THE FISCAL TIMES – A Top Economist’s Five-Point Plan to Fix the U.S.

Over the past month, several well-oiled Republican arguments against deficit spending have started to sound rusty.
GOP lawmakers can no longer claim that a debt-to-GDP ratio above 90 percent will squelch growth. That academic study has now been debunked because of spreadsheet errors and its hard line has become hazy.
Nor can they warn about federal annual shortfalls topping $1 trillion. The Congressional Budget Office estimates that the deficit should plunge by a stunning $445 billion this year to $642 billion, the sharpest decrease as a percentage of the economy since the end of World War II.
So Columbia University economist Glenn Hubbard roots his latest argument for the importance of taming the federal budget in history—the Roman Empire, the Ming Dynasty, Spanish conquistadors, and the Ottomans.
The premise of his new book co-written with Tim Kane, chief economist at the conservative Hudson Institute, Balance: The Economics of Great Powers from Ancient Rome to Modern America, is that internal rot destroys countries.
Could this be the GOP’s new economic playbook? The authors hope the entire country adopts it.
These are provocative claims by Hubbard, who advised both Bush presidents and Republican presidential nominee Mitt Romney. As the architect of George W. Bush’s income tax rate cut and a consultant with Wall Street firms, Hubbard has both the benefits and baggage that come with policymaking. He is perennially considered to be on the short list for Treasury secretary or Federal Reserve chairman should Republicans retake the Oval Office.
What does his new book mean for voters? Hubbard and Kane say the $17 trillion national debt and entitlement spending are emblematic of the same kind of inward excesses that killed past empires. They use history to reframe many conservative policies and challenge others.
“There are two paths if we’re going to change things,” Hubbard, dean of Columbia’s Graduate Business School, told The Fiscal Times. “One is politics. The other is processes and budget rules.”
“It’s a long-term issue,” explained Kane, his co-author. “America is not going to decline in the next decade. The alarmist claims about China we take issue with. The existential threat is not barbarians at the gate or in the mountains of Pakistan.”
Just as the Roman Emperor Hadrian built a wall across his British frontier, “America is sort of building a fortress mentality,” Kane said. “We link it to immigration, trade, foreign investment flows. We also directly take on that you have to cut the defense budget…. We think America’s national security posture, having so many troops abroad haven’t hurt us.”
Rome never had a Congressional Budget Office. Its Gross Domestic Product can only be calculated crudely and retroactively, so much of the book depends on generalities about cause-and-effect that in some cases are still being settled by historians, who also consider factors such as disease and natural disasters.
This is a danger in public policy books that try to extract principles from an incomplete set of information. Hubbard and Kane try to support their claims with the discredited 90 percent debt-to-GDP ratio study by economists Kenneth Rogoff and Carmen Reinhart that also depended on historical data.
“Reinhart and Rogoff got in trouble because they mentioned tipping points,” Hubbard said, saying that eventually increasing debt loads will result in a “a day of reckoning. That part is just arithmetic.”
Here are their five surprising conclusions to fix politics and the economy:
Super PACs Should Make a Better Government – The conventional wisdom is that the rise of independent groups such as the Club for Growth, FreedomWorks, and American Crossroads have distorted democracy. These organizations flush money into political campaigns, fueling political polarization now seen in Congress.
Hubbard and Kane argue that this narrative is false. They claim that such organizations give a voice to voters who were suppressed by a system that emphasized political parties, instead of ideas. These organizations end the monopoly that Republicans and Democrats previously held on politics, they argue.
“It is encouraging more political competition,” Hubbard said.
Not necessarily.
House districts are still heavily gerrymandered, such that the results are rigged toward one party. This is a form of political monopoly.
Their book Balance notes that reforms to stop gerrymandering enabled California to successfully address its budget problems, yet it ignores the issue on a federal level. Both authors said in interviews that gerrymandering should also be addressed in order to ensure a genuine exchange of political ideas exists.
“In reality, only a handful of those seats are a jump ball,” Hubbard said.
“They’re both bad,” said Kane. “They’re both evidence to our point that structural polarization is destructive and freezes out entrepreneurial political voices.”
Entitlement Spending Crowds Out Valuable Government Investments – Congressional Republicans see many government expenditures not connected to the military as hurting the economy. The 2014 House budget plan cuts all non-defense discretionary spending, while delaying any overhauls to entitlement programs for roughly a decade.
Hubbard and Kane argue that the real threat is runaway growth in spending for programs such as Medicare and Social Security, which provide health insurance and supplemental incomes for older Americans.
These are modern manifestations of the same kind of inward focus that caused Ming China to destroy its fleet of ships in the 15th Century, limiting its options for economic growth.
“In an ‘under-stretch’ situation, it is having entitlements chew up the budget, so that we can’t do other things,” Hubbard said. “We have to cut what we spend on education, what we spend on research, what we spend on defense. … What’s sinister about under-stretch is you don’t notice it easily.”
We Need to Measure Our Economic Power – Most Americans cringe when reading the explosive growth rates out of China, but their fear is misplaced.
The United States has a larger economy than China, whose expansion could easily tail off as seen in the examples of previous Asian tigers. Americans also enjoy a higher GDP per capita.
Hubbard and Kane propose a new measurement to assess economic power, in order to determine whether an economy is really in decline. Here is their simple equation:
Economic Power=GDP×Productivity×Growth½
Balanced Budget Amendments Should Allow Tax Hikes – When Republicans propose a Constitutional amendment to balance the budget, their language is highly partisan, constructed to prevent tax hikes.
Hubbard and Kane favor an amendment with neutral language that allows balance to occur through whatever combination of revenues and expenditures Congress chooses. They also make the case that balance should be based on a moving average of federal expenditures, so that financial stimuli are still an option during downturns.
“If the American people want a big government and are willing to pay for it, who am I to say no?” said Hubbard.
“I’m just an economist, not a philosopher.”
We Need More Foreign Alliances – If an inward focus chokes off growth, then the natural antidote is an emphasis on policies that expand the scope and size of American markets.
Kane envisions forging new alliances with countries such as the United Kingdom, Australia, Canada, and Mexico, enabling guest workers and investments to flow unfettered among countries. He wants to strengthen the bonds that already exist.
“Why isn’t there a huge move to create Puerto Rico as the 51st state?” he asked.
By Josh Boak, The Fiscal Times