James K. Glassman
March 9, 2015 10:14 am | USA Today
Three reforms could reboot the U.S. economy.
Today’s employment report shows 1.3 million net new jobs were created in the past four months, and the jobless rate, at 5.5%, is the lowest in seven years. That’s good news, but we’re not out of the woods. Not by a long shot. The new jobs numbers do little to allay fears that the long-term pace of the U.S. economy has slowed significantly. To reverse that trend, we need major policy changes, and the most effective places to begin are corporate taxes, trade and immigration.
Gross domestic product is the single best indicator of economic health. Since 1947, GDP has risen at an average rate of 3.3%, but since 2001, the rate has been just 1.9%. The last time GDP grew more than 3% was 2005. We seem to be in the midst of a secular, or long-term, slowdown.
The reduced growth rate means that living standards are increasingat about half their post-World War II pace for individual Americans. For low- and middle-income families, that’s not much better than standing still.
Echoing a growing pessimism among economists that a “New Normal” of tepid growth is developing, Robert Gordon, a Northwestern University scholar, published a paper in 2012 titled, “Is Economic Growth Over?” Gordon wrote that it was time to ask “basic questions about the process of economic growth,” including, “the assumption, nearly universal since (Richard) Solow’s seminal contributions of the 1950s, that economic growth is a continuous process that will persist forever.”
One danger sign is the lack of a quick rebound from the 2007 to 2009 recession. Usually, sharp declines produce sharp recoveries, but not this time. For the 10 downturns since World War II, it took an average of a little less than two years for employment to get back to the level at the start of the recession. But for the most recent recession, it took six and a half years.
Home prices are still lower than they were 10 years ago, unemployment rates for African Americans are still in double-digits, and the labor force participation rate has hit its lowest point since 1978.
Republicans say that high spending in the wake of the recession plus the introduction of Obamacare and regulations stemming from the Dodd-Frank law have been a drag on the economy. Democrats say government has not spent enough to give the economy a real boost. But neither of those analyses explains why sluggish growth extends to the start of the century.
Gordon and other economists in the New Normal camp cite longer-term problems: mismatched demographics (too few workers supporting too many retirees), poor education and disappointing productivity gains from the information revolution. But is a secular decline in growth really inevitable? I don’t think so.
There are three simple actions that both parties can agree on now to enhance growth:
1. Bring U.S. corporate taxes in line with the rest of the world. At 39%, including state taxes, we have the highest marginal rate among all 34 countries in the Organization for Economic Cooperation and Development. The OECD average is 25%. High rates put our companies are at a competitive disadvantage, with less money left over for capital investments, and high rates discourage foreign firms from putting plants here.
Unlike practically every other nation, we have a worldwide corporate tax system, which means that companies based in the U.S. owe taxes both abroad and at home for their foreign profits. Those taxes come due when our companies bring their profits back to the U.S.; as a result, they have a huge incentive to keep money abroad.
The answer is to cut the rate to 25%, the level of Canada and the Netherlands, and go to the more common territorial system, which would bring profits home. Short-term fixes, like a specially reduced rate if companies repatriate their earnings for a year or two, won’t change long-term behavior. Lower rates and an end to the worldwide system will.
2. Immigration involves another kind of global competition: for the best and brightest workers and entrepreneurs. Our current system discourages smart foreigners who have been educated in the United States from staying here to start or join businesses — to the benefit of the economic growth.
Again, the fix is relatively easy — end the limits on visas for skilled workers, such as the H1-B visas for skilled foreign professionals, currently capped at just 65,000 per year plus another 20,000 for graduates of U.S. universities with advanced degrees. That’s less than 10% of total immigration each year and less than one-tenth of 1% of total U.S. jobs.
3. The third element of a bipartisan growth agenda is an expansion of trade. Broader and deeper trade relations mean more exports for U.S. manufacturers and service providers and lower costs for consumers. After a lackluster record in its first six years, the Obama administration is getting close to deals with the European Union and a group of Pacific nations, including Japan, but Congress needs to give the president the same negotiating power it’s given his predecessors.
These are just three policy changes that can boost economic growth. Certainly, there are others with strong merit, including improving education, cutting the fat from the bureaucracy and encouraging greater contributions to retirement accounts.
The “New Normal” is not inevitable. But unless we make changes soon, we could face a sluggish economy for decades.
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