From Seeds of Destruction to Seeds of Prosperity
The American economy is structurally unbalanced and therefore stalling. Over the last decade, because of a combination of over-consumption, under-investment, excessive government spending and chronic trade deficits, our GDP has grown at a rate 25% below its historical average and thereby failed to create at least 10 million jobs. We cannot resolve these long term structural imbalances by relying on short term fixes. Instead, we must recognize these essential truths and embrace long term structural reforms.
#1: To avoid the debilitating long term effects of excessive government spending and debt, we must reject any further use of discretionary fiscal stimulus while having the patience to allow automatic stabilizers to do their job. In implementing any future stimulus, we should favor tax cuts to stimulate business investment over increased government expenditures as this is the best way to stimulate job creation. We cannot simply spend more money and expect to fiscally stimulate our way to prosperity.
#2: The Fed must turn its emphasis away from discretionary fine-tuning and firmly embrace a rules-based policy that targets price stability, a sound dollar, and sustainable long-term growth. We cannot simply print more money and expect our economy to recover.
#3: The American economy will never return to full prosperity until it completes a very broad-based tax reform because the current complex income-based tax system discourages both saving and investment, handcuffs American exporters, and promotes a cult of fiscal irresponsibility. Any broad-based tax reform should broaden the tax base, reduce marginal tax rates, and remove any tax incentives against savings, investment, entrepreneurial risk-taking, and exports.
#4: America’s chronic trade deficits act as a brake on growth, create inflation, and threaten the loss of our political sovereignty. Trade with reform with our largest trading partner is particularly critical because China engages in a wide range of protectionist and mercantilist practices that make it very difficult for American businesses to compete on a level, free trade playing field. Boosting the American savings rate and returning consumption to a normal level should be part of our overall trade policy.
#5: America’s “oil addiction” acts as a stiff tax and strong brake on growth. As oil prices rise, consumers lose purchasing power, businesses face higher production and transportation costs, and growth slows. A flexible oil import substitution fee set equal to the difference between the actual world price for a barrel of oil and the target price necessary to achieve a targeted reduction in oil import dependence is the best market-driven solution.
#6: America's largest entitlement program -- Social Security -- faces a looming funding deficit that threatens its very existence. The best way to close the forecast spending gap is to raise the retirement age to match rising life expectancies and index initial Social Security benefits to prices rather than wages so as to maintain real, inflation-adjusted purchasing power for beneficiaries.
#7: President Barack Obama was right to pursue health care reform, but ObamaCare is just plain wrong. It expands health insurance coverage rather than containing costs and pays for this massive new entitlement by increasing the budget deficit and raising taxes. The inevitable consequences will be to exacerbate our health care cost problem while stifling investment and stalling the economy. There is a clear market-driven path to reducing health care costs while improving the medical care quality that relies on eliminating the tax code bias for employer-provided insurance, removing state barriers to competition, and reforming malpractice laws.
What is sorely missing from the national dialog is any sense of urgency about America’s long-term economic prospects. What we all must realize is this: The greatest threat to America’s national security is an economy too weak to support our population and too structurally unbalanced to propel this nation to renewed strength and prosperity. Unless real change occurs in how this country conducts its politics, and unless we address the growth-killing structural imbalances in our economy, we as a nation will be unable to confront our challenges and seize the opportunities that lie before us -- to the detriment of our children’s future. That is why now is the time to find the appropriate path to prosperity and thereby achieve the economic security and political stability that come with such prosperity.Mr. Hubbard, dean of the Columbia Business School, was chairman of the Council of Economic Advisors under President George W. Bush. Peter Navarro is a professor of economics at the Merage School of Business, University of California-Irvine. They are the authors of “Seeds of Destruction: Why the Path to Economic Ruin Runs Through Washington, and How to Reclaim American Prosperity,” from which this policy blueprint is derived.