Archive for category: Commentary

February 11, 2013

A broader, growth-centered agenda is needed to propel the economy

There should be little disagreement across the political spectrum that growth and job creation remain America’s most serious national challenge. Ahead of President Barack Obama’s first State of the Union speech of his second term, and further fiscal negotiations in Washington, the US needs to think again about its priorities for economic policy.

The US economy grew at a rate of 1.5 per cent in 2012. Last week, the independent Congressional Budget Office projected that growth will be only 1.4 per cent during 2013 – and that unemployment will rise. While the CBO says growth will accelerate in 2014 and beyond, it nonetheless predicts that unemployment will remain above 7 per cent until 2016.

A weak economy and limited job creation make growth in middle class incomes all but impossible, pressure budgets by restricting tax revenues, and threaten essential private and public investments in education and innovation. Worse, it undermines the American example at a dangerous time in the world.

We can do better. With strains from the financial crisis receding and huge investment opportunities in energy, housing and reshored manufacturing, the US has a moment of opportunity unlike any in a long time. The economy could soon enter a virtuous cycle of confidence, growth and deficit reduction, much as it did in the 1990s. But this will require moving the national economic debate beyond its near total preoccupation with federal budget restraint.

Yes, medium-term fiscal restraint is necessary to contain financial risks. But it is not sufficient. Unlike the 1990s, when reduced deficits stimulated investment by bringing down capital costs, fiscal restraint cannot be relied on to provide stimulus now when long-term US Treasuries yield below 2 per cent.

A broader, growth-centred agenda is needed to propel the economy to its “escape velocity”.

First, as the president has recognized, budget cuts implicit in the fiscal “sequester” scheduled to begin in March should be spread over time. The economy is already taking a significant hit from increases in payroll taxes. Further across-the-board and sudden slashing of military and civilian spending will hurt the economy – and do serious damage to military readiness.

Second, the president and Congress should fix a firm deadline of the end of this year to address the international aspects of corporate tax reform. We are now in the worst of all worlds with US companies having nearly $2tn in cash sitting abroad, because of tax burdens on bringing it home and the perception that relief may be on the way. Ideally, the international tax system should be reformed in a way that is revenue-neutral but increases the attractiveness of bringing foreign profits home. This would be accomplished by replacing the current high rate of tax levied only on repatriated profits with a much lower tax levied on all global profits. If this is not going to happen, this should be made clear so business does not keep planning for an amnesty that will not come.

Third, no American should be satisfied with the nation’s system of housing finance. After a period when cheap mortgages were too available, the pendulum has swung too far and lack of finance is holding the economy back. The clearest evidence of this is the growing number of lower- and middle-income families paying rents to the private equity firms that own their homes at rates such as 8 per cent of value – far above what a mortgage would cost.

Fannie Mae and Freddie Mac, the government-sponsored housing enterprises, have historically provided support to the mortgage market in difficult times. It is high time they were forced to step up to support would-be lenders.

Fourth, the transformation of the North American energy sector must be accelerated. This will have economic and environmental benefits. Those weighing the decision about whether to approve the Keystone pipeline, which would run between the tar sands of western Canada and Nebraska, must recognise that any Canadian oil not flowing to the US will probably flow to Asia, where it will be burnt with fewer environmental protections.

Natural gas exploitation, too, can bring huge environmental benefits. Replacing coal with natural gas has much more scope to cut greenhouse gas emissions than more fashionable efforts to promote renewables. A period of record low capital costs and high unemployment is the best possible time to accelerate the replacement cycle for environmentally untenable coal-fired power plants. More generally, both production of natural gas and its use in industry should be a substantial job creator for the US for years.

More items could be added to this list, including innovations in regulation and finance with respect to infrastructure investment. Unlike deficit reduction, where all the choices are painful, measures to spur growth can benefit all Americans as well as help the federal budget. Growth and job creation are, after all, the ultimate ends of economic policy. They, at least as much as fiscal issues, should become the focus of our national economic conversation.

The writer is Charles W. Eliot university professor at Harvard and a former US Treasury secretary

January 21, 2013

America must not lose sight of infrastructure, jobs and growth

In the two and a half months between the election and this week’s inauguration of President Barack Obama, America’s public policy debate has been focused on prospective budget deficits and what can be done to reduce them.

The concerns are partly economic – there is a recognition that debts cannot be allowed to grow indefinitely faster than incomes and the capacity to repay them. Then there is a moral dimension in terms of not unduly burdening our children. There is also the global and security dimension, with the concern that the excessive build-up of debt would leave the US vulnerable to foreign creditors and without the flexibility to respond to international emergencies.

Economic forecasts are, of course, uncertain. Yet there is a great likelihood that, in the next 15 years, debts will rise relative to incomes in an unsustainable way if no action is taken beyond the 2011 budget deal and the end-of-year agreement to prevent the nation tumbling over the “fiscal cliff”. So even without the risk of self-inflicted catastrophes – failure to meet debt obligations or government shutdown – it is entirely appropriate to focus on reducing prospective deficits.

Those who argue against a further concentration on prospective deficits on the grounds that – contingent on a forecast that assumes no recessions – the debt to gross domestic product ratio may stabilise for a decade counsel irresponsibly. Given all uncertainties and current debt levels, we should be planning to reduce debt ratios if the next decade goes well economically.

Reducing prospective deficits should be a priority – but not an obsession that takes over economic policy. This would risk the enactment of measures such as pseudo-temporary tax cuts that produce cosmetic improvements in deficits at the cost of extra uncertainty and long-run fiscal burdens. It could preclude high-return investment in areas such as infrastructure, preventive medicine and tax enforcement that would, in the very long term, improve our fiscal position.

Economists have long been familiar with the concept “repressed inflation”. When concern with measured inflation takes over economic policy, and drives the introduction of price controls or subsidies to hold down prices, the results are perverse. Measured prices may not rise, so the appearance of inflation is avoided. But shortages, black markets and enlarged budget deficits appear. The repression is unsustainable and, when it is relaxed, measured inflation explodes as in the case of the Nixon price controls during the early 1970s.

Like repressing inflation, repressing budget deficits can be a serious mistake. Yet – just as corporate managements judged only on a single year’s earnings take perverse and ultimately harmful steps – government officials in the grip of a budget obsession repress rather than resolve deficit problems.

When arbitrary cuts are imposed, agencies respond by deferring maintenance, leading to greater liabilities later. Or compensation is provided in the form of promised retirement benefits that are less than fully accounted for, with the ultimate burden on taxpayers increased. Or measures such as the recent Roth Individual Retirement Arrangement legislation are enacted, encouraging taxpayers to accelerate their tax payment while reducing present value.

As important as avoiding the repression of the budget deficit is ensuring that focusing on it does not come at the expense of other, equally real deficits. Interest rates in the US and much of the industrialised world are now remarkably low. Indeed, in real terms the government’s cost of borrowing has been negative for as long as 20 years. No one who travels from the US can doubt that we have an enormous infrastructure deficit. Surely, even leaving aside any possible stimulus benefits, current economic conditions make this the ideal time to renew the nation’s bridges and roads. Such investments, borrowed at near-zero real rates of interest, need not increase debt ratios if their contribution to growth raises tax collections.

Infrastructure deficits are only the most salient of the deficits facing the US. Nearly six years after the onset of financial crisis, we are living with substantial jobs and growth deficits. Consider this: an increase of just 0.15 per cent in the growth rate maintained over the next 10 years would reduce the debt to GDP ratio in 2023 by about 2.5 percentage points. That is an amount equal to the much-debated end-of-year tax compromise. Increasing growth also creates jobs and raises incomes.

By all means, let us address the budget deficit. But let us not obsess over it in counterproductive ways – nor lose sight of the jobs and growth deficits that will ultimately have the greatest impact on the way this generation of Americans lives and what they bequeath to the next.

The writer is Charles W. Eliot university professor at Harvard and a former US Treasury secretary