In order to build a strong economy America needs a responsible and pro-growth fiscal policy, with a goal of getting our average annual economic growth rates back to 3-4%. Robust economic growth in this range leads to more jobs. More people working means additional tax revenue, lower social costs, and smaller deficits.
For all of 2014, Gross Domestic Product (GDP) growth was a modest 2.4%, and it is projected to be about the same this year. The average annual growth from 2000-2014 was an anemic 1.9%. For the last five decades of the 20th century (1950-1999) the average annual growth rate was 3.7%.
Since 2000, the U.S. has only had two years of growth of 3% or higher. Most economists consider 3% as a minimum goal for growth and an indicator of a healthy economy. Earlier this month, the Wall Street Journal published a survey of 60 economists who are predicting only 2.6% growth in 2016 and 2.5% growth in 2017. We shouldn’t be happy with such slow growth.
While the difference between 2.5% and 3% GDP growth rate may not sound like a lot, over a ten year period it equals about $1.25 trillion more in the economy. That’s an average of $125 billion a year. A growth rate of 3.5% roughly doubles these numbers.
Economic studies have shown that each $100 billion of GDP growth creates about 1 million job-years. A sustained growth rate of 3.5% would create a lot of jobs. There are currently about 7.9 million people unemployed, 1 million to 2.5 million new jobs would substantially lower unemployment rates and help put upward pressure on wages.
We need Congress to stop bickering and pass bi-partisan legislation that will get our growth rates back to 3-4%. True legislative leaders know that the only way to pass meaningful fiscal policy requires cooperation and compromise. The economy has strengthened and is still improving, but the recovery was uneven and took longer than any other since the Depression. It could have recovered sooner with better fiscal policy and less gridlock.
Here’s a short list of three things that Congress could do that would help boost economic growth without adding to the deficit: Fully fund the Highway Trust Fund; restore the Export-Import Bank; and tax reform. The first two would be easy to do quickly, and the third could be completed in a few months.
Fully funding the Highway Trust Fund (HTF) would create hundreds-of-thousands of jobs. Economists estimate that long-term increases in infrastructure investments would boost employment by almost 1.3 million jobs and help the economy grow 1.5%-2.9% of additional GDP within fifteen years. These types of jobs are precisely the solid middle-class jobs that we need.
The U.S. spends $53 billion annually on transportation projects, but the current gas tax only brings in $35 billion. To make up the difference in recent years, Congress has relied on borrowing money from general revenue accounts several times to keep the fund solvent.
During this time, Congress waited until the fund was almost broke before passing stop-gap legislation to borrow more money and keep the fund going for a few more months. This short-term bandage funding is the most inefficient and least transparent way to manage infrastructure investments, and borrowing from the general fund continues to add to our huge national debt.
Fully funding the HTF would not add to annual deficits, as it would phase-in an increase of the federal gas tax by 15 cents per gallon over three years. Phased-in over 36 months, it’s less than half a penny per gallon per month, and would not be noticeable to consumers. After three years, it adds up to an extra $3 for a 20-gallon tank. Those who drive more than others will pay more. However, the gas tax is essentially a user fee for the wear and tear on our roads and bridges. Those paying the most, use and benefit more. With relatively lower gas prices – this is a good time to do it.
The HTF bill should also include provisions for annual adjustments for inflation, making the funding sustainable and to prevent future unnecessary legislative fights. Such a law would provide planning and funding certainty to states, counties, cities, businesses, and those who depend on transportation systems.
Increasing the gas tax shouldn’t be political heresy. This proposal has gained the support of the U.S. Chamber of Commerce, labor, the trucking industry, manufacturers, and safety groups. Environmentalists should like it too, as it incentivizes fuel efficiency when carbon is taxed like this.
Too many members of Congress act timidly when it comes to raising any tax. Many have signed shortsighted pledges to never do so. They should be reminded that both Presidents Ronald Reagan and George H.W. Bush signed gas tax increases.
With interest rates still low, now is the time to enact this legislation and lock in favorable funding for these capital-intense projects. Other benefits of this legislation include: Improved safety, better mass-transit, strengthened global competitiveness, and increased exports. Sound transportation infrastructure is not only essential to a thriving economy, it’s a catalyst.
Another relatively easy step to sustain and boost economic growth would be renewing the charter of the Export-Import Bank. The Ex-Im bank helps overseas buyers purchase U.S. products like airplanes, agricultural products, and heavy equipment. Since its charter expired June 30, it can no longer assist American companies in the selling and exporting of their products.
Opponents of the bank say it only helps a few well-connected companies and is “crony-capitalism” that subsidizes several large businesses. But subsidies are the norm in international trade, and doing away with the Ex-Im bank puts American companies at an unfair disadvantage. In addition, the bank actually deposited $675 million in profits in the U.S. Treasury last year alone, so it doesn’t add to annual deficits.
In the last ten years the Ex-Im Bank has helped over a thousand U.S. companies with over $300 billion in assistance, helped preserve over 160,000 jobs in 2014, and helps sustain tens of thousands more in U.S. manufacturing jobs. In addition to helping a large company like Boeing, it has also assisted another 235 Washington state businesses, including several in Spokane.
The Ex-Im bank’s charter should be renewed for as many years as possible to avoid future unnecessary ideological fights. If the bank is allowed to die, it will hurt the country, our state, agriculture producers in our region, and Spokane; and result in the loss of thousands of jobs.
Simplifying the tax code would also be an economic catalyst. By reforming the tax code in a progressive, pro-growth manner, and reducing its complexity, economic decision-making becomes more market-driven than tax-driven. It would also improve efficiency in administration and compliance, and promote economic growth and the creation of jobs.
The Tax Reform Act of 1986 would be a good model to use as a starting point – fewer tax brackets and lower rates for everyone. But it should also include phasing out most tax deductions and credits, which mostly benefit the wealthy. A simpler tax code with fewer loopholes and lower rates would be good for the economy.
The Tea Party and the conservative wing of the Republican Party have been blocking the funding of the Highway Trust Fund, and renewing the charter of the Ex-Im Bank. Democrats have been reluctant to support tax reform that doesn’t raise additional tax revenues. If Democrats would agree to a revenue-neutral simplification of the tax code, perhaps they could get Republicans to agree to support the Ex-Im bank and the Highway Trust Fund.
A revenue-neutral revision of the tax code will initially bring in the same amount of taxes, not add to the deficit, and help accomplish the goals of promoting economic growth and creating jobs.
Passing legislation for these three items would be good long-term pro-growth economic policy. The importance of consistency and predictability are essential for planning and making large public and private investment decisions. Companies and government agencies need to be able to plan on a long-range basis, and creating an environment in which they can operate with confidence would have a substantial positive impact on the economy.
There’s more that could be done to help grow the economy, but adopting these three measures would be a good place to start. It’s likely that these three initiatives will help create and preserve hundreds-of-thousands of good middle-class jobs and assist in sustaining an upward virtuous cycle of economic growth for many years to come.
Once we start experiencing growth of 3-4% consistently, it will generate billions of dollars in additional tax revenue. This will help reduce the deficit, and it will allow us to make other strategic public investments, such as in education and research. Investments in these important areas are also vital to the economy, stoke the fires of entrepreneurship, and will keep the upward cycle of growth going longer and stronger.
Links to related blogs:
Building a Strong Economy: http://www.commonsensecentrist.com/building-a-strong-economy/
Needed Tax Reform: http://www.commonsensecentrist.com/needed-tax-reform/
Economic growth: http://www.commonsensecentrist.com/growing-the-economy-the-road-ahead/
Fiscal policy: http://www.commonsensecentrist.com/leadership-not-misleadership/