A New Economic Direction

At long last, private-sector jobs are growing again. They rose 159,000 in October, as reported by the Bureau of Labor Statistics. Even more encouraging are the revisions to earlier surveys, indicating that the improvement in new jobs was not a one-time event. Job gains for August and September were revised up to 250,000 from 157,000. Employment surveys are finally free of the distorting affects of rapid census hiring and firing. Moreover, the length of the work week increased slightly in October. Both job creation and the length of the work week provide reason for optimism that wage and salary incomes are trending up. Salaries account for the majority of personal income in our economy. With this visible improvement in critical measures of economic health — supported by strength of industry and exports, as well as a rise in new orders — the domestic economy has finally shaken the paralysis caused by the European debt crisis in April and the oil explosion in the Gulf.

Growth, however, will remain below optimum and below the economy’s potential. This is unfortunate and unnecessary. There are a number of reasons for stunted growth. The merits of the Troubled Asset Relief Program and other targeted spending initiatives will be debated by economists and politicians for years. The fact is that most of the spending was directed at a broad array of institutions and economic sectors by government planners. The goals overall were to provide short-term relief to preferred industries, clear out inventories, and “kick start” the economy. No new private-sector jobs were created. The aftermath is a massive addition to the government debt and the unintended consequence of borrowing from future sales. As the economic resurgence now gains strength, it faces the headwinds caused by extinguishing various stimulus initiatives.

 

Typically, employment rises rapidly in the early stages of recovery. The reluctance till now of businesses to add permanent jobs is caused by uncertainty about the costs and effects of government policies. Companies of all sizes find it difficult to quantify the added expenses and taxes embedded in the new health-care bill, as well as the multitude of new regulations that have sprouted up. The administration’s calls for higher taxes on individuals with income over $200,000 ($250,000 for joint filers), if carried out, will deal a major blow to owners of small businesses. Similarly, taxes on foreign-sourced income of multinationals places large employers at a major competitive disadvantage relative to their overseas competitors, most of whom are not taxed on foreign earnings. The cumulative result is a low level of consumer and business confidence in government fiscal policies.

All that has transpired to drive our economy into a deep recession and slow recovery has led to the widespread belief in a “new normal” — the idea that U.S. economic potential is lower than our historical experience. The implication of this view is that our economic future is out of our hands, and we must resign ourselves to our slow growth fate. Our standard of living must stagnate, and our young people face a future of decidedly limited potential. This view has crept in to the vocabulary of some government leaders and been used to justify even greater levels of government spending.

 

But this assessment ignores our exceptionally vibrant economic history and belittles the innate entrepreneurial and optimistic spirit of the American psyche.

An all-encompassing pro-growth economic framework must replace the restrictive fiscal measures now in effect. The myopic view that more government spending is necessary to cure our economic ills is a prescription for stagnation. Stimulus programs did not provide a trajectory toward sustained expansion and increased employment, and sugar-coating them by descriptions such as “green jobs” is a recipe for more of the same. Inappropriate forms of corporate welfare, such as subsidies and loan guarantees, distort financial integrity and should be eliminated.

America’s wonderful record of world economic leadership is based on advances in private-sector production and productivity. Increased production, productivity, and sound capital formation, supported by sympathetic fiscal policies, have provided the fuel for the creation of new industries, employment growth that is the envy of the world, and an increased standard of living. Fiscal policies today are anti-private-sector growth and, importantly, place U.S. corporations in a competitive disadvantage in an integrated world economy. Today, U.S. corporate taxes are among the highest in the industrialized world. A good start to empowering the private-sector expansion and employment growth is to reduce corporate taxes. Similarly, tax policy should encourage work through low income-tax rates and savings and investment through low capital gains and dividends rates. The expansion of various tax rebate and existing credit programs has resulted in an estimated 45 percent of our working population who pay no federal income tax.

Fiscal authorities and the Congress must resist the temptation to continually add to government spending. Prior to the financial collapse, government outlays accounted for about 20 percent of Gross Domestic Product, a 50-year average that has been shattered in the past few years. Government outlays are now in excess of 25 percent of GDP and climbing rapidly. This is a prescription for more printing of money, a weaker dollar, a loss of leadership in world financial affairs, and ultimately runaway inflation. A pro-growth policy would emphasize strict limits on government spending, including a freeze on automatic increases in entitlements and employment.

Adoption of pro-growth policies should be a major part of the deficit-reduction efforts being crafted by the White House commission on the budget deficit. Other aspects than those highlighted above will undoubtedly be included in the final recommendations. We should reject the notion that the U.S. economy is locked in to an insipid economic future by forces beyond its control. Recognition of the powerful economic potential of the United States, an orientation toward a long-term pro-growth agenda, and political courage are required.

Alfred A. Lagan

By

Alfred Lagan is the founder and chairman of Congress Asset Management Company, a respected investment management firm in Boston, MA. Prior to starting Congress in 1985, he held senior investment positions in several financial services firms. Mr. Lagan holds an MBA from New York University with distinction, and a BA in economics from Iona College. He was born in New York City of Irish immigrant parents, and served four years in the Navy.

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