There is only one source of growth. Nothing other than productivity matters in the long run.
The vast expansion in regulation is the most obvious change in public policy accompanying America’s growth slowdown. Most recently under the Dodd-Frank Act and the Affordable Care Act, the financial and healthcare sectors of the economy have seen radical increases in regulatory intervention. But environmental, labor, product and energy regulation have all increased dramatically as well.
Regulation during the financial crisis did not fail for being absent. It failed for being ineffective.
The best way for the government to subsidize healthcare efficiently is to give straightforward vouchers which people can use to buy insurance or to fund health savings accounts. Such vouchers should replace Obamacare, Medicaid and Medicare.
The basic structure of growth-oriented tax reform is lower marginal rates, paid for by broadening the base by removing exemptions and loopholes. Several additional tax principles are:
The ideal corporate tax rate is zero. A high corporate tax rate hurts the workers more than anyone else.
A growth-oriented tax system taxes consumption, not income and savings.
Eliminating or moving away from taxing income, would lessen the value of personal deductions such as for mortgage interest or charitable donations.
The estate tax is a particularly distorting tax on saving and investment. The tax code should not give strong incentives to middle-age people to stop building their businesses or investing their money.
Solving our immigration problem would turn 11 million illegal immigrants into productive citizens. Guest worker and e-Verify enforcement are fixable problems.
How to speed up economic growth ought to be one of the basic issues in the presidential election campaign. Here are some good ways to do this.
Thanks largely to Donald Trump the Republican presidential candidates are not taking the best approach to winning the White House in November. Instead of arguing with each other about who is the toughest on immigration or who is the most anti-establishment, they should be focusing on one issue where Republicans could have a big advantage: how to speed up our slow economic growth. The Stanford economist, John Cochrane, makes very clear the value of doing this on his blog, The Grumpy Economist. Says Mr. Cochrane:
From 1950 to 2000 the U.S. Economy grew at an average rate of 3.5% per year. Since 2000, it has grown at only half that rate, 1.7%.
The average American is more than three times better off than his or her counterpart in 1950. Real GDP per person has risen from $16,000 in 1952 to over $50,000 today, both measured in 2009 dollars.
If the U.S. economy had grown at 2% rather than 3.5% since 1950, income per person by 2000 would have been $23,000 not $50,000.
Even these large numbers understate reality. GDP per capita growth does not capture the increase in life span – nearly ten years – or other improvements in the quality of life such as health and environmental gains which we have experienced.
Says Mr. Cochrane, “Next to this increase in the standard of living, nothing the candidates are talking about – monetary policy, Fed, fiscal stimulus, minimum wage hikes, pay equity, and so on, even comes close to what growth can bring ordinary Americans.” The important question then is how to speed up economic growth. Even though there are strong headwinds slowing down our modern economy, Mr. Cochrane has many excellent ideas on measures which can be taken to accomplish this. This will be the subject of my next post.