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What the U.S. Needs to Do to Grow the Economy
Raymond Richman, 8/18/2014

Economics professor George Schultz, former Secretary of theTreasury, State, Labor, and Director of Management and Budget, in the Wall Street Journal (8/ 9/14), in an opinion piece entitled “How to get America Moving Again”, made the following recommendations: 1) reform the personal income tax system of deductions and lower the marginal rates as proposed in the 1986 Tax Act which passed the Senate 97-3, 2) lower the corporate income tax rates to be competitive with the rest of the world, 3) simplify and reform the multitude of business regulations and design them to work better, 4) establish rule-based rules for federal reserve policy for stable monetary growth, 5) get control of government spending, especially entitlement spending, and 6) replace Obamacare by neighborhood health clinics, health savings accounts, and protection against catastrophic illnesses. George Schultz not only speaks for himself but his views may be taken as the predominant view of the economics profession. As such, they are very disappointing. They would do very little to stimulate the economy and reduce unemployment. 

Since these same suggestions are repeated so often, let’s consider them, why they are inadequate, and what would speed the recovery and growth. Before doing so, we should note that the belief that the economy is slowly recovering is widely touted by government spokesmen and the media. It seemed to be borne out by the 2nd quarter Gross Domestic Product increase to 4.0 percent which followed a 2.9 percent decline in the first quarter. A continuing recovery is also indicated by the reduction in recent weeks of the number of claims for unemployment insurance. The trouble with the second quarter’s increase in GDP is that private inventories of goods increased, usually undesirable and unplanned, added 1.66 percentage points to the second-quarter rate of growth. So the 4.0% growth rate was more like 2.34 percent. Private businesses increased inventories $93.4 billion in the second quarter, following increases of $35.2 billion in the first quarter and $81.8 billion in the fourth quarter of 2013. An undesired increase in inventories is a drag on the economy.

The recent reduction of the weekly claims for unemployment insurance from over 300,000 per week to less than 300,000 per week, while positive, has to be balanced by the sharp increase in part-time jobs and an increase in the number of persons no longer looking for jobs. As Mortimer Zuckerman, editor of the US News and World Report, pointed out in the Wall Street Journal, 7/13/14, we have 374,000 fewer jobs than we had in November, 2007 and most of the jobs created since then have been part-time.

Shultz’s first point is that we need reforms of the individual income tax including a reduction in rates and restrictions on deductions. There are many reforms that one can recommend but none would have a significant effect on the recovery or growth. They are desirable on the grounds of interpersonal equity mostly. As to the rates, there is little evidence that the progressive structure has much negative effect on the economy and they are not in fact as high as they are believed to be. One pays no income tax on a taxable income of $10,000 since the standard deduction and personal exemption amount to more than that. The next $9000 is taxed at 10 percent, so the tax is about 5% when a single person’s income is $20,000 per year.  At $406,750, when the top rate of 39.6 percent kicks in, the tax is about $62,000 or 15.3% of income. There is no evidence that the tax inhibits personal effort at all. Indeed, the individual has an incentive to work harder (something economists call the income effect) to maintain a desired scale of living.

Reducing the corporate income tax rate would be an incentive to incorporate and do business in the U.S. But why have a corporate income tax at all? Corporations, as an artificial entity do not bear the burden of the tax; the individuals who own it bear the burden and most  economists believe a large part of the tax is passed on to consumers in the form of higher prices and to employees in the form of lower wages. The excuse often cited for the corporate income tax is that shareholders enjoy limited liability but limited liability partnerships and proprietorships now exist in most (all?) states. Why not tax shareholders as we do partners which in fact they are?

Schultz’s third suggestion is to reduce and simplify government business regulations. I have a better suggestion. Get rid of most of them! The government’s role is to set the rules and leave it to individuals and businesses and the courts to enforce them. When the government regulates, politics enters economic decision-making and politicians are not noted for their concern about  increased efficiency or economy.

Schultz’s 4th, 5th, and 6th suggestions are good for the long-run but would have little to do with speeding the recovery? That the Federal Reserve quantitative easing and low interest rates (negative in real terms!) has been ineffective except for raising asset prices can hardly be doubted. It has certainly resulted in increasing the number of millionaires and billionaires. But Schultz does not mention the Fed’s foolish actions like accepting administration of the Community Investment Act--still the law-- which forced it to ignore its responsibility to maintain mortgage loan standards and probably was the principal cause of the housing bubble and the financial crisis that caused the Great Recession. As for getting control of government spending, especially entitlement spending, it is hard to see how that would stimulate the recovery.

Obamacare has certainly been negative for the recovery. It has created an incentive to hire part-time workers and raised the cost of health insurance for middle-class Americans who are forced to subsidize the millions of Americans with incomes below $100,000 and force them to buy insurance against social diseases that they neither want nor need.

Schultz, while wanting to increase exports by reducing the corporate income tax rate, does not mention our persistent trade deficits. In a recent book, Balancing Trade (Lexington Books, 2014), my colleagues and I argued for the federal government’s imposition of our invention, the scaled tariff, a single-country variable tariff that is imposed against the imports from a country with which we are experiencing chronic international trade deficits. Whatever the cause of the trade deficits, our policies or the policies of our trading partners, the scaled tariff offers a remedy. We have lost millions of jobs to China, Japan, and Germany who fall into the category of countries with whom we have chronic trade deficits. China and Japan are well-known for pursuing mercantilist policies designed to create jobs at the expense of US jobs.  Balancing trade as we recommend would put millions of the unemployed back to work and provide a jolt to the recovery and growth.

And finally, Schultz does not mention the minimum wage laws of the federal and state governments that keep millions of teenagers and unskilled workers from finding jobs and maintain a permanent army of unemployed, the social consequences of which are incalculable. The minimum wage laws and the Davis-Bacon Act were originally designed to prevent competition from non-union employers from the South many of whose workers were black. Before the minimum wage was adopted blacks had a lower rate of unemployment than whites! It is scandalous that 42 percent of male black teenagers seeking jobs are unemployed.

Nor does Schultz deal with the negative economic effects of the government policies based on the widely accepted notion that man is the leading cause of global warming, an idea disputed by geologists and physicists acquainted with the history of the earth’s warming and cooling periods. The actions taken by governments internationally have cost billions and have had no effect on climate change at all. But what it has done is raise electricity prices, increased the public debt which will have a negative effect when it has to be repaid, and been a drag on the economy. Fortunately, the private sector, in spite of government policies stifling the coal, oil and natural gas industries, continued to invest in this economy. In particular, the oil and gas producing industry and coal mining, which the administration has hampered in every way it could to appease its environmental constituency, by their investment in exploration and growth, has done more to grow the economy than has monetary and fiscal policy. Employment in the mining sector, which included oil and gas and supporting activities, in 2012 was 793,000 compared with 640,000 in 2009, an increase of 22.4 percent. Total employment increased only 2.9 percent. The only other industry that grew at a double-digit rate was the motor vehicle industry.

How long, if ever, will it take to do what must be done to restore our economic growth and a full recovery? Or are we doomed to become another once-great power in decline. 

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    Wikipedia:

  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]