Changes in policy could speed U.S. recovery

By Bill Watkins For The Register

Many forecasts for 2013 anticipate slow economic growth, and polls show that most Americans are pessimistic about our economic future. It doesn't have to be that way.

Sure, there are real problems: The Middle East is less stable than it was a year ago; emerging economies in China, India and Brazil have slowed; and Europe, in spite of serial claims to the contrary, is deteriorating.

It is also true that the current recovery was always going to be weak. Distortions in housing and finance markets take a long time to work themselves out. Policy, though, has made things worse than they had to be, and good economic policy going forward can turn them around, quickly.

We need to change the forecast, and we can, but the politics are difficult. Outside of office, each party claims to be for reduced spending. In office, each increases spending. There are differences, though. Republicans promise to lower taxes. Democrats promise to raise taxes.

The paradox is that increased spending and lower taxes will lead to more debt and a continued weak recovery. Increased spending and higher taxes will lead to more debt and a continued weak recovery.

Taxes, increased or decreased within a relatively small range, and increased spending just won't generate a nice economic rebound. It is also the case that monetary policy won't help, either. We can have quantitative easing until the world uses dollar bills for dish rags, and it won't invigorate our economy.

So, if fiscal policy (taxes and spending) won't help and monetary policy (printing money) won't help, how do you accelerate the recovery?

The first step is to recognize that high government spending is part of the problem. According to George Mason University's Mercatus Center, total state, local and federal spending is about 37 percent of gross domestic product. This is slightly higher than total government spending at the peak of World War II. It is crowding out private investment, and it needs to come down. Washington needs to provide a credible commitment and plan to control government spending as a proportion of gross domestic product. A relatively painless way to do this is to cap spending on a real per capita basis, and let economic growth push governments' share of gross product down.

Stimulating the housing marketing and adding more skill to the labor force is step two. We can immediately increase housing demand and human capital by massively increasing legal immigration. This would solve the real estate blues and skills shortages in some industries. For the long run, it will generate a much-needed burst of risk-taking and innovation. Immigrants are risk takers, and they start businesses at a higher rate than home-grown Americans. This is exactly what we need. Let's welcome them.

More provocatively, we also need to get rid of “too big to fail.” It continues to create perverse incentives and guarantees future bailouts. The fix is conceptually easy. Figure out what “too big to fail” is – different for different industries – and put a 100 percent tax on anything over that. The most difficult challenge is reducing small business's regulatory burden. Excessive regulation works like an anti-competitive subsidy to big business. Unfortunately, big business doesn't create all that many new jobs or innovations. Reducing small business's regulatory overhead while preserving appropriate safeguards is a difficult job. It requires a sharp-pencil review of every regulation.

Each of these proposals is politically challenging and would likely be opposed by powerful and well-funded constituencies. Even so, this mantle is worthy of at least serious contemplation and debate.

Bill Watkins is executive director

of the California Lutheran

University Center for Economic

Research and Forecasting.

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