There’s now a 16-ring circus
of candidates performing for the 2016 US presidential election. Four Democrats
and a dozen Republicans have thrown their collective hats into the 24/7 blazing
media spectacle. As the New York Times
recently
pointed out, each of these men and women are searching for economists to dance with
them in their efforts to formulate economic positions, distinguish themselves
from the other 15 hopefuls, and ultimately win the nomination and presidential election
that’s now a mere 504 days away, OMG.
Even at this prematurely
early date, several candidates are running up economic policies on their flag
poles to see which way the political winds blow them. Given the clear need to
attract media attention, the candidates’ economic proposals can be quite
fantastic, including re-treads from long-ago campaigns.
For example, Rand Paul has revived
the flat tax concept from a 20-year slumber that was last seen on its death bed
after being proclaimed by presidential candidate Steve Forbes; you remember him
don’t you? Mr Paul’s one-more-time-with-feeling flat tax includes eliminating
the federal corporate income tax (hats off to corporate lobbyists) and
replacing it with what’s commonly called a value-added tax (VAT), although Mr
Paul pointedly calls his proposed 14.5% tax a “business activity tax.” His tax scheme is a combination of a 14.5%
personal income tax together with the 14.5% VAT, which is a type of sales tax
that virtually every person and every organization would have to pay directly
or indirectly. What’s the likelihood of such a regressive, federal VAT replacing
the dearly-unloved corporate income tax? Slim to none, once you multiply the
chance that Mr Paul will be elected president (currently he’s given an 8%
likelihood of capturing the nomination at fivethirtyeight.com) by the even smaller chance that Congress – even a Republican one – would actually produce
such a fundamental change in tax policy.
A more interesting economic policy
objective was proclaimed by Jeb Bush last week. Namely, that if elected
president he would usher in increased real (inflation-adjusted) economic growth
of at least 4% per year for a decade.
The US has indeed carried on
without historically-strong macroeconomic growth for some time. Our GDP growth this
year is expected to be a miserly 1.9%. Since
1975, the average yearly GDP growth has been 2.8%, which is nearly 2% less than
it was from 1945 to 1975. As our economy has grown and developed, if for no
other reason than its impressive size, it has become more challenging to
sustain previously-attained annual growth rates. As they say, quickly turning a
very large ship, like the Titanic (or the US economy), is next to impossible.
The US nominal GDP is now
$17,665 billion. Four percent of our GDP is thus $706.6 billion, which is the
about same size as the Philippines’ GDP (PPP), the world’s 30th largest economy.
That’s a lot of economic activity (and money) to add each year. The figure
below shows the annual economic growth attained by each of our 5 most recent
presidents. The average growth rate attained by the 3 Republicans is 20% less
than that achieved by Presidents Clinton and Obama. Other economic studies have
also shown that growth under Democratic presidents since Truman has been greater
than under Republicans.
Even though accelerating
economic growth is a worthy goal that has many benefits, it’s highly unlikely
Mr Bush could achieve 4% real annual growth. Although his statement provided a good media
soundbite, it’s more fantasy than eventual fact.
Increasing economic growth
requires changes in several factors. First, a noteworthy increase in the
working-age population is needed, as well as in the proportion of this
demographic group who are actually employed. Second, a substantial change in
federal fiscal policy has to occur (e.g., policies that promote investment and
spending); third, productivity must be amplified; and last, macroeconomic
growth rarely increases suddenly, it takes time.
Given that Republicans
generally want to lock the US’s borders to all immigrants (and deport all 11
million “illegals”), it’s hard to imagine our working-age population increasing
– especially when the US fertility rate now is 1.9 births
per woman, less than the 2.1 births per woman “replacement” rate needed to keep
the population stable. In addition, the labor-force participation rate,
measuring the percentage of the work force who’s actually working or looking
for a job, is as low as it’s
been since 1978 – not a good sign for increased growth. Federal spending on
research and development (R&D) has declined over 30% between 1995 and 2015.
Finally, due to Republican intransience, Congress has rebuffed its
responsibilities to complement the Federal Reserve’s efforts in improving our
economic performance by passing fiscal policies that promote private
investment, R&D and other growth-oriented spending like on infrastructure. Thus,
Republican candidates like Mr Bush call for increased growth, but have refused
to create policies that can produce it.
The Republican candidates are
instead espousing policies that pander to the insular, right-wing Republican
base that demands smaller government and ever-lower taxes. This base includes
many older citizens whose economic and financial literacy is chillingly deficient.
Here’s a sad indicator of
this basic lack of understanding. A decade ago, the University of Michigan added 3
questions to its Health and Retirement Study, a biennial survey of Americans
over 50:
■ If $100 earns 2% per year, in five years will you have more than $102,
less than $102 or $102?
■ If the interest rate on your savings is 1% per year and annual inflation
2%, could you buy more, less or the same with your money in a year’s time?
■ Is it true or false that buying a single company stock usually provides a
safer return than the stock of a mutual fund?
Woefully, only about 33% of all respondents answered all 3 questions
correctly. Here[1]
are the answers.
My bet is that the two-thirds of respondents who answered incorrectly have little or no sense of how to assess the future for themselves or the nation. In economic
terms, they maintain an infinite discount rate. For a variety of reasons, they’re
only concerned about the present moment. Such typical older households
have only $110,000 saved for their retirement.
This broad-based financial
illiteracy provides a basis for the fantasy that Republican members of Congress
are willing to create policies that stimulate longer-term macroeconomic growth, something they haven't done in over 6 years, and despite pronouncements by their presidential hopefuls.
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