Divided Washington Will Not Enact Pro-Growth Policies – Anemic US Economy Does Not Grow Enough – More Like Europe

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By Paolo von Schirach

May 7, 2012

WASHINGTON – Watching on C-SPAN, (the meritorious public affairs TV channels), a session of the US House Budget Committee was quite depressing. There was no real debate on the issues aimed at getting to some constructive policy outcome. I heard only prepackaged slogans and a lot of predictable posturing.


The Republicans “say” they want to liberalize the economy to lift growth so that the tax base will be expanded and revenue will actually increase. In the meantime, they say “no” to higher tax rates. Nonsense, claim the Democrats. The Republicans want to cut taxes for the rich. This will diminish revenue for needed social programs, hurting the poor. So let’s eliminate tax cuts for the oil companies and use the additional revenue to support health care. And on, and on. More than what was said, it was the way everything was said. It was all tired stuff, boringly scripted and totally predictable. The Republicans against “tax and spend”. the Democrats against “tax cuts for the rich”. And all members voted on any measure or amendment strictly along party lines.

Divided Government

This is no way to govern. Unfortunately, given our divided Government and this kind of rigidity, expect nothing different before the November elections. Still, unless Mitt Romney wins the White House while the Republicans will keep the House and take over the Senate as well, chances are that divided government will continue. If Obama will get re-elected, and I suspect he will be, given a still uninspiring Republican Party candidate, there are still good chances that the Republicans will keep control of the House and may be even capture the Senate, considering the large number of Democratic incumbents who may be a t risk there. Either way, if divided government continues, we are likely to get more of the same. Nothing will get done.

Fiscal reforms

And yet America needs to fix its fiscal mess. Luckily it does not have to fixed immediately. But it is now urgent to give the country, the world and financial markets the signal that there is now a strong bipartisan consensus in Washington about bending the cost curve. Simply stated, we need entitlement reform, some cuts in defense spending and tax simplification accompanied by some tax increases. Even with a long implementation time line, a broad based fiscal policy agreement would give reassurance to all, and in particular to business and investors. And it is important to reassure financial markets as to the continued reliability of the United States as a debtor finally able to put its house in order. We already had an S&P downgrade, do we want more?

Low growth

But even if we did all this, this is only half the story. Well crafted fiscal and tax policies are a good tonic for the economy. Still, while they can facilitate growth, by themselves they cannot create it.

America is essentially stuck in a low gear. There is no acceleration here. The last quarter the economy grew at a very modest 2.2% rate. Only 115,000 new jobs have been created in April, barely enough to compensate for population growth. The housing market is not back yet. People are still paying old debts.

Furthermore, fewer new companies are created. As Edward Luce notes in The Financial Times, “In 2010 just 8% of all US businesses were less than a year old, against 13% in the 1980s“. This is a worrisome trend. And fewer new companies are created because there is less financing available. Fewer companies mean less innovation, possibly fewer breakthroughs.

Less innovation

Capitalism advances only through its “creative destruction” process. If there is no creativity, we are stuck with old and overtime less productive technologies and systems. And what does this mean? Well it means that in a fiercely competitive global economy, if we do not innovate fast others take over. If we do not innovative and move up the value chain, we can only try and cling to smaller pieces of shrinking economic sectors by cutting wages, as we have fewer productivity enhancements due to lower investments.

More like Southern Europe

Allowing this to continue amounts to making America much closer to what we see in Southern Europe or even France toady. There is an ugly word for it: decline. The French just bought themselves a new left of center president, the Socialist Francois Hollande. He claims that he will do less austerity, while he’ll deliver more growth. This is great. But how will he make growth happen in a stagnating French economy? The only growth recipe the Europeans and now the Americans seem to understand is more public spending. And this means higher deficits. I am not sure this is going to work.

Create a better business climate?

But we are not doing much better. Can paralysed Washington deliver policies that will improve the “enabling environment”, so that more Americans will go into business chasing opportunities, this way helping overall growth? Impossible. And yet America needs clear and simple taxation, R&D tax credits, plus simple, user friendly regulations, not to mention clarity on health care obligations for employers. All this would contribute to a better investment climate.

If we could make all these changes at the Federal and State level, this would improve the picture. But I do not see any signs. The House Budget Committee session I mentioned above is just a small illustration of a debilitating impasse. Unless the attitudes change, expect more of the same.

Focus on entitlements

As for the creation of more fertile ground for growth, I have the bad feeling that for many Americans this is far less urgent than securing Social Security checks at current levels and Medicare benefits just as they are. And yet if we focus on entitlements as opposed to wealth creation, then our best days are really behind us. “This is what we have. It could be better; but we’ll have to make do”. True enough, overall America is still a very rich country. But with less innovation, fewer new companies created, real incomes stagnating and fewer people employed we are getting a little poorer every year. Does anyone care?

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