Saturday, December 12, 2009

Well, This Is Depressing

In his 1995 book To Renew America, Newt Gingrich wrote:

The power of economic growth was driven home to me by a study that suggested that a 1 percent increase in our economic growth rate would shrink the federal deficit by $640 billion over the next seven years, would increase federal tax revenues by $716 billion without a tax increase, and that each and every adult citizen would earn $9,600 more than they would in the current growth projection.

In this world of merely 1 percent higher growth, the Social Security Trust Fund never runs out of money....

That's not depressing. That just shows why economic growth is important. This is depressing, from Perot:

Faster economic growth can help,
but it cannot solve the problems

1. The Government Accountability Office estimates that closing the current fiscal gap based on reasonable assumptions would require real average annual economic growth in the double-digit range every year for the next 75 years.

2. During the 1990s, the economy grew at an average rate of 3.2 percent per year.

3. It is not feasible that we can simply grow our way out of this problem. That is, we cannot grow the economy fast enough to produce enough new tax revenue at the current level of taxation (18.8% of GDP) to solve the problem.

4. Tough choices will be required.

Two sides of a coin, there. Heads, just one percent more growth, we win. Tails, even if we grow like China, we lose. How can the two views be so different?

Gingrich was writing in the mid-1990s when economic growth was pretty good. The study he quotes probably came from that time too, and reflected the optimism of the economic environment of the time. The Perot quote (from 2008) comes from a time when economic conditions were going downhill fast. It and the GAO report both reflect the pessimism associated with that very different economic environment.

I'm with Gingrich on this one. America is the wealthiest nation in the world (or used to be. We're still among the wealthiest, certainly). And our economy has been messed up, what, since 1973? Since the late 1960s? That's 35 to 40 years downhill. We've created a big problem for ourselves, but I'm not ready to say it's insurmountable.

The real problem, as GAO seems to understand, is that we have been unable to achieve even the one percent increase that Gingrich longs for. That we all long for. If the GAO study is more pessimistic than conditions warrant, it's probably because they recognize the difficulty we've had spurring growth.

Yeah, we've had difficulty spurring growth. The reason is that we've used the wrong policies. Or hey: We were using the right policies, but then the economy changed, and then those policies didn't work any more, but we never changed our policies. All we ever did was strengthen them, and strengthen them more. We have to shut these policies down, and do something different.

In the "Hero Worship" episode of Star Trek: Next Generation, Picard brings the Enterprise into a black cluster to track down a missing ship, the Vico. As they enter the cluster, gravity waves threaten. Enterprise raises shields for protection from the waves. As they travel deeper into the cluster, the waves grow stronger and more threatening. Again and again, Enterprise increases power to the shields. Ultimately, Geordi diverts power to the shields from the warp drive, the ship's greatest source of power.

But the next approaching wave is stronger yet. The crew fears all is lost. The captain braces for impact. At that moment Mr. Data discovers that the shields have been causing the gravity waves. He tells Captain Picard to shut down the shields. With no time for argument or discussion, Picard chooses to trust Data's judgement and orders the shields down. Seconds from impact, the wave dissipates. Enterprise and her crew survive.

Sometimes you have to stop doing the thing that was always the right thing to do. In that episode of Star Trek, the gravity waves grew stronger as Enterprise traveled deeper into the cluster. It appeared that the gravity waves grew stronger because Enterprise traveled deeper into the cluster. But as Mr. Data discovered, that was not the case.

When you have a standard procedure that you use to solve a problem, it can be very difficult to believe that your procedure is the cause of the problem. On Enterprise, they always raise shields to protect the ship. This time, inside the black cluster, standard procedure was the cause of the problem.

For economists, politicians, and policy-makers today, the standard procedure is to apply monetary policy to the inflation problem, and tax policy to the growth problem. But we have traveled in this direction for so long that we have come to a different environment, a sort of black cluster where standard procedure only makes matters worse.

To save Enterprise, we need to drop the shields. We need to stop using monetary policy to fix the inflation problem, and stop using tax policy to fix the growth problem. My advice to the Captain? Use tax policy to fix the inflation problem, and monetary policy to fix the growth problem. At least until we're out of this cluster.


Tundra Kat said...

The Arthurian,
Thanks for finding my blog and commenting - I don't I would have discovered your site otherwise.

Nice postings - keep up the great work. I'll be reading.

Frozen Arctic Tundra

The Arthurian said...

F.A.T. Kat

Good name, that.