A Growth Pact for America
NEW YORK – America, once again, will have a divided government, with the Democrats holding the White House, and the Republicans controlling both houses of Congress. But that does not necessarily mean that the final two years of
Barack Obama’s presidency need to be defined by stalemate and mutual recrimination.
The electorate’s desire for change and fear of continuing slow growth, which pushed the Republicans to their victory in this week’s mid-term congressional election, will invariably prompt discussion about new policy options designed to raise growth, employment, and incomes. Of course, America’s experience with divided government can leave one pessimistic about the two parties’ ability to compromise; but, as Mexico recently demonstrated when its three big parties agreed on a market-oriented “Pact for Mexico,” even bitterly opposed political parties can overcome their suspicions to embrace needed reforms.
The list of potential policy actions that could benefit the United States – trade liberalization, comprehensive regulatory reform, and immigration and education reform, among others – is long. But only two policies are particularly promising for such a “Pact for America”: federal infrastructure spending and corporate-tax reform. Enactment of these reforms would generate a win for each side – and for both.
But such a bipartisan consensus requires removing both the left and the right’s ideological blinders, at least temporarily. On the left, a preoccupation with Keynesian stimulus reflects a misunderstanding of both the availability of measures (shovel-ready projects) and their desirability (whether they will meaningfully change the expectations of households and businesses). Indeed, to counteract the mindset forged in the recent financial crisis, spending measures will need to be longer-lasting if they are to raise expectations of future growth and thus stimulate current investment and hiring.
The right, for its part, must rethink its obsession with temporary tax cuts for households or businesses. The impact of such cuts on aggregate demand is almost always modest, and they are poorly suited for shifting expectations for recovery and growth in the post-financial-crisis downturn.
Politics complicates matters further, because the exclusively short-term focus on the fiscal impact of spending and revenues clashes with policies whose benefits accumulate over time. While such benefits may not appear to be “stimulus,” their mounting effect better serves the objective of raising expectations of future demand and growth.
But the concerns of serious people, whether on the left or the right, are not so different. Will economic growth accelerate sufficiently to boost job and income growth? Can the barriers that exclude many Americans from recovery and future prosperity be removed?
Federal infrastructure spending and corporate-tax reform should top the list of policies capable of attracting bipartisan agreement, because they promise significant long-term productivity, income, and employment gains, while also supporting short-term growth. A commitment to a multi-year federal infrastructure-spending program, for example, could increase demand, private investment, and employment, even though projects may not be immediately available. And such a program, normally proposed by Democrats, can and should be crafted to secure Republican support as well.
To that end, an infrastructure program should give states and localities a key role in selecting the projects to be funded, and these governmental units should have “skin in the game” by funding part of the costs. Policymakers should also give serious consideration to regulatory reforms that would reduce the expense of new projects and assure their timely completion.
An infrastructure program oriented in this way – as opposed to a grab bag of politically expedient shovel-ready projects – should be able to muster conservative support. And, done properly, federally funded infrastructure projects should provide substantial benefits to lower-income Americans. Better transport infrastructure, for example, would not only create jobs, but would also reduce the costs of commuting to work.
Corporate-tax reform also offers a good opportunity for bipartisan agreement, especially given that Obama and congressional leaders of both parties have expressed interest. While gains from fundamental tax reform – say, replacing the current tax system with a broad-based consumption tax – are large, on the order of 0.5-1 percentage point per year of economic growth for a decade, corporate-tax reform would also boost growth.
Reducing the tax rate for companies substantially, while eliminating targeted business-tax preferences and broadening the corporate-tax base, would increase both investment and workers’ wages. Allowing multinational companies to repatriate overseas profits without paying additional US tax would also bolster investment and job creation at home.
Given that recent research shows that much of the burden of corporate taxation is borne by workers in the form of lower wages, Democrats should embrace tax reform as a way to support income growth. One could add to such a reform further support for low-income Americans by increasing the Earned Income Tax Credit for single workers.
Given their policy objectives, conservatives should support a well-crafted federal infrastructure program, and liberals should support corporate-tax reform. But changes in the political process would help move matters ahead. Because the payoffs from infrastructure spending and tax reform do not fit neatly within the five-year or ten-year budget window used by America’s fiscal scorekeepers, measuring more completely the benefits from such policies is vital to attracting political support.
Moreover, any increase in spending on infrastructure or any revenue loss from tax reform should be offset elsewhere. For example, future growth in Social Security benefits or the home-mortgage-interest tax deduction could be scaled back for more affluent individuals, as progressive indexation, proposed by conservatives in the US, and the adjustment of mortgage-interest tax deductions in the United Kingdom, started during the Thatcher administration, attest.
Clearly, the economy is Americans’ top concern. Its leaders must respond with a policy agenda focused on reviving growth now and sustaining it in the future. But that can happen only if enough legislators in both parties, and the president, remove their intellectual and political blinders and reach the long-term compromises needed to create jobs and increase incomes. The time for a Pact for America has arrived.
Glenn Hubbard, former Chairman of the Council of Economic Advisers under President George W. Bush, is Dean of Columbia Business School.