ACRU

Economic Growth, Not Income Redistribution, Is What Helps Us All

This column by ACRU General Counsel and Senior Fellow for the Carleson Center for Public Policy (CCPP) Peter Ferrara was published September 29, 2011 on Forbes.com.

President Obama is proving a fundamental economic principle proven as well by President Reagan, though in the opposite way. That principle is that economic growth provides vastly greater benefits for working people and the poor than redistribution. It is economic growth that is the key to prosperity and the good life for the middle class, working people, and the poor.

President Obama’s policies have been all about redistribution, spreading the wealth as he puts it, a polite phrase for plunder. That redistribution is in evidence from ObamaCare, to runaway government spending, to raising tax rates on “the rich.”

The results of those policies are in the latest Census report on September 14. Median real family income has fallen all the way back to 1996 levels. As the Wall Street Journal explained the next day, “Earnings of the typical man who works full time year round fell, and are lower — adjusted for inflation — than in 1978.”

The Census also reported that the poverty rate has climbed to 15.1%, higher than in the late 1960s when the War on Poverty was getting underway, $16 trillion ago. The child poverty rate climbed to 22%, nearly a quarter of all American children. The total number of Americans in poverty is higher than at any time in the over 50 years that the Census Bureau has been tallying poverty.

Moreover, historically, for the American economy, the deeper the recession the stronger the recovery. Based on that historical record, we should be nearing the end of the second year of a booming recovery by now. But almost four years after the last recession started, there still has been no real recovery. Unemployment is stuck over 9%, with unemployment among African-Americans, Hispanics, and teenagers at depression double digit levels for at least two years now.

To most benefit working people and the poor, policy should focus instead on reigniting booming economic growth. Consider, if total real compensation, wages and benefits, grows at just 1% a year, after 20 years the real incomes of working people would be only 22% greater. After 40 years, a generation, real incomes would be 50% higher. But with sustained real compensation growth of 2%, after just 20 years the real incomes and living standards of working people would be nearly 50% greater, and after 40 years they would be 120% greater, more than doubled. At sustained 3% growth in wages and benefits, after 20 years the living standards of working people will have almost doubled, and after 40 years they will have more than tripled.

The U.S. economy sustained a real rate of economic growth of 3.3% from 1945 to 1973, and achieved the same 3.3% sustained real growth from 1982 to 2007. (Note that this 3.3% growth rate for the entire economy includes population growth. Real wages and benefits discussed above is a per worker concept). It was only during the stagflation decade of 1973 to 1982, reflecting the same Keynesian economics that President Obama is pursuing today, that real growth fell to only half of long-term trends. If we could revive and sustain that same 3.3% real growth for the coming 20 years, our total economic production (GDP) would double in that time. After 30 years, our economic output would grow by 2 and two-thirds. After 40 years, our prosperity bounty would grow by 3 and two-thirds. This is a quite realistic prospect if the nation adopts growth maximizing policies, as I discuss in my recent book, America’s Ticking Bankruptcy Bomb.

If we are truly following growth maximizing policies, we could conceivably do even better than we have in the past. At sustained real growth of 4% per year, our economic production would more than double after 20 years. After 30 years, GDP would more than triple. After 40 years, a generation, total U.S. economic output would nearly quadruple. America would by then have leapfrogged another generation ahead of the rest of the world. Achieving and sustaining such growth should be the central focus of national economic policy over the next decade, for it would solve every problem that plagues and threatens us today.

Such booming economic growth would produce surging revenues that would make balancing the budget so much more feasible. Surging GDP would reduce the national debt as a percent of GDP relatively quickly, particularly with balanced budgets not adding any further to the debt. Sustained, rapid economic growth is also the ultimate solution to poverty, as after a couple of decades or so of such growth, the poor would climb to the same living standards as the middle class of today.

With sustained, robust, economic growth, maintaining the most powerful military in the world, and thereby ensuring our nation’s security and national defense, will require a smaller and smaller percentage of GDP over time. That security itself will promote capital investment and economic growth in America. The booming economy will produce new technological marvels that will make our defenses all the more advanced. With the economy rapidly advancing, there will be more than enough funds for education. There will also be more than enough to clean up and maintain a healthy environment.

A booming economy would also make entitlement reform easier. Allowing workers to choose personal savings and investment accounts in place of some and eventually all of the payroll tax, a booming economy will make retirement all the more prosperous. Replacing Obamacare with market incentives to control costs, while a booming economy skyrockets GDP, the calamitous projections of health costs eating up our entire GDP will never come to pass. The booming economy instead will provide the resources to enable rapidly advancing modern science to solve tragic health problems that seem intractable today, meaning longer and healthier, more comfortable lives.

It was sustained, world leading economic growth that produced the America of today. As Brian Domitrovic explains in his book Econoclasts, “The unique ability of the United States to maintain a historic rate of economic growth over the long term is what has rendered this nation the world’s lone ‘hyperpower.'” Real per capita consumption in the U.S. nearly doubled from 1973 to 2004, or about 30 years. American living standards measured in this way grew by more than 5 times from 1935 to 2004, about 70 years. As noted by Stephen Moore and Julian L. Simon in their underappreciated work, It’s Getting Better All the Time: 100 Greatest Trends of the Last 100 Years, real per capita GDP grew by nearly 7 times from 1900 to 2000.

Moore and Simon also report that more financial wealth was created in the United States from 1950 to 2000 than in all the rest of the world in all the centuries before 1950. Real financial wealth in the U.S. doubled from 1950 to 1970, and tripled from 1970 to 2000. When we add housing equity to such real wealth, real assets in America soared from $6 trillion in 1950 to $40 trillion in 2000.

In addition, that typical home that most Americans own today is of far superior quality, bigger, less crowded, and stocked with a cornucopia of modern conveniences, after decades of sustained economic growth. The average new house by 2000 was 50% bigger than even in the 1960s, with 2-3 times as many rooms per person as in 1900. Moore and Simon add,

“It is hard for us to imagine, for example, that in 1900 less than one in five homes had running water, flush toilets, a vacuum cleaner, or gas or electric heat. As of 1950 fewer than 20% of homes had air conditioning, a dishwasher, or a microwave oven. Today between 80% and 100% of American homes have all of these modern conveniences.

Indeed, in 1900 only 2% of homes enjoyed electricity. As Cox and Alm note further in their insightful book Myths of Rich and Poor, ‘Homes aren’t just larger. They’re also much more likely to be equipped with central air conditioning, decks and patios, swimming pools, hot tubs, ceiling fans, and built in kitchen appliances. Fewer than half of the homes built in 1970 had two or more bathrooms; by 1997, 9 out of 10 did.'”

Such economic growth has produced dramatic improvements in personal health. Throughout most of human history, a typical lifespan was 25 to 30 years, as Moore and Simon report. But “from the mid-18th century to today, life spans in the advanced countries jumped from less than 30 years to about 75 years.” Average life expectancy in the U.S. has grown by more than 50% since 1900. Infant mortality declined from 1 in 10 back then to 1 in 150 today. Children under 15 are at least 10 times less likely to die, as one in four did during the 19th century, with their death rate reduced by 95%. The maternal death rate from pregnancy and childbirth was also 100 times greater back then than today.

Moore and Simon report, “Just three infectious diseases – tuberculosis, pneumonia and diarrhea – accounted for almost half of all deaths in 1900.” Today, we have virtually eliminated or drastically reduced these and other scourges of infectious disease that have killed or crippled billions throughout human history, such as typhoid fever, cholera, typhus, plague, smallpox, diphtheria, polio, influenza, bronchitis, whooping cough, malaria and others. Besides the advances in the development and application of modern health sciences, this has resulted from the drastic reduction in filthy and unsanitary living conditions that economic growth has made possible as well. More recently, great progress is being made against heart disease and cancer.

Greatly contributing to the well-being of working people, the middle class, and the poor in America has been the dramatically declining cost of food resulting from economic growth and soaring productivity in agriculture. As Moore and Simon report, “Americans devoted almost 50% of their incomes to putting food on the table in the early 1900s compared with 10% in the late 1900s.” While most of human history has involved a struggle against starvation, today in America the battle is against obesity, even more so among the poor. Moore and Simon quote Robert Rector of the Heritage Foundation, “The average consumption of protein, minerals, and vitamins is virtually the same for poor and middle income children, and in most cases is well above recommended norms for all children. Most poor children today are in fact overnourished.” That cited data comes from the U.S. Census Bureau. As a result, poor children in America today “grow up to be about 1 inch taller and 10 pounds heavier than the GIs who stormed the beaches of Normandy in World War II,” Rector reports.

That has resulted from a U.S. agricultural sector that required 75% of all American workers in 1800, 40% in 1900, and just 2.5% today, to “grow more than enough food for the entire nation and then enough to make the United States the world’s breadbasket.” Indeed, today, “The United States feeds three times as many people with one-third as many total farmers on one-third less farmland than in 1900,” in the process producing “almost 25% of the world’s food.”

Redistribution taking from those that have produced and accumulated wealth to give to working people and the middle class, to achieve more equal results for society overall, could never remotely produce the dramatic gains for working people and the middle class as economic growth has, and can in the future, if only we would let it rip. In fact, such redistribution would actually slash economic growth, and even reverse it, as we have seen in extreme socialist and communist countries around the world. Indeed, such redistribution is just a sophisticated, modern version of the medieval mindset for obtaining wealth, which still holds the potential for producing another Dark Ages.