The U.S. Can and Should Boost Growth
What can or should the U.S. government do about the economic malaise that has gripped the country for more than a decade and helped fuel a populist backlash?
During the last two U.S. presidencies, from the end of 2000 to the middle of 2016, the most important measure of prosperity -- economic output per capita -- has grown at the anemic pace of less than 1 percent a year. Over roughly the same period, median inflation-adjusted income has actually fallen for several major demographic groups (including by a shocking 10 percent for black males).
The obvious solution is faster growth. So how can we generate it? Allow me to offer three options, focused on boosting public, business and consumer spending.
First, the government could undertake large-scale investments to renovate the country's crumbling roads, bridges and other infrastructure. The American Society of Civil Engineers estimates that the U.S. needs to spend close to $4 trillion over the next four years to get its infrastructure into acceptable shape.
Second, the U.S. could eliminate the employer portion of the social security tax for the next decade (including for the self-employed). By reducing the cost of hiring and maintaining workers, this would encourage companies and individuals to create jobs and initiate new businesses. The added competition for workers, in turn, could help drive a long-overdue increase in wages.
Third, the U.S. government could give $10,000 a year to all households over the next decade. Many would just put the money in the bank. But those who face binding limits on their ability to borrow -- typically poorer households -- would spend most or all of it. This spending, in turn, would provide businesses with the demand they need to make investments and hire more workers.
Any of these measures would require the cooperation of the Federal Reserve, by which I mean a commitment to keep interest rates sufficiently low. If the Fed sticks to its current plan of raising rates to keep employment from increasing too much, no growth strategy will work. Coordination between monetary and fiscal authorities is crucial.
All of the measures would require a lot of money, which the government would have to borrow by issuing more Treasury bonds. As it happens, now is a great time to do so: Inflation-adjusted interest rates on even 30-year bonds are below 1 percent, and global investors are clamoring for safe assets such as U.S. government securities.
So if the government can boost growth, should it? To find an answer, we must weigh the benefits against the costs. Supportive monetary policy could, for example, drive inflation temporarily above the Fed's 2-percent target -- maybe to as much as 4 percent (like it was under Ronald Reagan). Issuing a lot of new Treasury bonds could engender concerns about the U.S. government's creditworthiness, causing its borrowing costs to rise.
In my view, the risks are well worth taking. For one, the extra growth will allow more people to lead more enjoyable and longer lives. Perhaps more important, greater prosperity would help ease social tensions. Low-growth societies are prone to conflict, because every public policy choice that raises someone’s income probably causes someone else’s to fall. By contrast, a high-growth society has plenty to go around, mitigating such re-distributional effects.
U.S. society is far too divided. The government can and should do all in its power to bring the nation back together.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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Narayana Kocherlakota at firstname.lastname@example.org
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