A Plan To Boost Economic Growth

In this political season, there is one overriding question: Can the U.S. economy grow faster? The answers are "yes," "no," "kinda," "maybe," and "why should it?"

To cut through the clutter and the confusion, BUSINESS WEEK offers up its own proposal. We think the economy can grow a full percentage point faster every year: 3% instead of the current 2% long-term rate. Over time, an increase of just one point would have an enormous impact on wages, job creation, and profits. We believe we have a sensible, pragmatic program to get us there--one that doesn't take the wild risks of a radical flat tax or repeat the mistakes of another big supply-side tax cut (been there, done that, and still paying interest on it). The BUSINESS WEEK plan attacks the core problem of America's anemic growth: too little savings and too little investment. It is a realistic plan to expand the wealth of this nation.

But first let's dispel a few myths. No.1 is that with gross domestic product expected to come in above 4% in the second quarter, there isn't any growth problem. We beg to differ. Despite the second-quarter pop, economic growth has still averaged only 1.7% in the past year, and over the past six years, it has averaged a measly 1.9%. Myth No.2 is that with capital spending running at double-digit rates for two years, there isn't a savings and investment problem either. Again, we think otherwise. Net national savings average only 5% of output, down from 11% during the hot-growth 1960s. And despite heavy spending on computers, net equipment investment is crawling along at only 2% of GDP.

So let's not kid ourselves. We've got real problems. Here are major solutions. They're not particularly trendy, but they are sound enough to boost growth to 3% without renewed inflation. Begin by ending Washington's drain on savings by finally balancing the budget. The Republicans and Democrats are close. A budget that curbs entitlement spending and glides toward balance in seven years will lower long-term rates and the cost of capital by nearly two percentage points. Go for it.

Next, clean up the tax code and roll back marginal rates. This doesn't require a new tax system, just a return to the Tax Reform Act of 1986. Closing loopholes and shelters could fund sharp cuts in tax rates. They could drop back to the earlier brackets of 15% and 28%, from the present top rate of about 40%.

Privatizing Social Security is the most dramatic part of the BUSINESS WEEK plan. By converting Social Security to a fully funded pension system, the U.S. can boost its savings. This is how privatization would work: Social Security would be broken into three parts, each supported by a portion of the existing 12.4% payroll tax. A standard pension for workers would be supported by a 5% payroll tax. Survivors' and disability insurance would be financed by a 2.4% payroll tax. And new Personal Security Accounts would be funded by a 5% tax. PSAs are, in effect, like 401(k) defined-contribution accounts, where individuals would invest in stocks, bonds, or other investments and receive substantially higher real rates of return than the 2% Social Security funds earn.

What's the downside to the BUSINESS WEEK plan? By investing a portion of their Social Security themselves, people must accept a higher level of risk. And paying for the transition to a privatized Social Security will be costly. Getting an extra 1% of growth may not sound like much, but it would make all the difference in the world. It means more income and a better retirement for nearly everyone. It means the end of economic anxiety.

Before it's here, it's on the Bloomberg Terminal.