Who’s Afraid of Growth?

By Stephen Moore
October 7, 1996

A September Wirthlin poll found that 70 percent of the American public agrees with the statement “My family and I are working harder and harder, but we are taking home less and less.” What the public seems to be trying to tell the politicians is quite clear: it’s a slow growth economy, stupid.

The public is right. Over the past seven years — the Bush-Clinton era — the American economy has grown at a slower rate (1.8 percent) than during any other period since the Great Depression (see Figure). The standard explanation for this economic anemia is that a 2 percent to 2.5 percent GDP growth rate is about as good as it gets without reigniting inflation.

Here’s the way the New York Times recently described the situation: “What [politicians] don’t debate is whether strong growth is in fact, possible. Strong growth is not possible, according to the great majority of American economists… . What is striking is how widely this view is held. The reasoning varies, depending on political or philosophical outlook but the conclusion is surprisingly unified: the upper limit of healthy growth is between 2.2 percent and 2.5 percent per year, which has been the average growth since the early 1970s.”

Charles L. Schultze of the Brookings Institute and the chairman of Jimmy Carter’s Council of Economic Advisers, adds: “When it comes to things like long-term growth of the economy … government has to work like hell to make a difference of a couple of tenths of a percentage-point.” Nixon’s chairman of the Council of Economic Advisers, Herb Stein, a tireless supply-side critic, concurred: “The economics effects [of policy changes] are mostly random.”

Wrong. They are not random. And the American economy can grow much faster than a measly 2.5 percent. In the 1960s the economy grew at 4.5 percent. During the seven-year Reagan expansion the economy grew at 3.9 percent. And it grew at that rate while the inflation rate fell. So to quote John F. Kennedy when he ran for the White House against Nixon in 1960, “We can do bettah.”

Washington economists regularly express bewilderment these days about why the economy grew at 4 percent per year 30 years ago, but now it grows barely half that fast. Here’s a clue: the government is twice as large and costly today as it was in the 1960s. If you chain 10-pound weights to each of Michael Jordan’s ankles, it’s a fairly good bet that he’s just not going to jump as high.

The slow growth, stagnant wages syndrome of the 1990s has been a predictable economic reaction to a torrent of bad laws enacted by George Bush, Bill Clinton and Democrat-controlled Congresses. The list of economic ankle weights that Washington has foisted upon workers and industry in recent years is nearly endless: the 1988 and 1990 Social Security payroll tax hikes; the 1990 budget deal with its $150 billion tax increase; the Americans with Disabilities Act, the Clean Air Act Amendments of 1990; the Civil Rights Act of 1990; the 1990 minimum wage increase (1990 will assuredly go down in the annals of American history as having generated the longest list of economically destructive legislation in the past half century); and the granddaddy of them all, Clinton’s 1993 $250 billion tax hike, which raised the top marginal tax rate to 42 percent.

Here’s a back-of-the-envelope calculation of the damage done: If over the past seven years the economy had continued on the same trajectory it followed in the 1980s, America would be $510 billion richer today — a figure larger than the total value of the combined annual output of eleven states. Five million more Americans would be working today. The income of the typical American household would be about $4,000 higher. Slow growth is the unkindest tax of all.

Individually, none of the policy changes has had ruinous effects. But their compounding effect has sapped the economy of its vitality and condemned America to a piddling growth rate for as far as the eye can see. Under current policies, the economy probably can’t grow much faster than 2 percent without inflation. The recipe for noninflationary growth is really no great mystery. It is embedded in Reagan’s supply-side policies, in Newt Gingrich’s “Contract with America,” and most recently in Steve Forbes’s agenda of “hope, growth and opportunity.” Here’s the basic framework for a 4 percent growth agenda:

• End the seven-year regulatory reign of terror in Washington — which now costs Americans $600 billion a year.

• Stop the stampede of frivolous lawsuits by enacting the English rule requiring the loser to pay the legal costs of the winner.

• Balance the budget through spending cuts alone.

• Abolish once and for all the capital gains tax and the estate tax. (Without capital, there can be no capitalism.)

• Tear down the Berlin Wall around our inner-city schools by abolishing the Department of Education and giving the money directly to low-income parents in the form of $2,500 scholarships that they can use to send their kids to schools that teach.

• Enact a flat tax or national sales tax with a single rate below 20 percent.

• End the spiraling inflation of health costs by allowing tax-free Medical Savings Accounts for workers and their families.

• Promote savings and generational equity for young workers by beginning to privatize the Social Security system.

This is a formidable arsenal of ideas. Together they would close America’s current performance deficit by creating a genuine “surge” in output and incomes — quickly. That’s the kind of growth that no one needs to be afraid of.

Stephen Moore is a senior fellow in budgetary affairs at the Cato Institute.