Commentary Magazine


Growth: The Only Way Out of This Mess

The American economy is unwell. The growth of manufacturing slowed in the spring, as did job growth, which was a dismal 54,000 jobs in May. Unemployment is rising again. Gasoline is nearly $4 per gallon, reducing tourism and retail sales while increasing the cost of everything from airfares to package delivery. And the housing sector, where so much personal wealth is invested, continues to retreat, with prices now down to 2002 levels. Not since the Great Depression three generations ago has recovery come so slowly after an economic crisis. Once again, as has been the case since the crisis began in 2007, most of the discussion about this has come to center on what the federal government can and should do to create growth. The problem is that the government has spent more than two years and more than $1.5 trillion trying to fix things, with what can charitably be described as limited results.

The Federal Reserve Board has arguably been more active since 2007 than at any other time in its history, structuring bank bailouts, injecting liquidity into the system, slashing interest rates and keeping them low, and working hand in hand with both the Bush and Obama administrations. Now it has just about shot its bolt. Its $600 billion effort in 2010 to speed up the economy through a second round of “quantitative easing” has proved ineffective. And the Fed has almost no room to maneuver when it comes to interest rates; they can’t fall below zero, after all.

So much for what the unelected powers in Washington can do. The situation is even more sobering when it comes to the policy choices of elected Democrats. Economists on the left, such as Christine Romer and Paul Krugman, want Congress to enact further Keynesian fiscal stimulus. They claim that the $814 billion stimulus package of 2009 wasn’t large enough to do the job of getting the economy growing strongly. The age-old truism that one shouldn’t throw good money after bad would seem to apply here; but even if it didn’t, the notion is risible from a practical standpoint. The public appetite for further stimulus spending is nonexistent. The election of 2010 made it abundantly clear that the public wants the government to spend less, not more.

Indeed, the discussion in Washington in 2011 is about what to cut, not what to spend. Discussions on raising the government’s debt ceiling, which must happen by August, are all about how much federal spending should be reduced in tandem with extending its borrowing power. Conservatives want to slash the federal budget drastically to reduce the deficit in the near term while reforming federal entitlement programs to reduce or eliminate it in the long term.

The Republican Party has coalesced, for understandable reasons, around the notion that the country is going broke—and that it’s time for Americans to face the music or consign coming generations to a future either of intolerable taxation or the diminution of the United States to a second-class nation with the economic policies of a banana republic.

It is absolutely true that the need to address the destructive direction of the overall economy is vital. But the concentration on the deficit crisis does not address the immediate problem with the U.S. economy, which is a lack of economic growth. Usually, deficit hawks make the argument that cutting federal spending is good for growth because it means the private sector doesn’t have to compete for capital with government. But that is not the case at the moment; there is not enough loan demand right now for that to matter much.

Indeed, without sustained growth over the next 5 to 10 years, it will be impossible for the economy to generate the kind of tax receipts necessary in part to pay down the debt. But there isn’t much talk of growth these days even from the right. Though the Republican Party reveres Ronald Reagan as the Democrats have long revered FDR, its politicians have reverted to the root-canal, green-eyeshade economics Reagan famously rejected—and in so rejecting, both transformed the U.S. economy in the 1980s and brought the GOP to new political heights.

While it would appear that deficit hawkishness is the one thing that both unifies Republicans and appeals to independents and is therefore a good thing for the GOP, concentrating on the problems caused by the deficit is rarely a political winner in the long term. People whose oxen are gored in the process object violently, as we saw in the response of public-sector employees in Wisconsin last winter. They become motivated and respond with concerted action designed to frighten politicians into capitulating. The strategy usually works, because politicians are oriented toward the short term, with the next election looming far larger on their radar than the long-term benefit to the economy. Note the panic induced among Republicans who supported the visionary budget plan of Rep. Paul Ryan after a single defeat in a special House election in May run partly as a referendum on it.

Liberals want spending that won’t happen. Republicans want to pursue a strategy of cutting that, necessary though it is, won’t fill or change the economic flat tire. So what can we do? The history of the American economy is very instructive as to what produces economic growth. Americans turned a wilderness into the mightiest instrument of wealth creation the world has ever known in less than half a millennium. How might that history apply to getting today’s economy back on track?

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First let us consider the matter of land. The United States has by far the most diverse national territory of any great nation on earth. It is the only country in the world composed of arctic, temperate, and tropical regions, with most of it located in the temperate zone. The natural resources of this territory are beyond equal. Its agricultural lands are second to none and its mineral resources likewise.

Perhaps the most important aspect of the national territory is its location on the globe. While the U.S. is one of the largest countries in the world, it borders only two others, Canada and Mexico, neither of which poses even the slightest military threat. China, on the other hand, borders no fewer than 14 countries, some of which have been less than friendly in the recent past. India has been at war with two of its neighbors in recent decades. Thus, the United States, unlike China or India, is simultaneously a continental power with the size, diversity, and resources of such powers as Russia and China, and an island power with the military security of Britain and Japan.

Then there is the matter of the sheer amount of territory here. Europe has long been land-poor and labor-rich. The land was mostly developed and entirely owned by a small class of people. Equally, the supply of labor was abundant in most periods of European history. In a preindustrial world, this kept down most wages to the subsistence level. The American colonies were the opposite. They were land-rich and labor-poor. Land, the measure of wealth in preindustrial times, was available in unlimited abundance.

There was, of course, much labor in making that land productive. But for the ambitious who came to the colonies, that was not a deterrent. And being labor-poor had two important consequences that are with us today as well. First, it meant that wages were always substantially higher here than in Europe. Instead of being condemned to subsistence, a person could live a comfortable existence and acquire a nest egg far more easily. In other words, they could much more easily rise to the middle class.

But a large and productive national territory is neither a necessary nor sufficient condition for prosperity. Japan is only about the size of California and has few natural resources, but it is today the third largest economy in the world. Argentina, on the other hand, is larger than the United States east of the Mississippi and richly endowed with some of the finest agricultural land in the world and vast mineral wealth. It, too, has been immune to foreign attack. Yet it has been an economic basket case for most of the last 75 years, thanks to its wretched internal politics.

It is often said that the frontier is closed, that we are now a fully developed country, and that our mineral wealth, especially oil and natural gas, has been exploited. That is simply not true. There are hundreds of millions of acres owned by the state and federal governments that, with careful regard for the environment, can be made to be wealth-producing. This is especially true of the huge untapped mineral resources we still possess.

Liberals endlessly repeat the meme that we have only 2 percent of the world’s proven reserves of oil, and therefore exploiting those reserves would not solve our energy problems. That is a semantic sleight of hand at best. The definition of the term “proven reserves” requires that the oil be known to exist and be exploitable with currently available technology and under current regulatory constraints. There are still huge areas of the country where regulation has made the exploitation of known major oil fields impossible. The Arctic National Wildlife Refuge in Alaska is, perhaps, the best known of these fields. Oil is there in prodigious quantities, but it doesn’t count among the proven reserves because regulation makes it impossible to extract. With the new horizontal drilling technology now being utilized elsewhere, it could be exploited with minimal—indeed miniscule—disruption to the wildlife and the arctic environment.

Even oil exploration has not been allowed in many areas offshore on the continental shelf, in the Atlantic and Pacific Oceans and the Gulf of Mexico. There is every reason to think that billions of barrels of oil are there for the taking. (Brazil’s recent huge strike off its Atlantic coast has turned that chronic oil importer into an increasingly significant exporter.) And the new technology of “fracking” now makes it possible to recover previously unrecoverable “tight oil” from shale deposits. Known American shale oil (and shale natural gas) deposits would, if regulation permitted it, give the United States one of the world’s largest hydrocarbon reserves, right up there with Saudi Arabia and Iraq.

Opening up exploration and drilling in areas where it is now forbidden would create hundreds of thousands of jobs, significantly increase economic growth, and do wonders for the country’s balance of trade, reducing oil imports dramatically. The Bakken tight-oil field in North Dakota has already given that state the lowest unemployment rate in the country.

But as is the case with resource extraction, much of what prevents the creation of new wealth through the harvesting of national resources now comes from government action intended to slow or halt it. American history offers a lesson there, too—a lesson in how to think about the relation of the government to the citizenry, and how to rebalance it so that government does not function as an impediment.

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It was a great stroke of luck for the future United States that the 13 colonies were founded by the English rather than those from another European nation. England, being an island power and thus much safer from invasion, had a smaller government and lower taxes than either France or Spain. The shires largely ran their own affairs unless there was serious trouble, so experience with government was widespread through the population. So was the uniquely English concept of liberty, the idea that people had rights that came not from the king but from God and that these rights could be enforced by law. Nothing could be clearer in economic history than the fact that the rule of law is essential to long-term economic success.

Virginia’s legislature was founded in 1619, only 12 years after the colony itself. By the time of independence, the United States had over a century-and-a-half’s worth of experience in self-government while the Spanish colonies in the New World had none when they achieved independence a generation later, a fact that has haunted many of them ever since. This proved crucial in establishing a stable political culture and a U.S. Constitution that is now the second oldest written constitution in the world, second among functioning constitutions only to the state constitution of Massachusetts.

Further, because the British government was small and had limited financial resources, it was not the government that founded the colonies along the Atlantic seaboard, but rather individual proprietors, such as Lord Baltimore and William Penn, or profit-seeking corporations, such as the Virginia Company. Even the Puritan settlers in New England, the most religious group of immigrants, were sent by a corporation whose investors wanted to see profits on their investments along with any shining cities on a hill the colonists might build. Puritans regarded wealth as a sign of God’s grace.

We are still very much a nation of capitalists. But we are a nation that is increasingly reining in our capitalist instincts with regulations that make it difficult to open a business and make a profit, and with taxation that reduces the rewards for risk-taking. And it is not only bureaucrats and liberals who are confining the population’s wealth-creating instincts. Lawyers do as well, and so do environmentalists, who together have learned how to game the legal system so that new technologies and new businesses are tied up in court for years. Frivolous lawsuits are a constant expense to American businesses thanks to the “American rule,” whereby each side in a court case pays its own expenses regardless of outcome. That is an open invitation, frequently accepted, to legal extortion. We are the only country in the common-law world that uses the American rule.

Here is a near perfect example of what Ronald Reagan meant when he said that government is not the solution, it’s the problem. Reforming the American legal system to promote growth, instead of lawyers’ incomes and special-interest-group agendas, would have a highly positive effect on GDP growth and job creation.

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The nation that demonstrated the inestimable strengths of capitalism was founded by self-starters who arrived from elsewhere, which leads us to the next factor vital for economic growth: immigration. Everyone living today in the United States either came himself or has ancestors who said goodbye to everyone and everything they had ever known and came to a strange land in search of a better—and more prosperous—life. It was true in the 17th century, when people crossed the Atlantic in small sailing ships that took two months to reach America. It was true in the early 20th century, when immigrants arrived at Ellis Island in steerage. It is equally true today, when immigrants arrive by bus and by jet, and, not infrequently, at night and on foot.

If the United States is famous for its get-up-and-go, it is because we all have ancestors who got up and went in search of economic opportunity. Those who arrived as slaves, and thus had no choice about it, survived an ordeal that is utterly beyond modern imagination and passed that incredible strength down to their descendants.

As in the days after World War I, when immigration was restricted for the first time in American history, anti-immigration sentiments have been rising in this country. No one argues with the idea that the United States needs to get control of its borders so we might control immigration. That is a task that the federal government has singularly failed to do, although progress is now being made.

But the idea that this country has no room for immigrants is nonsense. Of the countries around the world, the United States ranks 179th in population density, with 83 people per square mile. The Netherlands has 1,041, Israel 961, Japan 873, the United Kingdom 660, Germany 593, China 360. Excluding people who, like our ancestors, want to seek their fortunes in America is to exclude some of the most motivated, hardworking, and creative people. Why would we want to do that?

Even worse is the current regulation that requires students in graduate programs at American universities to return to their native countries once they complete their studies, even though many of them would like to stay and become highly productive citizens. This is not a brain drain; it is a brain expulsion. In an era when intellectual capital is the most valuable form of wealth there is, this is idiotic public policy. We need these immigrants in order to exploit the greatest resource created in the last 75 years—a resource made literally out of sand.

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The microprocessor is the most consequential invention since the steam engine and probably since agriculture. First marketed in 1972, it has already changed the world beyond reckoning. And we haven’t seen anything yet. Thanks to the microprocessor and the entrepreneurial, profit-seeking spirit of American capitalism, the average 10-year-old today has on his desk greater computing power than the Pentagon could have afforded 40 years ago.

The most significant spin-off of the microprocessor, the Internet, is remaking the world of communications on an almost daily basis. There is not a single branch of science or technology that has not been revolutionized by the advent of cheap computing power. The explosion of knowledge that has resulted therefrom is breathtaking.

By no means the least of the technologies the microprocessor has changed profoundly is the technology of war. When World War II ended, a Cold War quickly developed between the two so-called superpowers, the United States and the Soviet Union. Although the United States economy was far richer, more productive, and more technologically capable than the Soviet centralized economy, the Soviet Union was in the early days of the Cold War able to match the United States militarily, albeit at the cost of a much lower standard of living for its population. One way it did that was by extensive industrial and technological espionage.

The microprocessor would soon make that impossible. The speed of the advance of technology increased enormously, and the Soviet Union simply could no longer steal secrets fast enough to stay even. The revolution in communications, meanwhile, made it impossible to keep control over what information was available to the people. The only possibility was for the Soviet Union to reform its deeply corrupt and bureaucratic system. But that proved impossible to control, and the system began to collapse in 1989 with the liberation of eastern Europe. In 1991, the Soviet Union disappeared from the map of the world, leaving the United States alone as the world’s only economic and military superpower.

That technological advantage remains—for example, our planes flying over Libya have an accuracy rate of 95 percent when it comes to hitting bombing targets, as opposed to the 50–60 percent accuracy rate of other NATO aircraft. Keeping up that advantage is central to maintaining America’s predominance not only in military affairs but also in the world economy as a stabilizing force in pursuit of worldwide standards for rule of law and open trade.

It goes without saying that continuing innovation in the peaceful use of the microprocessor is crucial to American economic growth now and in the future. Thanks to the microprocessor, we live in an era of change even more rapid than the early 19th century, when the steam engine was remaking the world. If we cannot adapt to that change, embrace it, and exploit it as quickly as the other major economic powers, we will be left in the dust.

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The greatest periods of American economic growth came when taxes were very low—such as in the 19th century—or being lowered and simplified, as in the 1920s, 60s, and 80s. Inescapably, to tax wealth creation is to discourage it. But there is a large and politically potent segment of the population that, because its interests are now aligned with those of the government, seek to promote dependency through entitlements. This segment favors ever higher taxes (although they disguise the fact by demanding that only “the rich” pay their “fair share.”) But, as with regulation, high taxes inevitably produce low growth—and low growth threatens entitlements in the long term. If the United States remains in the doldrums for several more years without hope of a real turnaround, Medicare as it is currently constituted will go bankrupt in 2019. Raising taxes to prevent that will only slow overall growth, and that will actually defeat the purpose of saving Medicare.

So there is really no alternative to pursuing policies that encourage economic growth through private action by liberating the forces of the free market. A presidential candidate who finds a way to ground his economic policies in this core truth—and harnesses the idea to a larger and more optimistic understanding of the United States, both past and future, and resists the take-your-medicine tone that dominates the conservative policy discussion of the present moment—will be able to draw a sharp and effective contrast with the failures of the Obama years.

About the Author

John Steele Gordon, a regular contributor, is the author of, among other works, An Empire of Wealth: The Epic History of American Economic Power (Harper Perennial). This article is adapted from a speech he gave in May at the Fifth Federal Judicial Circuit Conference in San Antonio, Texas.