Economic Growth – Balancing the Federal Budget without Spending Cuts

As noted in the previous post, there is a recently published book – The 4% Solution – that is based on the idea that if we could have 4% economic growth, we could balance the Federal budget without a major austerity program or raising tax rates.  Because taxes are a % of things that make up economic GDP, increasing GDP will increase tax revenue without any change in rates.  A 4% per year rate of growth would increase tax revenue enough to cover current spending levels.  We are currently growing at 2-2.5% rate.  So what would it take to increase that?  Since Keynes published his book in the late 1930’s establishing the field of macro-economics, most of the attention that we have given has been to Federal fiscal policy – i.e. tax rates and spending.  There have always been are more variable factors than those two.  So the question here, is what other things would make a difference to the overall state of the economy?

My minister likes to point out to his congregation from time to time that, if you live in the US and have a bank account of any size you are better off than 98% of the people in the world.  Not sure where his number comes from.  But since he is impeccable in his research, I’m sure it’s accurate.  How did we get so well off?  Most of us think that it was a viable and vibrant free enterprise system plus a culture that put value on individual self-reliance and responsibility. Unfortunately, most of us don’t compare ourselves to all the people in the world, but rather our fellow countrymen.   All the benefits of our system have not been distributed equally, and maybe not always “fairly”.  But it has made us all better off than any other system in history.  And it is a part of Keynesian economics.  Keynes assumed the existence of a viable free-enterprise system.  The question he addressed was how government fiscal policy would either help or hurt the operation of that system.  But a more basic question might be, what are all the important variables that enable a free market economy to operate effectively.  This was the question put to the 21 authors writing essays in The 4% Solution.  There are many interesting ideas in the book, what follows here are what I believe may be the four most important things.  These come my educational background and my own experience from working 40 years in the private sector.

1.)  Reduce the uncertainty that currently exists in Federal Government Policy:

I’m not the first one to think of this but I do believe that it may be our biggest problem at the moment.  Some economists would say reduce taxes; we reportedly have the most progressive individual rates of any country in the world, both in terms of rates and in terms of actual payments.  However I think the uncertainty in future tax rates is a bigger problem than the absolute rates.  U. S. citizens have shown an ability to adjust to many things given that they know what to adjust to.  There has not been a “permanent” individual tax bill passed in this century, and our politicians debate tax rate changes every year.  Changes that have been frequently made to both the individual income tax and the estate taxes have come with reasonably close-in expiration dates.   Whether you are a retiree concerned about running out of money, or 50 year olds trying to save for retirement now that your kids are out of college, or a young family starting out, your planning horizon is likely to be longer than the expiration date on some of the legislation.  There is enough uncertainty in investing for the future without the government adding to that.

And while we are on that.  What the Fed is doing with interest rates adds considerably to the uncertainty.  Low interest rates may have helped initially, but no one knows how long they will last and no one believes that they won’t rise at some point.  We’ve never had a Fed do some of the things that this one has.  I don’t believe anyone knows – including the Fed members – how it will end with any certainty.  But most of us do what we usually do when we are uncertain, we fear the worst and not knowing what it is safe to do, we do nothing.

The other thing that we don’t believe can go on forever is the running of large deficits.  And if that continues, we don’t know how it will end or when or what the result will be.  I don’t believe most or us expect (or want) the government to balance the budget in one year, but it would be nice if there seemed to be a consensus in Washington that it needed to be done.  But many still seem to be fixed on things that will raise spending.   If we could get the economic growth rate up we could balance the budget at today’s spending levels, but not if we keep raising it as rapidly as we have in recent history.  We may not need to implement significant spending cuts, but it would be helpful if we set a limit on raises that we were willing to hold to with conviction.

Amity Shlaes, who has written a book on the presidency of Calvin Coolidge, writes that his predecessor, Warren Harding, “specifically combated uncertainty by calling for a ‘return to normalcy'”.  She said that Coolidge remained committed to the policy of normalcy.  During his terms in office, he actually cut Federal spending and yet the economy grew at a real dollar rate of 3.48% – not exactly what Keynesian economics would expect.  In addition to that, with the productivity gains made in the private sector,  factory hours were cut from 50 hours to 40 hours per week.  Everyone gained.

2.)  Reduce the cost to private companies of government regulations:

If we are to survive and prosper in the new world economy, we need to have a competitive business environment.   In an article for the Wall Street Journal on June 8, 2013, Niall Ferguson cites data from various sources on how the US ranks on various factors in competitiveness with other countries.  In addition he has information on how those rankings have changed in the last few years.  The direction is definitely not good if you believe we are entering an age of the global economy.

As long ago as 1994, Phillip Howard wrote a book – The Death of Common Sense. In it he argues that much of government regulation, while well-intentioned, has become bureaucratic to the point that it often doesn’t accomplish it’s intended purpose.  In it he cites many examples.  His orientation seemed to be that the government is spending a lot of our money without accomplishing anything for the common good.  But these things also tend to cost business a great deal of money.  In many cases more than what the government is spending making them do things that don’t matter.  Then in 2001 he published another book The Collapse of the Common Good subtitled “How America’s Lawsuit Culture Undermines our Freedom”.  Howard is a New York City Lawyer (co-founder of the New York law firm of Howard, Darby & Levin), so he is criticizing the fraternity of which he is a member.  Ferguson classifies himself as an academic, but in his article he states “We used to have the rule of law.  Now we have the rule of lawyers.”  he also says “The decline of U.S. institutions is well documented but largely ignored”.  Perhaps most bothersome thing is that his story picks up in this century where Howard’s leaves off.  He has 7-10 years of data from the early 2000’s to last year that suggests that most of the world’s countries are making it easier to do business.  In only about 20, he says, has the total  time required to deal with “red tape” gone up, and the 6th worse case is the U.S.  Part of the problem he thinks is excessively complex legislation.  His recent examples – the 848 page Wall Street Reform and Consumer Protection Act (otherwise known as the Dodd-Frank Act).  and the Patient Protection and Affordable Care Act (906 pages).  When the implementation regulations are written, there will likely be many more pages than that.  So how many of  the people affected will ever have the time and interest to read them?  And if no one reads them, how effective will they be?  So he asks – Who will benefit? – His answer is, “Lawyers”.

Other data he cites include:

  • The number of days needed to start a business in the U.S. has risen from 368 in 2006 to 433 in 2013.
  • U.S. ranking in “global competitiveness”:  #1 in 2008 to #7 in 2012
  • Legal System and property Rights  ranking:  #9 in 2000 to #33 in 2010

I believe much of our business regulation legislation  “fights the last war”.  The “Tulip mania” crises happened in 1636, and since then there have been many manias, panics, and crashes.  But there hasn’t been another Tulip Mania even without 848 pages of legislation.  In fact, even though we seem to have a mania followed by a crisis about every ten to twenty years since the 1600s, we may never have had the same one twice.  We the people may learn some things from experience without government help.

Well you are probably as tired of reading at this point as I am tired of writing, so we will save the last two areas for the next installment.  The  two areas left are Immigration and Traditional Values.


About tjc13

BE - Chem Engineering, Vanderbilt Univ, MBA, University of Tulsa - Worked for an energy and chemical company for many years and then started a management consulting business working for both for-profit and not-for-profit organizations.
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One Response to Economic Growth – Balancing the Federal Budget without Spending Cuts

  1. Bob says:

    Good one Tom. Do our elected politicos from Oklahoma get your posts? They should.


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