Rejuvenate US growth with spending control

America faces an alarming growth gap — a gap between where our economy is in the present recovery compared with where our economy should be in an average recovery. More troubling, many economists now believe America faces a new normal with a permanent growth gap that lowers our future economic growth rate from the robust 3.3 percent of the past 50 years to a projected 2.2 percent. 

Unfortunately, our perpetual game of political one-upmanship is not conducive to good, predictable economic policy that is critical for rejuvenating growth and job creation and closing the growth gap.

{mosads}Though the president and Congress resolved the so-called “fiscal cliff” issue, the economy continues to grow at an anemic pace. The current recovery trails the average American economic recovery by 4.1 million private-sector jobs and $1.2 trillion in real gross domestic product (GDP).

In addition to the economic headwinds created by higher taxes, the president’s new healthcare reform law and a tsunami of poorly conceived federal regulations, there remains a real skepticism among investors that Washington will act soon to credibly address the long-term financial crisis. 

The White House doesn’t seem to take it seriously. Their massive Keynesian stimulus failed to jump-start the economy, and now the effects of this spending surge are diminishing the opportunity for all Americans to support their families and contribute to America’s prosperity. Class warfare and populist cries of “tax the rich” are insufficient to return the nation to a fiscally sustainable course. Washington’s problem is not that we tax too little, it is that we spend too much. 

Getting spending under control and rightsizing the federal government is the key to reinvigorating our economy and closing the growth gap. The problem is that if Washington were a manufacturing plant, it would be designed to manufacture spending. If we want it to manufacture savings and efficiency, we need to retool the plant. 

The credible macroeconomic approach that I have offered in this debate is the Maximizing America’s Prosperity (MAP) Act. The MAP Act would reduce non-interest spending over a decade to 16.5 percent of potential GDP — back to a Clinton-era level — therein keeping spending on a lower, stable, predictable path through economic booms and busts. The MAP Act uses smarter metrics to erect guardrails to keeps future Congresses and presidents from “jumping the rails” to spend beyond our country’s means. The metrics are: 

First, to focus on what spending Congress can really control: non-interest spending. Non-interest spending includes all appropriated and mandatory spending, but excludes interest payments, over which Congress has no control and will be paid regardless. This has two benefits: It prevents Congress from disguising tax increases as spending cuts, and it lessens the political pressure on the Federal Reserve to keep interest rates low to mask the debt. Like your credit card, you might not be able to control the interest rate, but if you continually shrink the principal, you’ll get your debt under control. The spending caps in the MAP Act do not ignore interest costs. Instead, it simply lowers them over time by reducing non-interest spending. 

Second, the MAP Act bases the cap on potential GDP. Potential GDP, as calculated by the Congressional Budget Office, is a measure of what the economy would produce if it operated at peak efficiency without inflation. As a measurement, potential GDP removes the spending excesses in a boom, and it prevents draconian cuts during a recession — when Congress is most likely to jump the spending guardrails. This smoothing allows for predictable budgeting decisions and is less susceptible to gaming by lawmakers. 

This approach mirrors the finding of the Joint Economic Committee study, “Spend Less, Owe Less, Grow the Economy,” which examined the experiences of America’s global competitors as they dealt with rising government debt, and how some were able to reduce their debt-to-GDP ratio and grow their economies by implementing fiscal consolidations that relied most heavily on spending cuts. 

Here’s the key lesson: Cutting debt while growing the economy requires spending reductions that are large, credible and politically difficult to reverse once made. When government debt shrank through spending cuts, business and consumer investment grew — and so did jobs. Conversely, countries that increased taxes were not as successful. 

Closing the growth gap is essential as we aim to solve our debt crisis, save Social Security and Medicare for the long haul, and ensure a bright and prosperous future. We cannot allow these next months to go to waste. 

Congress and the president must work together now, this year, to find bipartisan agreement to close the growth gap. The MAP Act offers an economically credible path forward.

Brady is chairman of the Joint Economic Committee.


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