Economics

Targeting Economic Growth

Former Minnesota Governor Tim Pawlenty, in a major economic speech last week, called for targeting a 5 percent economic growth rate, arguing that “such a national economic growth target will set our sights on a positive future. And inspire the actions needed to reach it.”

I disagree with the target, but agree with the aspiration. Five percent growth is possible in any given year, and may even be likely as the economy eventually recovers and America’s idle stocks of labor, capital, and technology are again fully utilized. Over the long term, however, 5 percent growth really isn’t consistent with a labor force that will grow by only around half a percent per year, with productivity growth required to make up the difference. Five percent is just too high a bar to reach. An aging population means slower labor force growth and, all other things equal, slower economic growth.

But it’s that aging population that also makes it so is important to focus on economic growth. When smaller populations of workers have to support larger populations of retirees, you need the workforce to be as productive as possible. It’s only by raising output that population aging doesn’t get to be a tug of war over resources between the old and the young.

My shorthand is that to support an aging population you want policy to encourage individuals to:

—Work more: Meaning more hours of the day and more weeks of the year;

—Save more: Meaning more participation in employer pension plans and higher contributions into them; and

—Retire later: which means not claiming Social Security at 62 like many people do today, but at 65, 66, or beyond.

This context makes clearer why I oppose relying too much on taxes to fix entitlements and the budget. Higher taxes mean that people will:

—Work less: Since they’ll receive less for each hour of work;

—Save less: Since they’ll have less money to save and less reason to save, since those taxes will support more generous entitlement programs; and

—Retire earlier: Since Social Security and Medicare benefits will look more generous relative to their after-tax pay when working.

Obviously the execution is a lot more complicated than this, but the basic logic isn’t. Economic policy shouldn’t be about a number, be it 5 percent or whatever, so much as about a sign: positive or negative. If you need a stronger economy to thrive then you want public policy to encourage the things that lead to a stronger economy, not a weaker one. And it’s there, more so than in the details, where Pawlenty’s on basically the right track.

3 thoughts on “Targeting Economic Growth

  1. Might not comprehensive immigration reform and a more welcoming visa program provide a solution to the problem of an aging population, especially in a country where abortion has been legal for decades?

    Coupled with necessary reductions to entitlement benefits for all, of course.

  2. You’d need a LOT of immigrants to keep aging-related costs from rising significantly, probably more than we’re culturally willing to accept. Plus, they’d have to be high income immigrants who pay more into the programs than they receive. In theory immigration can help, but I wouldn’t put too much stock in it. More broadly, I think that immigration is such a difficult issue with so many big picture ramifications that it shouldn’t be decided by something like Social Security policy.

  3. I’m not suggesting immigration reform equals entitlement reform, and I don’t think that was the impetus for Pawlenty’s (or Reagan’s) pro-growth agenda, either, although we’re using illegal immigrants’ “unassigned” contributions right now ($4B a few years ago, by one account) to fund entitlement debt.

    Entitlements ought to be reformed no matter who is eligible, to ratchet down our growing dependence on the nanny state. We should not be trying to grow our economy in order to fund the wwelfare state; we should remove impediments on businesses and individuals to allow them to grow the economy.

    Part of the regulatory burden for small businesses in the last decade or so has been the need to either act as border guard, choose to stay small (for lack of employees), or hope that legislation would provide relief.

    The idea that only high income immigrants should be welcomed is like Obama and Geitner arguing for taxing the wealthy as a solution to the debt–the numbers aren’t there. You can take 25% of a millionaire’s income plus 10% of 100 of his employees’ $50,000 incomes (whom he couldn’t employ if his taxes were higher)–aren’t you better off, especially when the workers are buying goods and services in their communities?

    We weren’t “culturally willing” to accept the Irish or the Chinese, either, but we only had our prejudices to overcome, and no (false) excuses available that they were overburdening social services. Now we have both, and Republicans cannot continue to dodge this issue, both for the sake of our economy and our character.

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