In this season of New Year’s resolutions, a suggestion: Presidential candidates and those covering them should focus economic discussion on the most important change needed – faster growth.
Growth and its benefits are being drowned out in campaign discourse and coverage. Concerns over stagnating fortunes of low-and-middle-income Americans have fanned the flames of two political fires in the present presidential campaign – the populist and nativist rhetoric of GOP candidate Donald TrumpDonald TrumpJeh Johnson is designated survivor for inauguration Fox News signs Nigel Farage, backer of Trump and Brexit Trump sworn in as 45th president MORE and the redistributionist rhetoric of Democratic candidate Hillary ClintonHillary Rodham ClintonHuckabee praises Clinton’s inauguration stop Sanders: This is a 'tough day for millions of Americans' Pelosi on Dems' approach to Trump: Look at Bush MORE. Both the concerns and the rhetoric miss two larger points: More rapid economic growth still offers the best chance for rising fortunes of all Americans. And the populist offerings on the right and the redistributionist offerings on the left harm most the very voters whose concerns place us in this debate.
So growth matters – a lot, the most. A policy agenda to achieve faster growth must seek to increase productivity and hours worked. A ‘productivity’ policy thrust emphasizes innovation (support for basic research and a financial system centered more on business than financial engineering, better capital allocation (tax reform to reduce marginal tax rates on business income and make business decisions more reflective of economic fundamentals than the tax code), and enhanced competition (advancing trade deals to open up global markets and cutting back mindless entry barriers to many businesses and occupations). Smart immigration reform can increase hours worked and talent in the American economy. And tax reform can reduce high marginal tax rates on work that affect many Americans – from the superiority for many of government benefits over work that calls out for more generous support for work in the Earned Income Tax Credit and reducing implicit marginal tax rates on work woven into the Affordable Care Act, as well as cutting payroll taxes on older workers eligible for Social Security. These productivity and labor market policies are as sensible and doable as they are absent from coverage of the 2016 presidential campaigns of both parties’ front runners.
Given the primary emphasis on growth as the CEA estimates suggest, we should do more to encourage a broader sharing in its benefits. Two changes on the supply side are important. Smarter federal support for low- and moderate-skilled workers can help them move within the country toward places with more promising opportunities for them. The fear of losing state benefits can keep a worker frozen in place. Complementing traditional Unemployment Insurance with federal Personal Reemployment Accounts that would provide income and private training support would be a step in the right direction. Heath care reform that improves markets for health insurance and health care – in contrast to the costly doubling down on the current system under the Affordable Care Act – can slow health care cost growth. As a consequence, more employee compensation growth can flow into wages, improving workers’ incomes. On the demand side, tighter labor markets will raise incomes for all workers. Key policy elements here are business tax reform to increase investment demand and federal-state-private partnerships to boost infrastructure spending in the context of a comprehensive strategy for the nation.
Second, through these lenses, the overtures to the ‘middle class’ from presidential candidates can be assessed. On the one hand, Secretary Clinton’s emphasis on growth-limiting tax increases and greater income redistribution will do relatively little to enhance incomes of average Americans, as the Obama CEA calculations suggest. And raising taxes on businesses and entrepreneurs will reduce employment opportunities and income growth. On the other hand, the anti-trade and anti-immigration policies of Mr. Trump portend a slower-growth future for all Americans, and middle- and lower-income Americans in particular.
There should be a deeper concern with the faulty economics of the front runners: Periods of slow growth raise social as well as economic tensions and can lead to very bad policy, as Harvard economist Benjamin Friedman argued a decade ago in his book The Moral Consequences of Economic Growth. Secretary Clinton’s redistribution-without-opportunity agenda is an example. And Mr. Trump’s populist demagoguery is the very fear Professor Friedman expressed. An observation for the new year: Faster growth – in no small part a policy choice -- is the better answer.
Hubbard, dean of Columbia Business School, was chairman of the Council of Economic Advisers under President George W. Bush.