The proposal that was put forth by the chairmen of the Deficit Reduction Commission highlighted the seemingly intractable problem of balancing higher taxes or lower spending as a way to bring down the deficit of the federal government. Strangely, most of the discussions of this subject ignore the best way to bring down the deficit, namely to grow the economy. Restoring a growth rate of 4% to the US economy would accomplish much towards bringing down the deficit. First of all, a 4% growth rate would mean that jobs were being created at a rate faster than needed to keep up with population increases. The resulting decline in unemployment would necessarily reduce expenditures at the federal, state, and local government levels (assuming that governments could refrain from still more new spending initiatives.) Second, a 4% growth rate would also mean and increase in tax revenues. Four percent growth translates into an increase to the GDP of about $600 billion dollars. If only one-sixth of that gets taken in taxes, it still means an additional $100 billion per year in revenue for the government. In short, the fastest way to bring down the deficit is to grow the economy.
So what can be done to increase economic growth? There are a number of steps that could be taken right away. First is to remove obstacles to growth. These obstacles include uncertainty, restrictive regulations and risky government changes. In the last two years, Obama, working with his party, has injected major amounts of uncertainty into the economy. Obamacare places a big question mark on the cost of healthcare for business as we move forward. There are still so many regulations to come from the government on Obamacare that any sane company has to adopt a wait and see approach, an approach that is a killer of growth and investment. The lack of a coherent and clear tax policy is also hurting growth. Perhaps the best thing that Obama could do to remove this uncertainty would be to change course and recommend that for the next two years, all taxes will remain at 2010 levels with two exceptions: the estate tax which will be brought back at 2009 levels and the Alternative Minimum Tax which will be fixed also at 2009 levels. A longer fix would be preferable, but two years should at least give business a chance to move forward now without worry.
Regulations and new regulatory schemes from the government should also be stopped. Here a good example is the plethora of affirmative action regulations injected into the financial industry by the Wall Street “Reform” bill. It is fine and appropriate for there to be laws that prohibit discrimination in employment. These are part of American society. There is no reason, however, for the government to determine what percentage of investment bankers have to be women, blacks, Asians, Latinos, or any other racial, sexual, ethnic or other category. There is simply no need for this governmental intrusion in the market. It only serves to make it harder for the firms to do business in an efficient and profitable way. By the same token, all manner of intrusive regulations must be rescinded.
As part of the regulatory overhaul, overlapping and overly restrictive regulations need to go. For example, President Obama has spoken of his supposed support for the construction of new nuclear power plants in the USA. Of course, actual construction of a nuclear plant is just about impossible due to the large number of regulations from different bodies that have to be satisfied in order for construction to commence. Imagine how much easier the whole process could be if congress were to pass laws giving the NRC total control over the construction approval process and also specifying the requirements regarding safety, etc. that had to be met. Indeed, there could even be a restriction on court challenges to such regulation by limiting appeals of decisions by the NRC to just one court in the Federal system.
Preventing risky governmental changes means two things: Congress has to cool it for a while with the adoption of new programs that impinge upon the economy. No cap and trade for example. Obamacare should be repealed.
The other half of promoting growth is to undertake programs that actually will stimulate the economy. This is not things like cash for clunkers which just moved sales around. Instead, it is the adoption of programs that will increase investment in the US economy. A good example here would be providing an investment tax credit for investments in domestic energy production. If the desire is to favor “green” energies, the credit can be a bit higher for investments in wind or other renewable energy sources. This is a subsidy to domestic energy producers, but it is a subsidy of new investment which will still need to support itself in the market place. There is no point in providing ongoing operating subsidies since these will just inject inefficiencies into the market. Investment subsidies, however, will allow newer technologies to make it into the marketplace so that they can achieve the economies of scale that will reduce their future costs to a competitive level. These investments would include things like production of natural gas powered cars and trucks, natural gas filing stations, new transmission lines to carry the output of wind turbines from windy locations to places where the power is needed and the like. Investments like these will provide jobs both for their construction and to operate the resulting power generation stations for many years to come.
There is also the traditional item for promoting growth, namely tax reductions. These, however, are already being discussed at great length. Using other methods to promote growth, however, cannot be ignored. The problem is just too big to solve any other way.
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