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The Compass Points Toward Growth Policy

Last week saw the simultaneous ignition of three flammable DC-based policy conversations: (1) what to do with the so-called Bush tax cuts; aka the Democrats’ drive to commit class warfare regardless of the cost; (2) how to react to the president’s pesky debt commission, and (3) how to achieve “bi-partisan governance” and avoid the dreaded “gridlock” condition.  Into this combustible mix, the Labor Department lobbed a lit match: a November jobs report full of disappointment and bad news for long-suffering American workers.

The congressional reaction was predictable.  Panicked Democrats cried: “Quick, quick, tax the rich and then spend, spend, spend.”  Deficit be damned.  Republicans, with the bemused looks of those who have said the same thing for the 1000th time, asked: “Which economic doctrine, exactly, suggests that tax increases solves the jobs problem?”  The administration took at look at 50,000 new private sector jobs and simply declared victory, with CEA Chairman Austan Goolsbee blithely championing 11 straight months of private sector job growth.  By their standards, any sign of life in the private sector is an upset, but seriously?

Meanwhile, 11 members of the Bowles-Simpson commission supported a surprisingly sensible — not to be confused with perfect — plan to take on the debt.  While it would have taken 14 votes to officially ratify the report, I am in the camp who finds 11 to be a more-than-half-full glass.  The report made four important points:

  • The problem is large and not amenable to solution by wishful thinking; a focus on “waste, fraud and abuse,” cutting foreign aid, or other budgetary gnats; or waving Harry Potter’s wand,
  • The problem is spending, and everything in the federal budget has to be on the fiscal operating table,
  • The health spending problem is enormous, and ObamaCare is a part of the problem, and
  • The tax code is broken, so if you want more revenue, tax reform is the only route forward.

Disarray ensued.  Progressives simply walked away from anything that did not endorse a full-throttle acceleration toward a eurozone-style meltdown.  No surprise.  Responsible Democrats embraced the report, as did Republicans who saw it as an imperfect step toward finally dealing with out-of-control spending.  The politically aggressive conservatives held out for a consumption-oriented tax reform and greater attention to entitlement reform. And the Obama administration — who set up the commission as political cover for their feckless budgets — cowered in the face of a substantive report.

Lastly, the president held a “Slurpee Summit” on Tuesday, which was forgotten by Friday.  (Well, at least it lasted longer than his G-20 successes.)  Has effective bipartisan governance died in the cradle?

In short, by Friday, Washington was burning.

Which raises the question: if you are caught in a figurative forest fire, which way do you escape?  Answer: take out the compass and point toward growth.

The solution to all three problems lies in a relentless focus on pro-growth fiscal policy.  Not so-called Keynesian stimulus which amounts to tax cuts regardless of their tax policy merit and federal spending increases on anything.  The problem with that approach is not that it has been tried and failed.  It is not that it is a medicine ill-suited to the economic woes that beset this economy.  Both of those are true, but the real problem is that any Keynesian stimulus would have to be reversed in the future.  The federal government has a spending problem, so any increases are a mistake that would have to be unwound quickly.  And stupid tax cuts are just that: stupid.  As the Bowles-Simpson commission has highlighted, we need less spending and a better tax code.

Worse, Keynesian stimulus is a political igniter, not a uniter.  Republicans will simply not sign on.

On the other hand, reducing spending to control the inexorable rise in debt would take off the table the threat of sharp future rise in interest rates or taxes.  That is a strongly pro-growth policy that fits the need to address weak job performance and the commission’s concerns.  Moreover, if Republicans recognize that it is poor policy to continue to fund Cold War-era defense infrastructure, it is possible to generate a real bipartisan consensus around spending reductions.  Democrats will never believe that cutting federal spending is a good idea, but they will join if Republicans acknowledge the reality that even Bush-era defense strategy documents highlighted: we are funding both legacy systems and the national security needs of the future.  It is time to give up on the former.

Tax reform, which was endorsed by the commission majority, can be strongly pro-growth.  The commission’s most innovative proposal was a territorial corporate tax system at a 26 percent rate.  The current U.S. corporate tax is anti-growth and anti-competitiveness.  The rate — 35 percent — has become the highest among developed countries, as our competitors have realized the value of a low rate and broad base.  Simply lowering the rate to 26 percent gets the U.S. back to the middle of the pack.

Having the highest rate is merely disastrous.  Even worse, the U.S. clings illogically to an outmoded system of “worldwide taxation” that every other country has abandoned.  The stakes are enormous. Under a worldwide system our firms competing in, say, Brazil are liable for Brazilian and U.S. taxes.  A German or Chinese competitor is subject to only the “territory’s” taxes — Brazil’s — giving them an advantage over U.S. firms in international competition for 95 percent of the world’s consumers.  Under the Bowles-Simpson approach, U.S. firms will compete on a level playing field in every market around the globe.

Last but not least, moving to a territorial system will stop the loss of headquarters for large multinational firms.  The global competitive disadvantage of a worldwide approach forces firms to move their headquarters abroad.  In short order, the research facilities and manufacturing operations often follow.

The bottom line: real tax reform would address jobs and financing a trimmed-down government.

The final piece is the hardest: entitlement reforms.  Here, frankly, the ball is in the president’s court.  Democrats have reflexively fought against real reform to Social Security, Medicare, and Medicaid.  And the recent Affordable Care Act (“ObamaCare”) creates yet new entitlement reforms. There will be no way to bridge the partisan divide without presidential leadership and a willingness to acknowledge that the health care reform took us in a dangerous direction.  If, and only if, the president is willing to provide this kind of genuine national leadership will it be possible to bridge the partisan divides in Congress.

Is it possible to resolve the tax debate, address the debt explosion, govern in a bipartisan fashion, and create jobs?  Yes.  Will the United States?  Only if the president aims for growth.