Economic Policy Analysis
By Arnold Kling
Whoever is writing the lead editorials for the Washington Post (I suspect Sebastian Mallaby) on economic policy issues in this year’s election is providing pieces that are highly educational. Today’s editorial is called The Growth Mystery.
we don’t know how to repeat the 1990s miracle, and the government’s policy options — a trade deal, tort reform, deregulation — aren’t powerful enough to do it. The productivity revolution inside American companies seems to have reflected technological and organizational changes that had been percolating inside corporations for at least a decade, none of which had much to do with government policy.
Concerning tax cuts and economic growth, the editorial makes this point:
Lower tax rates on wages do boost the labor supply; lower tax rates on investment may boost savings; more labor and more capital mean more economic output. But Mr. Bush’s tax cuts also have an offsetting consequence. Because they have not been accompanied by spending cuts, government borrowing has gone up, nudging everybody’s cost of borrowing higher than it would be otherwise. A range of econometric studies suggest that these opposing impacts — more labor and capital on the one hand, higher interest rates on the other — roughly cancel one another out.
Yesterday’s Post editorial looked at the tax cuts in the context of the long-run fiscal situation.
The share of government in GDP has more than quadrupled in the United States over the past century, and a World Bank cross-country study has shown that the richer a country, the larger the share of its resources that flows through the government. As people grow richer, their appetites for newer and jazzier consumer durables taper off, and the things they want more of include health, education, clean air and safety from threats both foreign and domestic. These things are often provided by the government. To starve the government with tax cuts is to misread this trend.
The editorial looks at Social Security privatization.
privatization is a way of shifting the nation from a pay-go system to a pre-funded one. Savings would become more plentiful.
See also my essay The Ultimate Lockbox.
The editorial later says,
The Berkeley-Brookings projections put the size of the deficit in 2040 at 20 percent of GDP, so containing Social Security costs might address one-twentieth of the problem…
The dirty little secret about Social Security is that it’s too small to transform the fiscal future. For all the books and seminars devoted to the subject, it is a side show next to the policies we consider in our next two pieces: the growth rate and health care.
This is the conclusion that I spelled out in The Great Race.
For Discussion. Yesterday’s editorial argues that the share of government in the economy has been growing because as incomes rise people want relatively more of the types of services provided by government. Is this an inevitable trend? Will anything slow it down, or will the private sector continue to shrink as a share of the economy?