January 24, 2013
The mammoth US economy is sputtering along. Its fiscal and monetary imbalances while not yet as acute as Greece’s, are unsustainable. But America is not Greece. An anemic US economy is a drag on world growth. Another crash would be catastrophic.
With the ballyhooed New Year’s Day fiscal-cliff deal, pundits and Wall Street breathed a sigh of relief. However, while it eased uncertainty, the deal wasn’t pro-growth and didn’t even put an installment on solving America’s pressing fiscal issues.
Lurching into 2013 America remains mired in the economic doldrums, with unsustainable trillion-dollar-plus deficits as far as the eye can see, improving but lackluster GDP growth, and a December 58.6% employment-to-civilian-population ratio stuck stubbornly near its thirty-year low. While US population increased 11.4 million since November, 2007, soberingly, there are 3.3 million fewer jobs.
Human action determines economic growth. Decisions to work an hour more, invest, start a business, hire, or go on the dole, are driven by incentives. The average 5th grader but not necessarily Washington mandarins understands you get more of what’s rewarded and less of what’s punished.
Medieval English friar and philosopher William of Ockham posited when trying to understand phenomena the hypothesis requiring the fewest assumptions was preferred. The test came to be known as Occam’s razor. Applying it to predicting President Obama and Senate Majority Leader Reid’s positions, they are consistently on the side of the issue putting a damper on growth, diminishing economic freedom and increasing the state’s role.
Thirteen fiscal-cliff-deal and Obamacare tax increases batter America effective New Year’s Day, including: (1) a 48% increase in the 4.2% payroll tax in place since 2011, (2) for high-income earners marginal income-tax rates rising from 35% to 39.6%, capital gains and dividends taxes from 15% to 20%, a 3.8% surtax on investment income, and a .9% hike in the hospital-insurance portion of the payroll tax, (3) boosting the death tax from 35% to 40%, and (4) a 2.3% excise tax on medical devices, all of which suppress growth.
The deal also provides billions of dollars of tax-credit subsidies for political cronies including rum producers, Nascar track owners, Hollywood and
fashionable but uneconomic bio and algae-based fuels and wind-power, indirectly rewarding rent seekers such as GE and Siemens.
It extended yet again unemployment insurance. When unemployed receive benefits for almost 2 years it’s European-long-term dependency, not insurance, sapping initiative and prolonging unemployment.
Since 1870 US-production growth averaged 3% annually. From 1981 through 2008, real-US-GDP growth averaged 3%. Under Presidents Reagan and Clinton annual-real-GDP growth averaged 3.54% and 3.88% respectively. The American way has been to grow the pie. From 1870 through 2010 real per capita income increased twelvefold.
Since 2007 however the US growth trajectory declined from its century plus trend.
After WW2 Europe was catching up to the US, but in the seventies with the advent of its massive welfare and regulatory state, growth stagnated. Nobel-prize winning economist Robert Lucas Jr. attributes this to Europe’s labor, welfare and tax policies and worries by embracing similar policies the US condemns itself to sclerotic, EuroSocialist growth.
Apologists for America’s economic malaise suggest tepid 2% growth or worse is the “new normal.” Excepting the Great Depression and Great Recession, the economy normally roars out of recessions, the deeper trough the more robust the recovery. The Reagan recovery crested at 7.2% real-GDP growth in 1984. After 2009’s 3.1% real-GDP decline, growth should have been well above average.
Senator Phil Gramm said America’s problem was too many people in the wagon and not enough pulling it. Nobody however, argues America doesn’t need or can’t afford a safety net. It ought to be easy to get on, but hard to stay on, and stigma should attach. Washington however turns this timeless wisdom on its head, encouraging individual and corporate welfare and punishing enterprise and wealth creation.
A whopping 47.5 million Americans receive food stamps, up 68% from 2008 and 176% from 2000. Houston, we have a problem. A record 8.8 million Americans collect disability. In the last four years disability recipients increased four times faster than new jobs. In a market where most employment opportunities are not stevedore or UFC-cage-fighting jobs, that suggests an increasingly loose notion of disabled.
Energy is a cost of everything consumed and produced. A fracking revolution on private land spurred a boom in US gas and oil production, heralding to the dismay of Energy Secretary Steve Chu pining for $10 dollar a gallon gas, the prospect of falling gas and electricity prices. International Energy Agency economist Fatih Birol forecasts the US will surpass Russia in 2015 and Saudi Arabia in 2017 as the world’s largest gas and oil producer respectively, assuming the EPA doesn’t put a kibosh on it.
The fracking miracle happened because of heroic entrepreneurs operating on private land and it wasn’t on anti-growth Greens’ radar. Tellingly, on Federal lands and offshore production has declined and new leases and permits have plummeted.
Obamacare generated a firestorm of protest. The president’s other landmark legislation the 2300-page Dodd-Frank Act is every bit as harmful crowding out the private sector. A healthy financial services sector allocating capital from savers to consumers and investors and providing payment services is vital for economic growth. Dodd-Frank converts financial services into a public utility, suppressing innovation and value creation.
The president, Treasury Secretary designee Jack Lew and Fed Chairman Bernanke continue supporting a reckless zero-interest-rate-weak-dollar policy. Money matters. It’s a store of value, a medium of exchange and unit of account. Interest rates – the price of present versus future investment and consumption, are the economy’s most important prices.
The Fed’s balance sheet mushroomed from $900 million in 2007 to $2.9 trillion, including $1.7 trillion in government securities partially monetizing the national debt. Bernanke’s $2 trillion haven’t ignited explosive inflation yet because in the current climate banks are sitting on record excess reserves. While popular with borrowers, keeping interest rates artificially low punishes savers, distorts consumption and investment decision making, and fuels the next bubble(s).
Growth improves Americans’ standard of living, and makes addressing the politically-difficult exploding deficit and entitlement crises easier. Robust US growth would be a shot of adrenaline for the global economy. Anemic growth is a choice America doesn’t need to make.