have dropped steeply in recent years.

As I have pointed out in previous posts, the U.S. economy has become less entrepreneurial in recent years in the sense that there are now more firms going out of business than new firms going into business.
An article in yesterday’s Wall Street Journal has another way of looking at this.  The rate of startup formation has been declining in the U.S. for decades (as shown just below). It is obvious that figuring out how to boost entrepreneurship would do a lot to spur economic growth.

This can be accomplished with:

  • General growth measuresTax reform (lower marginal rates paid for by shrinking deductions), regulatory reform and simplification, maximum free trade to open markets, immigration reform to bring in more skilled workers, entitlement reforms to prevent a debt explosion.
  • Business tax incentives. Immediate write-off (i.e. expensing) of business investment. This encourages more investment by eliminating the need for depreciation over an arbitrary number of years. It is paid for by eliminating the deduction for interest expense to finance such investment.

Conclusion. Lots of voices are saying that technological innovation is slowing down and that only fiscal stimulus by the government can speed up growth.  Such pessimistic views will predominate unless the private sector is given the tools it needs to achieve growth in the most productive way.

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Why Is U.S. Economic Growth So Slow?


In a recent post I discussed the issue of slow economic growth in the U.S. and why it is so harmful and dangerous to our nation’s future.  In short, it not only deprives many citizens of a more prosperous life and makes it more difficult to shrink our annual budget deficits, but it also endangers our national security as our chief competitor, China, grows faster than we do.
In the long run, an economy can expand only at a rate sustained by the growth of its labor force and the productivity of its workers.  I have previously pointed out  that there are far too many prime working age men who are unemployed.
capture67Today let’s talk about the rate of productivity growth (see the above chart).  In particular:

  • From 1994 – 2003, U.S. output per hour worked rose annually by an average of 2.8%.  Since then it has grown at an annual rate of 1.3%, including just 0.4% since 2011.
  • Business capital spending is down as companies are spending their profits to buy back stock rather than making new investments (see second chart).

    capture69As I have previously discussed, the U.S. is now caught in a vicious trap:

  • Slow growth keeps the under-employment level (U6) high and also means minimal raises for employed workers  The resulting economic slack leads to
  • Low Inflation. But low inflation in turn means that the Federal Reserve can maintain
  • Low Interest Rates to try to encourage borrowing. But an unfortunate side effect of low interest rates is that Congress can borrow at will and run up huge deficits without really having to worry about paying interest on this “free” money. This leads to
  • Massive Debt. But what is going to happen when inflation does eventually take off and the Fed is forced to raise interest rates? Then we will be stuck with huge interest payments on our accumulated debt. When this happens, interest payments plus ever growing entitlement spending will eat up most, if not all, of the federal budget. This will inevitably lead to a severe
  • Fiscal Crisis.

    It is absolutely imperative to speed up economic growth.
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