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Thursday, August 3, 2017

The Naysayers Counterattack

There's a very important article out today about the prospects for achieving a 3% growth rate for the economy.  It was written by Simon Johnson who is the former chief economist for the IMF and is now a professor at MIT; that means he is a person who is totally plugged in to the conventional economic thinking followed by the people on the left and the media (the same thing, I guess).  Johnson not only says that 3% growth won't be achieved, but he also says the whole attempt is a "charade".  Despite Johnson's credentials, he seems unable to recognize the reality of the situation.

Johnson says three things block growth much higher than 2% per year.  First, he points out the America's population is aging.  Baby boomers are reaching retirement age, so we have more old people.  On top of that, reductions in immigration (like those that have been proposed) would further slow increases in the population.  He also claims that changes in health insurance laws will make fewer people want to work.

Let's look at Johnson's first point.  To start, they are not even factually correct.  There has been no change in the health insurance law.  Further, a change which made it harder to get insurance absent a job should push MORE people to work, not less.  If you want insurance, you get a job that provides that insurance.  There has also not been any reduction in immigration, although that has been proposed.  On top of the factual errors, there are more problems.  Baby boomers may be aging, but large numbers of people are also joining the work force.  The combination of young people entering the labor force and immigrants who joined them is much larger than the boomers who are leaving the labor force.  Further, we need to keep in mind that the worst record for economic growth of the last 75 years came during the stretch when the people aging out of the labor force were those born in the 1930s and early 1940s, the time of the lowest US birthrate.  In other words, the exact opposite conditions from the one that Johnson says will retard economic growth failed completely to enhance economic growth.

Johnson's second point is that productivity is not growing sufficiently to achieve higher economic growth.  This point is more serious, but Johnson ignores the basic answer.  Productivity increases as investment increases.  New plants and equipment or all sorts increase worker output per hour.  The whole goal of the tax changes proposed by the President is to get much higher investment into the US economy.  That would lead to higher productivity growth and also to economic growth.  Johnson scoffs at this argument by saying that the Bush tax cuts (which he says the Trump cuts will resemble) did not goose economic growth.  Once again, this is factually wrong.  The Bush cuts focused on individuals; they did not reduce the corporate income tax or change the territorial nature of US corporate taxation.  If corporate taxes fall from 35% to 15% or even 20%, there will be a major incentive to locate new investments in the US rather than abroad.  Combine this with annual taxation on the profits of those plants abroad, and the American advantage grows.  Throw in the push for repatriation of the more than two trillion dollars held by US corporations outside the country and you get an enormous boost to the growth of the American economy.  Indeed, 3% may be the announced goal, but 4% or higher is more likely as the initial wave of investment gets the economy moving.

Johnson's third point is perhaps the silliest.  He argues that regulators will relax constraints in ways that will lead to another financial meltdown like 2008.  That, of course, assumes that the federal regulators learned nothing from the 2008 disaster.  We had a financial disaster in the great depression.  Regulators understood what had happened and steps were taken to keep it from repeating itself.  America went through strong growth for many, many decades after that with the problems of the depression not reappearing.  People make mistakes, but it is folly to assume that federal regulators will just follow failed practices that led to 2008.

The real point is that 3% growth is possible, indeed likely if the new tax plan is put in place soon.  It has to focus on the engine of the economy which is investment.  All the hoopla about increasing consumption by passing out small amounts of cash to the public is minor by comparison.  It is business taxation that needs reform to grow the economy more quickly.

Johnson and his cohorts in the economics community don't like the idea that a good dose of Capitalist vigor for the business sector of the country could lead to strong economic growth.  Unleashing the private sector is counterintuitive to people who think that everything has to come from government.  Hopefully, President Trump and Congress will get to prove these statist propagandists wrong.

Johnson's third point is that

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