4% growth

I wrote last week on the simple factual question of whether and how often the US has experienced 4% real GDP growth in the past.

The deeper question, is that growth possible again? I answered yes, it's surely possible as a matter of economics. 

A few have asked me "why do so many of your colleagues disagree?" It's a question I hate. It's hard enough to understand the economy, I don't pretend to understand how others respond to media inquiries. And I don't like the invitation to squabble in public. 

It has taken me some time to reflect on it, though, and I think I have a useful answer. I think we actually agree.

As I read through the many economists' quotes in the media, I don't think there is in fact substantial disagreement on the economic question -- is it economically possible for the U.S. to grow at 4% for a decade or more? Their caution is political. They don't think that any of the announced candidates (at least with a prayer of being elected) will advocate, let alone get enacted, a set of policies sufficiently radical to raise growth that much. 

This is a sensible position. When I answer the question, is 4% growth for a decade economically possible, my answer is whether the most extreme pro-growth policies would yield at least that result. A  short list:

• The tax code is thoroughly reformed to do nothing but raise revenue with minimal distortion -- a uniform consumption tax and no income, corporate, estate etc. taxes, or deductions.
• A dramatic regulatory reform. For example 
• Simple equity-financed banking in place of Dodd-Frank. 
• Private health-status insurance (with, if needed, on-budget voucher subsidies) in place of Obamacare. 
• An end to the mess of energy subsidies and interference. No more fuel economy standards, HOV lanes, Tesla tax credits, windmill subsidies, and so on and so on. (If you want to control carbon, a uniform carbon tax and nothing else.) 
• Many agencies cease to exist. 
• No more endless waits for regulatory decisions. 
• No more witch hunts for multibillion dollar settlements.
• Thorough overhaul of social programs to remove disincentives. Most help comes via on-budget vouchers.
• No more agricultural subsidies.
• No more subsidies, period. Fannie and Freddie closed down.  
• Unilateral free trade. 
• Essentially open immigration -- anyone can work.  
• Much labor law rolled back. Uber drivers can be contractors, thank you. Most occupational licenses removed -- anyone can work.  
• Drug legalization.
• School vouchers. 
• And so on. Essentially, every single action and policy is re-oriented toward growth. 

This program removes a lot of level inefficiencies. 10% increase in level over 10 years is 1% more growth per year. Labor force participation increases. The labor force itself grows. We get a spurt of productivity growth just from greater efficiency without needing big investments. And then innovation and new businesses, investment, technology kicks in.

There would be a lot of lawyer, accountant, lobbyist, compliance officer, and regulator unemployment. Well, Uber needs drivers.

Politically, this is free-market libertarian nirvana.

I think my fellow economists might agree that 4% growth for a decade is possible with such a program. In fact, it we can likely get to 4% with much less than all of these policies. They might complain about inequality or other objectives.  But most of all, they might say it's unlikely that the new President and Congress will enact anything like such a program.

That's a very reasonable view. I also agree that typical proposals -- a  small reduction in corporate rates, a twiddle here a tweak there, the typical small promise to improve regulation -- will not have one tenth the needed effect.

But, dear colleagues, they asked us about economic possibility, not our guess about political probability. Let's answer the question they asked us.  It would be better to say: "Sure, 4% growth is economically possible. But I don't think any politician will advocate the policies necessary to produce it."  If we were to say that more often, rather than give up at the outset, we just might get such policies and politicians.

You never know what's "politically feasible." In 1955, civil rights was "politically infeasible." In 2005 gay marriage was "politically infeasible." Politics sticks in the mud for 100 years and then changes faster than we imagine.

I think there actually are quite a few politicians who would do some of the radical things that need to be done. They need to hear from us that it could work, as a matter of economics, and let them handle the politics.

We will soon see a first test: Can any candidate show up in Iowa, and say "Ladies and Gentlemen, government subsidized corn ethanol is a rotten idea." Then, can they say something vaguely coherent on immigration and trade.  The campaign season is young. Let's not prejudge them. 

Growth is just too important to give up on so easily. Sclerotic growth is the economic issue of our time. Economists should be cheering any policy agenda focused on growth.  If you think the policies needed to give us growth are hard, and out of the current political mainstream, that's ever more reason to keep reminding people that growth is possible and needs big changes, not to confuse "it's unlikely they'll do it" with "it's economically impossible."

Update: Response to Noah Smith's comment on this post  here