Let's Put Growth First!

If the great football coach Vince Lombardi was alive today, he could modify his famous speech, “What it Takes to Be Number One,” to address our fiscal problems:

Growth is not a sometime thing. Growth is an all-time thing. You don’t grow once in a while, you grow all the time. There is no room for stagnation. Stagnation is a game for losers, played by losers.

When Republicans don’t stand for growth, they don’t stand a chance. If authentic growth is not an option, the electorate chooses redistribution over austerity. Austerity surrenders to stagnation and puts Republicans on a losing battlefield where cutting entitlements is too easily framed by the opposing team as redistribution from the poor to the rich. How’s that working for us?

Federal finances are ultra-sensitive to economic growth. Chuck Kadlec, economic advisor to the late Jack Kemp and more recently to Herman Cain’s presidential campaign, pointed out in his recent Forbes column that every one-tenth of one percentage-point increase in the real rate of economic growth reduces the deficit over 10 years by $314 billion.

On a present value basis, increasing the rate of real economic growth by a tenth of a percent is 27 times more beneficial to federal finances than reducing spending as a share of GDP by a tenth of a percent. Why choose the harder course, there are no bonus points for degree of difficulty.

At 3.5% real growth, entitlement programs are not a drag on the budget and neither benefits nor the retirement age “need” to be reformed.

The Republicans’ Plan A should always be about increasing economic growth. If we accept the stagnation forecast of the CBO, the White House and the Social Security Trustees (2.1%-2.2% real growth) we are doomed to fail.

How can we increase our economic growth? If the essence of football is blocking and tackling, the essence of economic growth is capital investment.

In what I call the “Woodhill Equation,” put forth by economic growth guru and fellow Cain economic advisor Louis Woodhill, GDP always equals 46% times non-residential produced assets (equipment, machines, structures, computers, etc.), plus 7% times residential produced assets. Accordingly, every additional dollar of capital investment in plant and equipment increases the stock of non-residential produced assets by a dollar, and this, in turn, generates 46 cents more GDP…every year! There is no better game in town.

Since the average job is supported by roughly $210,000 of non-residential produced assets, to create 15 million average jobs, a little more than $3 trillion of private sector capital investment is needed. Putting people back to work is a great way to reduce federal outlays and increase federal revenues.

Standing in the way of growth is a wall that separates people with ideas from people with capital. It makes no sense to wall off those with ideas. That’s where we get innovation, new business formation, job creation and wealth generation. This wall consists of a tax code that retards new capital formation and double taxes any capital that does form. It is reinforced by an unstable monetary system that diverts precious capital from its most productive uses because of the need to guard against the chaos caused by a floating dollar. As if that’s not enough, the wall is guarded by regulators who treat the marriage of capital and ideas as an anti-social act.

To borrow a phrase from Ronald Reagan, we must, “Tear down this wall.” Unfortunately, we just added more bricks to it by increasing taxes on income, dividends, and capital gains. Fixing our broken monetary system would entice capital out of hedges and shelters, and send it streaming over the wall to drive significant capital investment, despite today’s lower after tax returns.

Texas Congressman Kevin Brady’s Sound Dollar Act would constrain the Fed’s discretionary activism, requiring it to respond when real time price signals, including gold, indicate that policy is inconsistent with dollar stability. A dependable dollar makes sense. Do you know anyone who thinks it is a good idea to “float” the hour, rather than keeping it stable at sixty minutes? The Senate version of this bill, sponsored by Utah’s Mike Lee, picked up a new co-sponsor in 2016 presidential hopeful Marco Rubio.

For America’s first 180 years, when the dollar had a defined value backed by gold, real growth averaged 3.9%, despite income tax rates that varied widely. During our subsequent 41 years of the paper dollar standard, in which the dollar has no defined value and is backed only by empty political promises, growth has averaged 2.8%. Under the weak dollar regimes of George W. Bush and Barack Obama, growth has been an anemic 1.6%. If we want to return to high growth rates, we must return to a stable dollar.

Beyond generating stronger growth, a rules-based monetary system designed to stabilize the dollar is a natural and effective restraint on spending, much more so than the debt ceiling ever was or will be.

Perhaps equally important, restoring a stable dollar is a political winner. In a poll commissioned by American Principles Project during the Republican presidential primary, blacks showed stronger support for “returning to the gold standard” than whites. In terms of income, those earning $60k or less showed net favorability five times greater than those in the highest income brackets. When asked whether their support would change “If You Knew It Would Reduce Power of Bankers and Political Leaders to Steer Economy?” support soared. The only demographic to respond unfavorably to both questions were those self-identified members of the “political class.”