Hoover Daily Report

Avoiding the Global Slowdown Blues

via Wall Street Journal
Monday, October 27, 2014
Image credit: 
Alex Mit, Shutterstock

It has been five years since the end of the Great Recession, yet President Obama and members of his administration still speak of it as if it were yesterday and play down the anemic recovery. Despite nearly a trillion in fiscal “stimulus,” record deficits, and the Federal Reserve’s near-zero interest rates and unprecedented asset purchases, America’s economic recovery hasn’t had three consecutive quarters of 3% growth, let alone the 4%-5% average following other deep recessions.

U.S. employment and productivity growth have been painfully slow since 2008. Some argue we are in a period of secular stagnation, an era of permanent low growth. Labor-force growth is slowing due to the retirement of the baby boomers, but also because expanded government benefits make it less costly to leave the labor force.

Resolving these problems will be difficult. But at many times in U.S. history a similar list of allegedly insurmountable problems could be compiled. In the 1960s, automation was going to lead to huge permanent structural unemployment. In the 1970s and early 1980s, the U.S. suffered a ruinous combination of high inflation and recession. In the 1980s and early 1990s, the threat was competition from Japan. Nonetheless, America’s dynamic market economy managed not only to weather each of these storms, but to adapt and thrive. There’s no reason the same can’t happen this time.

Among the world’s 10 largest economies, only the U.S. and the U.K. have recently posted improving economic growth and employment trends. Five—Japan, Germany, Italy, France and Brazil—contracted at last report. Three others—Russia, China and India—have slowed substantially. All of these factors, plus weak retail sales in the U.S., recently sent the Dow reeling and Europe’s markets close to bear territory before rebounding.

But this doesn’t mean we’re headed for another downturn, as implied by the adage that the stock market called nine of the last five recessions. The Fed ending its quantitative-easing program and preparing to raise interest rates next year has caused jitters on Wall Street and a rise in the dollar. That will lower earnings of U.S. multinationals and decrease exports and GDP by about a quarter-point, twice the gain from lower oil prices. But the higher dollar also signals more confidence in U.S. growth and helps contain any currently unforeseen inflation pressure.

Despite the slowdown in global growth, the U.S. has many strengths: the best higher-education system in the world; a highly productive workforce; the deepest, most liquid capital markets; the most dynamic and innovative companies, as witnessed in the “fracking” revolution and booming U.S. oil and gas industry; and, despite recent demagoguery, a diverse population supportive of earned success. But these advantages are not immutable. And, as has happened with our K-12 education, anticompetitive forces and poor policy can throw sand in the gears of these great contributors to American success.

President John F. Kennedy, whose economic strategy emphasized tax cuts and trade liberalization, opined that “A rising tide lifts all boats.” That was overstated. But it lifts by far the most boats and leaves by far the fewest stranded or sunk. That is why President Obama promoting redistribution at the expense of growth is a tragic mistake, for the nation and especially for those hoping to climb the economic ladder.

Our highest priority is a strategy that removes obstacles to growth and re-incentivizes the supply side of the economy. The U.S. must gradually phase in stronger controls on budgets, especially entitlement reform, and lower tax rates on a broader base of activity and people. Europe must raise retirement ages, lower taxes and improve labor-market flexibility.

A new direction following the midterm elections may be possible. Examples of pro-growth policy reforms enacted by divided government include President Ronald Reagan ’s 1986 tax reform; President George H.W. Bush ’s fast track to Nafta and the Uruguay Round of multilateral trade negotiations; and President Bill Clinton ’s balanced budgets and welfare reform.

Mr. Obama would be wise to work with Republicans in three areas with low-hanging bipartisan fruit: 1) lower the anticompetitive U.S. corporate tax rate; 2) liberalize trade with the Trans-Atlantic Trade and Investment Partnership, Trans-Pacific Partnership and the Doha Round of multilateral trade; 3) promote North American energy by approving the Keystone XL Pipeline, more LNG export terminals, and more oil-exploration permits in the Gulf of Mexico.

Even these small steps would start to rebuild confidence that growth is a priority. If Mr. Obama won’t do so, and Republicans control the House and Senate, they should send him such bills to sign or veto, a strategy that worked with President Clinton on welfare reform.

Major tax and entitlement reforms may have to wait until the 2016 presidential election. A period of sustained prosperity requires a firmer policy foundation based on proven principles: the lowest possible tax rates on the broadest base, target-effective and cost-conscious spending; incentive-compatible regulation; free, rules-based trade; and predictable, rules-based monetary policy.

Possible? A generation ago, amid fears of endless “stagflation” and dire forecasts of “American decline,” President Reagan did precisely that.

Mr. Boskin, a professor of economics at Stanford University and senior fellow at the Hoover Institution, was chairman of the Council of Economic Advisers under President George H.W. Bush.