By Rob Nichols, President and CEO, The Financial Services Forum
With the midterm elections just months away, the limitations of the congressional calendar, and a contentious political environment, conventional wisdom suggests that little is likely to become law between now and November. Acknowledging these headwinds, it’s not too early to think about what Washington should focus on to accelerate economic growth and job creation once the environment is right.
Five years into the post-recession recovery, economic growth remains subpar and more than 20 million Americans remain out of work, underemployed, or have left the workforce, discouraged. Working together, Congress and the business community can — and must — do more.
Gradual but meaningful debt reduction: As recently as 2007, U.S. publicly held debt amounted to just 36 percent of the gross domestic product (GDP). Since then, the nation’s debt has increased 155 percent, and that’s not counting trillions of dollars more in unfunded liabilities. According to the Congressional Budget Office, federal debt will likely exceed 76 percent of GDP this year and “could have serious negative consequences, including restraining economic growth in the long term, giving policymakers less flexibility to respond to unexpected challenges, and eventually increasing the risk of a fiscal crisis.”
Recent research indicates that gradual but substantial reduction of government debt promotes economic growth as business expectations of lower future debt levels and taxes encourage private spending and investment. While the urgency to put America on a more sustainable fiscal path has unfortunately faded, the problem remains unsolved, and we need to remain diligent about addressing our long-term fiscal circumstances.
Tax reform: The last significant overhaul of the U.S. tax code was signed into law by President Ronald Reagan nearly 30 years ago. The Tax Reform Act of 1986 simplified the code, broadened the tax base and lowered rates, revitalizing the economy and laying the foundation for one of the longest periods of economic expansion in American history.
In the years since, Congress has passed nearly 15,000 changes to the tax code; now, any of the loopholes, deductions, special credits, and expenditures are back. Higher marginal tax rates are also back. The U.S. corporate tax rate is the highest in the developed world, 14 percentage points higher than the average of the 33 other members of the Organization for Economic Co-operation and Development. A simpler and fairer code, with lower rates and a broader base achieved by eliminating loopholes and expenditures will encourage greater investment and production and significantly enhance America’s economic competitiveness.
Further trade liberalization: After completing 19 free trade agreements (FTAs) between 1994 and 2007, an average of more than one each year, the United States has not ratified a new FTA since October 2011. The United States is currently party to negotiations of the Trans-Pacific Partnership and the Trans-Atlantic Trade and Investment Partnership, but negotiations are arduous and congressional ratification is very much in question. Meanwhile, “fast track,” or trade promotion authority (TPA), the president’s authority to negotiate international agreements that Congress can approve or disapprove but not amend or filibuster, expired in July 2007.
Trade liberalization achieved to date adds about $1 trillion to America’s income each year, and further liberalization would deliver an estimated $500 billion more. Moreover, according to the Commerce Department, each additional $1 billion in U.S. exports creates about 5,000 new American jobs. Expanded trade, particularly with rapidly growing emerging economies, represents an enormous opportunity for America’s manufacturers, service providers, and farmers. A bipartisan, bicameral bill to renew TPA, introduced in January, should be passed as soon as possible.
Recall the simple fact that 95 percent of the world’s consumers live outside the United States. Given that reality, a focus on trade policy frankly should be a priority for every Congress. Restoring the U.S. economy’s growth rate to the post-World War II average of 3.5 percent-4 percent from the current pace of just 2 percent -2.5 percent should be policymakers’ foremost domestic priority. Faster economic growth would produce the jobs necessary to end the current job crisis; the expanded opportunity necessary to accelerate socio-economic mobility; the rising real wages needed to narrow the income gap and reduce poverty; and the tax revenue necessary to narrow budget deficits and substantially reduce the nation’s long-term debt.
Immigration reform: In an ever-more competitive global economy in which highly skilled talent and brainpower are among the resources most sought after, current U.S. immigration policies are irrational and self-defeating. Though representing just 12 percent of the U.S. population, immigrants account for nearly 20 percent of small-business owners and launch half of the nation’s top startups, which, research has shown, account for virtually all net new job creation. According to the Partnership for a New American Economy, immigrants were also involved in more than 75 percent of the nearly 1,500 patents awarded at the nation’s top 10 research universities in 2011. And nearly all the patents were in science, technology, engineering and mathematics.
The net result of immigrants’ propensity for innovation and entrepreneurship is faster economic growth and job creation. And, as the program’s trustees pointed out in a report last May, more legal immigration will improve the financial position of Social Security, adding $4.6 trillion over the next 75 years.
There are a number of things that can be done to spur economic growth, but making real progress on immigration reform, tax reform, debt reduction, and further trade liberalization will create the growth America needs.