By: Larry Kudlow
First-quarter real GDP actually declined by 0.7 percent, according to revisions out this week, creating much new talk about recession. But there is no recession. Trouble is, there continues to be virtually no recovery.
The economy has expanded about 1.5 percent over the past two quarters, 2.4 percent at an annual rate over the past two years, and about 2.3 percent during this six-year, so-called recovery. That’s the real problem. Not a one-quarter snowstorm or inaccurate seasonal adjustments.
Following the deepest recession since World War II, a normal recovery should have featured an outsized rebound. The Reagan years exemplified that model. But it hasn’t happened. Why?
On the eve of the Republican primaries, here’s the big question: What must we do to restore America’s long-term economic-growth performance, which is roughly 3.4 percent per year? Answer: 5 percent growth for the next decade.
Today’s economy is about $2 trillion below that long-term trend line. And the absence of normal growth is a big part of 15 million fewer jobs and a 10.8 percent U-6 unemployment rate (marginally attached workers, part-timers who want full-time work, people who have given up).
There are federal-entitlement disincentives at play, but a normal growth path would have produced many more jobs and a higher employment-to-population rate. And while I have written on family breakup as a huge source of poverty, the absence of economic growth is surely part of the problem.
And here’s a point for those who worry about federal debt and deficits. According to the CBO, a 1 percent increase in real economic growth would lower the deficit by about $3 trillion over ten years. In other words, growth solves a lot of problems.
And it’s high time for growth.
A little history: Despite the urban legend of a booming 1950s, there were three recessions under Ike and an average growth rate of only 2.5 percent. Then, in the spring of 1960, Nelson Rockefeller sat down with presidential hopeful Richard Nixon and hammered out the so-called Fifth Avenue compact, headlined by a 5 percent growth target. And almost at the same time, Senator John F. Kennedy entered a 5 percent growth target into his campaign. By the way, with JFK’s supply-side tax cut, the 1960s registered nearly 5 percent growth.
So how about some Republican leadership today, with all the candidates pushing for a 5 percent economic-growth target. It’s exactly what we need to get back to America’s long-term prosperity trend, which had long ensured our world leadership. We don’t have that today. Unfortunately, it’s just as Ronald Reagan warned: Weakness at home creates weakness abroad.
In a recent Wall Street Journal op-ed, distinguished economist Martin Feldstein made a plea for tax-cut policies that would generate much faster growth. In particular, he argued for more capital investment, which by the way, adjusted for inflation, hasn’t increased in 20 years.
Here’s the Feldstein prescription: Slash the corporate income tax and lower personal income-tax rates. Get rid of taxes on interest and dividends to promote saving. Get rid of deductions that shift capital to less-productive investments. Reform means-tested programs, such as disability insurance and Obamacare, which reduce benefits if people move from welfare to work.
As for my part, I understand that education reform, stable families, job training, reducing regulation, and other non-tax items are crucial for growth. But if we want more risk and innovation, and more take-home pay for the middle class, we must look hard at pro-growth tax reform. And by that I mean across-the-board tax-rate cuts, along with simplification and ending cronyist deductions.
A reformicon recently penned a piece arguing that traditional supply-siders (I guess like myself) only want to cut the top personal tax rate. Nonsense. Kemp-Roth, Reagan’s ’81 and ’86 reforms, and even George W. Bush’s ’03 reform were focused on across-the-board reductions in marginal tax rates. In fact, most of the time, the tax-rate-cut percentage has been greatest for the middle class. And we all borrowed from the JFK tax cuts, which were across-the-board.
That’s the most efficient pro-growth approach: incentive-oriented, economically neutral, tax-rate reduction. Targeted tax credits are inefficient government planning. And they won’t produce growth.
Now, I would prefer a 15 and 28 percent personal tax reform that goes back to Reagan ’86. This would end the 10, 25, 28, and 33 percent brackets that have plagued the middle class. It would increase take-home pay for everyone, providing a bigger bang than child tax credits. I would also like a 20 percent corporate tax rate, along with territorial-based repatriation and cash expensing for investment, all of which would offer the greatest benefit to middle-income earners.
But a 5 percent growth target gets the ball rolling in the right direction. The Democrats won’t do it. But the Republicans can.