Two “Secrets” for Growing the Economy

In 351 pages and nine chapters, on Monday the Bush administration presented the latest version of the annual Economic Report of the President. The report is a chance to step back from the day-to-day political fray and assess the overall health of the economy and related policy issues from a more fundamental economics view. If the State of the Union Address outlines a president’s political goals for the year, the Economic Report is the nuts and bolts of how we did in 2006 alongside the government’s projections for 2007, mixed in with some serious policy recommendations. It is a kind of annual report for America, Inc.

As such, parts of the Economic Report are an interesting read for those of use who care about prosperity, liberty, and maintaining America’s competitive edge. 

The news of the past year is pretty good. Despite high oil prices and weakness in the housing market, the U.S. economy turned in its fifth consecutive year of growth in 2006.   The unemployment rate was only 4.6 percent in 2006 (compared to 6 percent in 2003) and GDP growth clocked in at 3.4 percent over the entire year. Compare those macroeconomic numbers with the 2006 performance in high-tax France, where growth was around 2 percent and the unemployment rate was more than twice that of the U.S.  It is very clear that America’s 2001 and 2003 tax cuts have been an unmitigated success, and Congress urgently needs to make them permanent.

So, if inflation is in check, productivity is increasing, the stock market is rising, and growth is solid, what are the problems facing the United States economy?   

First, we shouldn’t be satisfied with 3.4 percent growth, and we must continue to expand our economy in an increasingly competitive global marketplace. There are many, many policy distortions that drag on the economy and keep America, and her people, from reaching our full potential. Just because we’re a little more free than Japan or Europe is no cause for celebration. 

Tax Reform
Consider the tax code. The Economic Report says

The United States tax system has become increasingly distortionary and inefficient, with hundreds of highly targeted tax provisions that erode the potential for tax system neutrality and greater economic growth. … The profusion of provisions has resulted in a system where taxes can be the primary determinant in whether to undertake new investment, what form the investment should take, and how to finance the investment (p. 66).

In other words, meeting the demands of the byzantine federal tax code, rather than the demands of consumers and the market, is increasingly driving America’s investment decisions. Those tax-driven inefficiencies, plus double taxes, and compliance costs will result in well over $1 trillion in lost output over the next eight years, according to data from the U.S. Treasury. That is the price we are paying because Congress has failed to pass fundamental tax reform, like the Flat Tax. Indeed, the Economic Report says that tax reform could, “increase real gross domestic product (GDP) by as much as 8 percent in the long run.” (p. 64) Those are huge gains in our national standard of living; let’s get moving and pass tax reform!

Free Trade

A second major area of concern raised by the Economic Report is international trade. Free trade benefits America several ways—imports give consumers access to a greater range of goods and keep prices in check, export markets are creating high-paying jobs and growth here at home, and foreign investment in American businesses is a critical pillar of our economy.  The Economic Report notes the benefits from trade:

Increased international trade has raised real incomes, restrained prices, introduced greater product variety, spurred technological advances and innovation, and raised living standards in the United States. Studies have estimated that the annual payoff from U.S. trade and investment liberalization to date, including [GATT, the WTO, and NAFTA] is up to $1.5 trillion (p. 168).

That’s $1.5 trillion in extra growth per year. Trade clearly benefits America—after all, 95 percent of the world’s population lives outside our borders—but some in Congress want to protect favored industries at the expense of consumers. That’s why there is still plenty of gain to be had by pushing new trade deals. The Economic Report says,

While global tariff liberalization in manufacturing and agriculture could generate over $16 billion in income for the United States each year, the prospective gains from services liberalization are immense: an estimated $575 billion in annual U.S. income (4.3 percent of GDP). Summing up, this is an additional $591 billion in annual income that will be foregone in the absence of further trade reform (p. 174).

That is a staggering amount potential growth that Congress can unlock, simply by giving the president the authority to negotiate new trade deals that are protected from Congressional meddling. As with tax code reform, expanding free trade can quickly bring significant economic gains.  The U.S. economy is doing okay, but there is a lot more that Congress can do to free entrepreneurs, consumers, and businesses to grow the nation’s economic pie even faster.

The full report is available here:

http://www.whitehouse.gov/cea/pubs.html

Unions Attack the Secret Ballot

In other news, Congress is beginning consideration this week of new legislation from Senator Ted Kennedy (D –Mass.) called the “Employee Free Choice Act.” This legislation will actually reduce workplace fairness and democracy. The cornerstone of this bill is the “Card Check” provision. Under current law, employees vote by secret ballot in a government monitored election to decide if they would like to join a union. This process of debate and vote is, however, unacceptable to union bosses who often lose in a fair workplace election. They want to be able to demand that workers make a public decision in front of a union organizer– literally, “checking a card” instead of having the right to a private vote.

Card Check is a top down system which does away with secret ballots. Employers would be forced to recognize a union without an election with just over 50 percent of workers checking “yes.”

Card Check removes privacy protections for employees. It opens the workplace to intimidation and corruption, and to say the least, is a violation of the American principle of a secret ballot.

Take Action and Tell Congress to Oppose “Card Check”