Sunday, August 5, 2012

The 4% Solution: America Needs Growth

Rich Karlgaard, Forbes Staff

I celebrate innovation and growth.

The 4% Solution: America Needs Growth

U.S. Presidential flag, 1960-present (not usua...
U.S. Presidential flag, 1960-present (not usually called a "standard" in official U.S. government terminology). It is defined in Executive Order 10860. (Photo credit: Wikipedia)
This article originally appeared in the May 5, 2012 issue of Forbes magazine.
Name a problem facing the U.S.—government debt, joblessness, rising racial tensions, broken politics, etc. Will any of these improve with sluggish 1% to 2% growth? No. Each will get worse with slow growth. America, therefore, needs urgently to return to 4% growth.
Is it possible? Of course. The U.S. economy has averaged 3.3% annual growth since the end of World War II. But this period also saw 11 recessions. Two of them (1973–74 and 2007–09) sank the country’s confidence to generational lows. Both dips left Americans worried that the good times would never return.
Here’s a fact that’s often missed: When the American economy is not in recession, 4% growth is the norm. This year, if the U.S. grew at 4% instead of the expected 2%, the country would add $600 billion more in economic activity. That would mean a lot of jobs, a lot of hopes restored.
It is a moral imperative to get the U.S. back to 4% growth. President Obama talks often about fairness, rarely about growth. He’s missing the big picture. His lapse could—should—cost him the election. Mitt Romney has a golden opportunity to talk about the stark differences between 2% and 4% growth. Let’s hope he grasps it. We already know where 2% will take us: mounting debts, high rates of joblessness, zero-sum thinking, political rancor, a sense of national decline.
How can the U.S. get back to 4% growth?
• Cut government spending. In the half-century between 1950 and 1999 the federal government’s spending averaged about 19% of GDP. It crept up to 21% under George W. Bush and is now 24% under Obama. Optimal growth—4%+—occurs at 18%, according to First Trust Advisors economist Brian Wesbury and many others. Think about it this way: The difference between 18% in federal spending and 24% may not seem radically different, but the consequences to growth are huge. Growth rates fall off a cliff when federal government spending exceeds 20%. It is vital that we trim government spending to below 20%.
• Simplify the tax code. Our complex tax code is ruinous on so many levels it’s hard to know where to start. Every page of this magazine could cite the code’s follies and distortions. Here’s one: Tax preparation for individuals and corporations is a $300 billion industry. This is good for CPAs, bad for the country’s productivity.
• Drill and dig. Few factors correlate to robust growth as much as affordable and reliable energy. This is especially true for such blue-collar industries as mining, manufacturing, construction and shipping. Loss of good-paying blue-collar jobs has been a national disaster. The brass hats of Wall Street,Washington, Hollywood and Silicon Valley are immune to the devastation caused by Washington’s anti-fossil-fuel campaign. They live in a world apart and feign ignorance. One of my favorite pranks is to ask a Tesla Roadster owner how he likes his coal-fired car. The owner always gasps, as if kicked in the shins. But the truth is coal supplies 42% of America’s electricity. No electricity, no electric cars. No movies, computers, smartphones or Internet, either.
• Import the skilled. If the U.S. were to design an immigration policy from scratch that would most hurt growth, it would look much like our current one. It would favor the uneducated, unskilled and undocumented over the educated and skilled. It would make no demands for language assimilation. It would grant easy access to welfare. At the same time it would send ambitious college graduates back to their native lands.

• Let technology transform education and health care. Google’s driverless car has accumulated 200,000 miles. It can now navigate mountain passes. The genius behind Google’s car is Sebastian Thrun. These days Thrun teaches a course in artificial intelligence at Stanford. He also makes the course available online. More than 150,000 students have signed up. Thrun says some of the highest-performing students in this AI class are online students, not Stanford students.
The health care revolution will also be an “outside-in” thing, driven by consumers armed with smartphones. Sequence your DNA for $200, put it on a social network and let high-powered analytics quantify your health risks and offer solutions. Scan your moles with an iPad camera and e-mail to a dermatologist.
If Americans could be healthier and smarter for less money, what do you think would happen to productivity and growth? I think they would spike. Four percent, here we come!