ConservativeHome's Big Ideas blog

Tyler Cowen: America is not nearly as innovative as we think, the coming fiscal crunch will be worse than we think...so let's get busy investing in science and bringing entitlement costs under control

Tyler Cowen's Marginal Revolution is among the most-visited economics blogs, and his new e-book, The Great Stagnation, has been getting a lot of attention for its somewhat surprising and pessimistic conclusion that American economic advancement really began to slow in the early 1970s - and that we're in for a period of stagnant growth.

 

In this mini-Q&A (less than 300 words), Cowen responds to 2 questions from Ryan Streeter: what's the main takeaway policymakers should get from the book, and is there anything they can do?

 

RS: For the policymakers who have not read The Great Stagnation, what is the one big takeaway from the book they should know about?

Cowen: Right now American society is not nearly as innovative as we think. The rate of technological progress has been slowing down for decades, and we’re spending more in sectors, like health care and education, where more money does not automatically bring better results. In macroeconomic terms, the internet, for all its conveniences, has yet to pay off. We are mismeasuring value, or in other words, we are poorer than we think and the financial crisis of 2007-2009 was the first wake-up call in a series of more to come.

 

RS: You've said in the book that we are probably in for a long stretch of relative stagnation before the U.S. economy enjoys the kind of surge we experienced until the early 1970s. But is there anything policymakers can do to get us moving in the right direction?

Cowen: The coming fiscal crunch will be worse than most people think.  Addressing Medicare and health care costs is absolutely essential and we must do it now.  It is hard to control these costs by turning on a dime.

 

Policymakers should be aggressively pro-science in their attitudes and behavior. Science doesn’t play an important enough role in American public discourse, even though it is a major determinant of our living standards. Science had higher status in American society in the early 1960s than today, yet few people see this as a major problem.

 

Liability law, NIMBY, and overregulation slow down the rate of technological progress.  We need reform in all those areas.

 

If you would like to hear more from Tyler on The Great Stagnation, watch this video interview that our friend Nick Schulz over at The American recently did with him.

Lower corporate tax rates are the best way to get America's economy growing: evidence from two reports this week suggests Congress should get to work on this issue

Ryan Streeter

Chris Edwards at Cato and Kevin Hassett at AEI have each published reports on the corporate tax rate in the U.S. this week.

Given that President Obama has expressed support for corporate tax reform and the bipartisan deficit commission made strong recommendations on its behalf, one can only hope Congress will get around to acting on the matter.

But we’re not hearing very much about it in the midst of the spending cuts debate.

Reading the two reports will convince you that we should.

Edwards’ main points can be summarized as follows:

• The U.S. statutory rate of about 40 percent—including federal and state taxes—will be the highest in the Organization for Economic Cooperation and Development, after Japan cuts its rate as planned in April.

• We find that the U.S. effective corporate tax rate on new investment was 34.6 percent in 2010, which was the highest rate in the OECD and the fifth-highest rate among 83 countries.

• The average OECD rate was 18.6 percent, and the average rate for 83 countries was 17.7 percent.

• America’s largest trading partner, Canada, cut its statutory corporate rate from 43 percent to 29 percent, which helped to bring down its effective rate from 44 percent to 21 percent, according to our calculations. 

• Across-the-board rate cuts matter more than temporary measures, such as bonus depreciation. The one-year bonus depreciation measure passed by Congress for 2011 “reduces the U.S. effective tax rate to as low as 17.5 percent, but this is only a single-year windfall. It does not create certainty for businesses in their capital planning, and it may simply accelerate investment ahead of the normal replacement schedule.”

• In addition, bonus depreciation discriminates against the services sector. This is “because businesses in the services sector use relatively fewer shorter-lived capital assets (e.g., equipment with a useful life of 20 years or less), which qualify for bonus depreciation, and relatively more longer-lived capital assets (e.g., office buildings), which do not qualify for bonus depreciation. Therefore, bonus depreciation is an inferior policy to a substantial statutory tax-rate cut, which would improve long-term investment incentives broadly across the economy.

Edwards points out that the deficit commission's recommendations don't go far enough:

He also cites a couple key findings from recent studies:

• Corporate tax rates affect economic growth more than anything: “[W]hen considering the efficiency characteristics of different taxes, corporate income taxes are the most distortive, and hence the most harmful for economic growth.”

• Corporate tax rate cuts in high- rate countries will probably not cause substantial revenue losses. “Keeping the corporate rate competitive helps avoid ‘income shifting’ by multinational companies from high-tax to low-tax jurisdictions.”

Kevin Hassett at AEI has also just published his report card on corporate tax rates. The result? America gets an “F.”

He provides in-depth analysis that confirms Edwards’ main points. He also shows the effect on revenues. This about sums it up:

In 1981, the United States raised about 2.3 percent of GDP from corporate tax revenues, but between 2000 and 2004, it raised between 1.7 and 1.9 percent.

In a separate study, Hassett has shown how lower corporate tax rates will raise additional tax revenue.

He has also argued here at ConservativeHome that working class families are hit especially hard by the higher corporate rates, and that lowering them is the most effective strategy for helping middle class workers today.

Lawmakers are frozen right now when it comes to just about anything on which they can work together in a bipartisan way. Corporate tax reform seems about as low-hanging a piece of fruit right now one can find. Let's hope we can push our friends in Congress to act on it soon.

Hennessey: Obama's budget isn't just bad because it grows the size of the deficit, but the way it grows government's overall share of the U.S. economy

Keith Hennessey is the most skilled translator of complicated economic policy into plainspeak in America today.

He has an important post today on President Obama's budget, and it centers on this chart:

Hennessey writes:

I’m a small government guy, so I want the red line to be as low as possible.  Whatever your policy preference about the size of government relative to the private sector, two things are undisputable:  bigger government comes at the expense of a smaller private sector, and at some point that growth in government has to stop.  This second point is just another way of saying that eventually we have to flatten that red line.

This size-of-government metric is often ignored.  Washington fights about whether a policy (like the new health care laws) widens or narrows the gap (the deficit) without asking whether the policy shifts the lines up or down.  Both things matter.

He's right. We focus so much in our debates on the distance between the red and blue lines, but the height to which they rise together above zero is our measure of how much government is crowding out the private sector.

These remarks conclude the point. Our President cares more about raising the lines up, not the distance between the two.

You can see that President Obama proposes long-term revenues of about 20% of GDP over the next decade.  Other than a brief tick above 20% during the tech stock bubble in the late 90s, that would put federal taxes at an all-time high share of GDP.  That difference, between 18.1% of GDP and almost 20%, is enormous. Those higher taxes are an explicit policy proposal from the President.

Cato's Chris Edwards: The federal government has been loving states to death with an explosion of state aid programs

Ryan Streeter

We at ConservativeHome try to keep our eyes on interesting information, data, facts, and ideas that should get attention among conservative lawmakers and their staff.

Here’s the most impressive data point I’ve seen this week:

The cost of federal aid has soared, and so has the number of different aid programs. By my count, the number of federal aid programs for the states totaled 1,122 in 2010. That is up 72 percent from 2000, and it is more than triple the number of aid programs there were in the mid-1980s, after terminations by President Reagan. (emphasis added)

This is from Cato’s Chris Edwards. It’s based on a new study he has done and written up at National Review.

The numbers are astounding. Look at this chart from his study:

 

States are in the midst of a fiscal crisis for a number of reasons of their own making, but one cannot discount the role that the federal siege of state ledgers has played. The additional aid to states increases spending at the state level in other ways that are detrimental, as Edwards notes.

Just yesterday, hearings began in the House Oversight Subcommittee on TARP and Financial Services on the debt crisis facing states. While bankruptcy for states is receiving a lukewarm reception these days, the appetite for federal relief of some kind to states will be fierce.

Some might want to say that the feds’ role in making things worse for states through the kind of aid Edwards documents strengthens the case of those who want Washington to provide state bailouts. But this would get things exactly backwards. Bailouts would, in the end, be another massive state aid program with most of the very same negative consequences Edwards details.

Both governors and lawmakers in Congress need to stiffen their spines and fix this problem the right way rather than caving to the bailout pressure that is only going to get stronger in coming months.

In response to current developments in the Middle East, Elliott Abrams details six key points for US policymakers to consider

Natalie Gonnella

The House Committee on Foreign Affairs, led by chairman Ileana Ros-Lehtinen, hosted the first of a two part hearing examining "Recent Developments in Egypt and Lebanon: Implications for U.S. Policy and Allies in the Broader Middle East." 

In the initial session, committee members heard testimony from The Honorable Elliott Abrams (Council on Foreign Relations), The Honorable Lorne Craner (International Republican Institute) and Dr. Robert Satloff (The Washington Institute for Near East Policy).

With remarks focused on democracy, human rights and stability in the Middle East, in response to current developments, Abrams outlined six key points which policymakers should consider as they assess US strategy in the region:

1. The uprisings we have seen in Tunisia and Egypt are exciting proof that the thirst for freedom is indeed universal. The Middle East has lagged behind the rest of the world in moving toward democracy...President Bush was right when he adopted a Freedom Agenda for the Middle East. 
2. American policy in the region should accordingly favor democracies and countries that are moving toward reform.  That means one building block for us should be our alliance with Israel, the region’s only established democracy...Favoring democracies and those on the road to reform mean we should also value and enhance our relations with countries such as Jordan and Morocco, where reform efforts are under way....Democracy promotion cannot be a policy applied to American allies while America’s enemies are forgotten...We should be relentless in denouncing the massive human rights violations in Syria and Iran: the abuse of political prisoners, the lack of freedom of thought, assembly, speech, and press, and the phony elections.  The sooner the tide of democracy reaches those shores the better off and safer we in the United States will be.  
3. The events in Tunisia, Egypt, Yemen, Algeria, and several other Middle Eastern states should persuade us once and for all that the linkage argument—that every problem in the region is really tied to the Israeli-Palestinian conflict—is false.  None of those events had anything to with Israel and the Palestinians. 
4. US strategy in the region should use our assistance programs, economic and military, to help those building democratic systems and respecting human rights. Too often there’s a disconnect; we make speeches about human rights but we wink at violations.  This is not to say we should insult friendly rulers, or break alliances, but we should be much clearer about our values and our hopes—about which side we are on in the struggle for change and reform.
5. Despite the drama in Tunisia and Egypt events in Lebanon compel our attention.
6. Are we doing all we can?: How is democracy promotion faring? Look at the way we are training our foreign service officers, for example, to meet the challenges we see before us in the Middle East.

Abrams full testimony can be viewed here.

Ronald Reagan's four pillars and what they mean for today - compliments of Nicole Gelinas of the Manhattan Institute

Nicole Gelinas of the Manhattan Institute has a very good article in City Journal on Reagan and what we can learn from him as we face 21st century challenges. She focuses on 4 pillars of his original campaign that were important parts of his 8 year tenure. 

• The first pillar of his campaign was to reduce inflation, which was wreaking economic havoc. Reagan held a tough line in backing Paul Volcker, and it worked despite early worries. Today's leaders, fearful of moving away from easy money even after what we've been through, can learn from this.
• The second pillar was tax reform. Today's politicians can learn from this one by creating certainty in tax rates by adding permanency to the temporary extension of the Bush cuts. They can also get serious about all the breaks in the tax code, which could free up $1 trillion each year - yes, trillion.
• The third pillar was higher defense spending. Reagan was able to pull this off because we faced a very real external enemy, the Soviet Union, whom the public understood we needed to defeat. Gelinas points out that Obama's stimulus failure resulted from the President's inability to show the public why this spending mattered. 
• The fourth pillar was to balance the budget. On this front, Reagan failed - but in a manner of his choosing. He decided the deficit wasn't the biggest threat to America. Our enemies were, and he chose to spend on the latter instead of winning on the former. Today, things might be reversed.

The entire article is worth the read.

Interview with Scott Shane: the effects of Obamacare and regulations on small businesses in America

Scott Shane is Professor of Economics at Case Western Reserve University and author of Illusions of Entrepreneurship. He also writes for Bloomberg's Business Week.

ConservativeHome's Ryan Streeter recently asked Scott Shane 3 questions about the effects of Obamacare and regulation on small businesses. Here they are:

RS: Why have small businesses been less than enthusiastic about the new health care law?

Shane: For several reasons. First, it doesn’t solve the problem that they face, which is rapidly rising health insurance costs. Surveys show that small business owners wanted the kind of reform that would have kept their costs of offering insurance to their employees from rising faster than inflation. But they didn’t get it. Moreover, the vast majority of them want to offer health insurance, but many simply cannot afford it. Even with the tax credits for small business, the small business owners who couldn’t offer insurance  before the law find they still can’t pay for it. So small business owners are frustrated that Congress passed a law that didn’t solve their actual problem.  

On top of that, the law is very complex and many of the ways that the federal bureaucracy will interpret the law are unknown. Small business owners are uncomfortable with the uncertainty that this creates. They feel that they can’t make hiring and investment decisions because they don’t know the impact of the law on their businesses. Add to that the fact that the complexity means that they have to spend money hiring advisors to explain the impact to them when understanding the impact won’t improve their profits, and you can see why they are upset.

Finally, small business doesn’t like the way Congress passes laws. They are very upset that a law about health care increases the cost of tax compliance by requiring them to file 1099s to all vendors starting in 2012. This unrelated compliance burden makes no sense from a business perspective and therefore upsets them.  

RS:  We Americans love to celebrate the entrepreneur. You've made the case in the past in your writings that what really drives entrepreneurship is the business idea and opportunity, more than the characteristics of "entrepreneurial individuals." Can you talk a bit about the implications of this for public policy?

Shane: We need to be careful about over-celebrating entrepreneurs. Most people who start businesses create no jobs, contribute little to GDP, and then fail. This is a statistical reality. So we can’t assume, as many in government do, that everyone who starts a business knows what they are doing, and that entrepreneurs are the solution to all our problems. That leads to a belief in policy circles that more entrepreneurship is always better. That belief is problematic.

Let me give one example to show the fallacy of that reasoning. There is a correlations of 0.77 between the rate at which people start businesses in industries and the rate at which businesses in those industries fail. The industries with the highest odds of business failure have the most start-ups. That’s because most people don’t choose to start businesses in the industries where they are most likely to succeed but rather choose the industries easiest to enter.

The problem is that when we give people subsidies to start businesses or otherwise encouraging more entrepreneurship, we are disproportionately giving incentives to people who will start unsuccessful businesses rather than successful ones. We would be better off recognizing that some businesses have much higher odds of creating jobs and contributing to GDP than others. We should get rid of the generic incentives for everyone to start businesses and, if we need to offer incentives at all, target them to people who are starting high potential businesses.

RS: You've recently written in The American that regulatory reform efforts aimed at reducing the burden of government agencies' rules on businesses are good, but that they don't go far enough since the burden of regulation on small business today is coming more from what Congress is doing in areas such as health care and financial reform legislation. Can you elaborate on this and offer any advice for lawmakers on how to reverse this trend toward statutory over-regulation?  

Shane: I have two specific recommendations. First, politicians need to follow the advice of country singer Toby Keith. We need “a little less talk and a lot more action.” It’s nice that the President now recognizes that small business is overregulated and that those regulations need to be reduced. But telling federal agencies to review what the effects of regulation are and have several agencies say – within the same week – "we did it and our regulations are fine," indicates that much of this is talk

I would suggest that we need specific targets on reducing regulation. For instance, cut the number of small business regulations so that the cost of compliance in real dollars is the same as it was back in 2004.

Second, if you are going to regulate small business, pass simple straightforward regulations that are easy to understand, not laws that require years of bureaucratic interpretation before small business owners even know what they mean for them. Most small business owners realize that the government needs to regulate some things. Few people want companies dumping raw sewage into our lakes and rivers, people dying because they can’t get health care, or banks lending money to companies that can’t pay back the loans. But you don’t need 2000 plus page laws that no one understands to do that. You don’t need laws that require companies to hire experts just to understand the law. It’s the complexity of regulation and the cost to understand its effects that is so unproductive and bothersome to small business.