What an economy doesn’t need to prosper

“Various currency bills pinned to a large world map with colorful pins in various locations” by Christine Roy on Unsplash

Politicians love to promise jobs, “a chicken in every pot,” “peace and prosperity,” and any number of other pledges that to bring economic growth to all Americans. In reality, there is very little a politician can do to positively impact the economy in the short term.

That said, there is much a politician can do to damage the economy in the short term. I could write extensively about how damaging are President Trump’s unfunded tax cut for the rich, his trade wars, and his attacks on our health insurance system. As of right now, however, the evidence seems to contradict those arguments. We are experiencing reasonably robust economic growth overall, although wage growth for most people is virtually nonexistent.

Fortunately, we don’t need to speculate to see what a politician can do to an economy in the short term. In Venezuala, profligate government spending without commensurate domestic growth led to a genuine humanitarian crisis within our hemisphere. And what’s more shocking is that Venezuela was once one of Latin America’s economic powerhouses. And it has extensive oil reserves.

Turkey is another example. To boost his efforts to establish himself as a totalitarian ruler, President Erdogan has embarked upon wildly expensive spending projects without the funding to support them. The resulting budgetary crisis has resulted in dramatic drops in the value of the lira and the risk that the resulting financial panic could spread worldwide.

This story is an old one that has been repeated again and again. It occurred in Zimbabwe, Argentina, and even Germany during the Weimar Republic. Politicians are constantly pulled between the unrealistic expectations of their voters and the budgetary limitations of the government’s treasury.

Everybody likes spending on their own pet project, and they like how lower taxes and higher spending can boost economic activity in the short term. But nobody likes the higher taxes or tough budgetary choices that are the reality of making ends meet.

The response of most taxpayers is to cut “waste.” But waste is never spending that benefits them. To most people, waste is spending that benefits someone else.

The problem is that there is a constituency for every government program and for every tax deduction. Making tough budgetary decisions will inevitably result in pissing people off. There is no way for responsible government executives to make everyone happy.

As Greece found out, governments are able to borrow at favorable interest rates. But at some point, the willingness of Wall Street to extend credit comes to an end. Then, there is trouble. The government can no longer pay its bills and you have a full-fledged economic crisis.

This is not to say that in the long-term, economic policy does not make a difference. Successful economic growth over the long-term requires a stable government, rule of law, property rights that are respected by all, an educated workforce, decent infrastructure. Inevitably, many of these things take money — in other words, taxes.

Therefore, to deliver the raw materials that are necessary for long-term economic growth, a government needs to balance the need for taxes with the goal of keeping funds available for business investment. Lower taxes is not always better. There is an ideal tax rate. We just don’t know what it exactly is.

There is a saying that partisanship ends at the water’s edge. In other words, up until recently, there was a broad, bi-partisan consensus in support of a strong American foreign policy.

Similarly, up until recently, there was a broad consensus in support of a long-term pro-growth policy that supported the rule of law, property rights, an independent Federal Reserve Board, lower barriers to trade, and long-term investment in infrastructure. In effect, the goal was to provide businesses with stability and predictability no matter what party was in control. If a party made policy changes, they tended to be modest.

After all, long-term growth is what really matters to an economy. As Loretta Mester pointed out, “if real GDP were to grow at 2.0 percent per year over the next 20 years, instead of 2.5 percent, the difference in income at the end of that period would amount to about $7,000 per person.” In other words, small differences in the short-term make a big difference over time.

The strength of the U.S. economy has not been the result of rapid, dramatic growth spurts, but of steady 3.5 percent growth from the end of World War II until the late 1990s.

There are certainly problems with our economy, foremost of which is its uneven distribution of wealth. However, without long-term economic growth, there is no wealth to be more equitably distributed.

Unfortunately, it seems that just as the consensus on foreign policy has eroded as of late, so too has the overall harmony on economic policy. While much attention has been directed at Trump’s sledgehammer-like approach to foreign policy, we need to be concerned about his similar view of long-term economic policy.

In truth, long-term economic growth might not be sexy or exciting, but it is singularly responsible for our strong economic position today. Perhaps this is one more example of where we need to consider whether the baby really needs to be thrown out with the bath water.

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Mike is an Assistant Professor of Management for Legal and Ethical Studies at Oakland U. Mike combines his scholarship with practical experience in politics.

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