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Friday, August 12, 2011

Ways To Restore Economic Growth - And Not To


President Obama and congressional Democrats appear to accept a conventional wisdom that the US "cannot grow its way out of the current economic crisis". Pundits on the left say we must increase taxes, while those on the right say we must cut government spending. Virtually everyone speaks against deficit spending - though a separate post shows using common sense logic that some form of money creation or deficit spending is necessary in growing economies. Many discount the likelihood or possibility of economic growth and the degree to which it may help solve economic problems.

Economic growth is both possible and necessary to solve our economic problems. Though there are changes that should be made in spending and taxes, neither of these will be sufficient to solve our problems, and the wrong changes to spending and taxes will make our economic problems much worse.

The economy would resume strong growth if the government would allow US companies to rapidly increase domestic energy production in oil, natural gas, clean coal and nuclear energy. This would add US jobs in energy and supporting industries such as construction, transportation, manufacturing, engineering, information technology, etc. It would reduce energy prices, reduce inflation and encourage growth broadly across the US economy.[1] Producing more energy in the US would improve our balance of payments, and strengthen national security.

Reducing federal taxes to encourage economic growth is a successful strategy that was recommended at different times by Presidents Kennedy and Reagan. To gain additional revenue we should simplify and flatten the tax code, removing loopholes, so that tax rates are reduced but revenues increase.

In general, reducing government regulation throughout the economy, will encourage economic growth.

In contrast, other options could make the economic crisis worse. The Democrat's preferred measure, raising taxes on individuals earning over $200,000 a year (or couples earning over $250,000 a year) would handicap economic growth. 

While the federal budget should be trimmed in several areas, rapid major cuts in federal spending could make the unemployment situation worse, putting further stress on the economy. If a trillion dollars were quickly taken out of the federal budget, the consequence could be millions of additional people unemployed in the US: former federal employees, and people funded by federal contracts. That would cause a severe shock to the economy, halting recovery and sending us further into recession. So, any plan to reduce the federal budget needs to be gradual, to avoid this problem.

The Republicans' commonsense belief that we need to increase retirement age to address budgetary problems with Social Security and Medicare has the disadvantage that it weakens the social "safety net". It may not be necessary if the economy resumes strong, long-term growth. In a prosperous economy, we should seek to reduce retirement age, and strengthen the safety net. (Mannion, 2011) We need to seek other ways to solve the financial problems of Social Security and Medicare, while still providing a social safety net, for those who need it. A step in the right direction would be to solve the $60 billion a year fraud expense in Medicare.

While "Obamacare" is motivated by a noble vision, to provide guaranteed health care to everyone, it does so at a cost too great for the federal budget, with the risk of rationing health care and reducing quality of health care, and also a reduction in Medicare. Based on the situation with Medicare, the federal government has proven itself incompetent at managing all the nation's health care.

The best approach to national health care is to provide a safety net of health care to people who cannot afford it, and to allow the free market and free enterprise to drive down the cost of health care so that more people can afford to provide it for themselves, through personal and corporate insurance programs.

If we are going to invest stimulus money then it should be used for proven, efficient, large-scale energy production to generate both short-term and long-term self-sustaining jobs, promote economic growth & energy independence. Building Hoover Dam did that in the 1930's, and is still producing a return on investment, in hydroelectric energy. The $800 billion 2009-2010 stimulus funds should have gone into a major expansion of oil, coal, natural gas, and nuclear power in the US, not just into inefficient green energy and transportation infrastructure.

Energy is required to repair and maintain transportation infrastructure. Thus, transportation infrastructure stimulus creates only short-term jobs with increased demand for energy, which worsens the balance of payments if we are overly dependent on foreign energy. (The same argument applies to stimulus for bullet trains.) Infrastructure repair and maintenance should be motivated and funded as a side effect of increased US energy production.

However, allowing US companies to rapidly increase energy production would not require a federal stimulus. Economic recovery and job growth should still result if the federal government encourages US companies to rapidly increase domestic energy production in oil, natural gas, clean coal and nuclear energy, and addresses regulatory issues as rapidly as possible.

Unfortunately, the Obama administration seems to act as though the only good energy sources are solar and wind. These are far from being able to support the economy in the near term, and not without  environmental impacts. The administration also seems convinced the US should bear the burden for relying on "clean" energy, while China, Russia and many other countries expand their use of coal and oil. And the administration is convinced the danger of global warming has been proved scientifically, though key questions remain open to scientific debate. (Lindzen, 2007; Orlowski, 2011)  In the 2011 State of the Union address, President Obama voiced a recognition that we need development of nuclear, clean coal and natural gas, yet it appears the executive branch is focused on regulation rather than encouragement of conventional domestic energy sources.

The strengthening of conventional energy production  is of vital importance to US national security, as well as to the economy. Research should continue on development of more efficient, lower cost technologies for solar energy. Research should also continue on scientific questions about the existence, causes and nature of climate change: we should work to shift over the next few decades to nuclear power, augmented by solar and other carbon-neutral energy sources, if the case for human-caused global warming is proved. In the meantime, economic prosperity and national security require that we promote energy independence for carbon-based fuels.[2]

REFERENCES

Moore, Stephen (2011)  How North Dakota Became Saudi Arabia. The Wall Street Journal, October 1, 2011.


NOTES

[1] Stephen Moore (2011) cites Harold Hamm, discoverer of the Bakken fields: "Mr. Hamm calculates that if Washington would allow more drilling permits for oil and natural gas on federal lands and federal waters, 'I truly believe the federal government could over time raise $18 trillion in royalties.' [...] This estimate sounds implausibly high, but Mr. Hamm has a lifelong habit of proving skeptics wrong. And even if he's wrong by half, it's a stunning number to think about. So this America-first energy story isn't just about jobs and economic revival. It's also about repairing America's battered balance sheet. Someone should get this man in front of the congressional deficit-reduction supercommittee."

[2] As part of this approach Congress should enact the Open Fuel Standards Act to ensure that US automobiles can run on methanol, which can be made cleanly without subsidies from coal, natural gas, or any kind of biomass (waste, inedible plants, etc.) The US has enough coal to make methanol to power all our autos for 150 years. (Zubrin, Energy Victory, p.25)