All Commentary
Friday, October 18, 2013

Time for First Principles and Growth

With gross federal outstanding debt poised to pierce $17 trillion, an entitlement crisis that includes over $80 trillion in unfunded liabilities, 47 million people on food stamps, and 16 percent of the population living in poverty, it has become clear that our current system is now broken in terms of its ability to effect substantive policy change.

Like children with virtually no self-control, lawmakers, in a great show of reckless bipartisanship, have put the nation in a precarious fiscal position.

This horrid backdrop is only being made worse by the current recovery, which has indeed been a slog. In fact, what was once thought to be a transitory sluggishness has taken on the feeling of permanence, characterized by growth rates significantly below our long-term average. After all, the difference between 3.3 percent growth (the U.S. average between 1929 and 2012) and a 2 percent rate is 40 percent less output, employment, and production. This economic performance gap damages our standard of living a little more with each passing quarter. Over the last four he gap has actually been even worse: Real growth has only averaged 1.6 percent. 

Policies do influence economic behavior and payroll decisions, and the unprecedented increase in both part-time and temporary workers during this recovery is corporate America’s attempt to circumvent a plethora of burdensome government-mandated cost increases that are reaching lofty heights this year with the implementation of the 906-page Affordable Care Act, which continues to spawn thousands of pages of regulations. As Wayne Crews of the Competitive Enterprise Institute recently pointed out, this costs the U.S. economy around $1.8 trillion a year, which is slightly more than Canada’s entire 2011 GDP, and acts as a major disincentive for capital formation, job creation, and overall economic vibrancy. As the accompanying chart demonstrates, the 1980s recovery was the antithesis of the current expansion on a variety of sensitive economic fronts, with tax and regulatory burdens falling substantially during the former era.

This tepid environment is also expressing itself through a falling labor-force participation rate, which is close to historic lows, meaning the unemployment rate is declining primarily because people are simply dropping out of the labor force. That's an unprecedented trend during a recovery, as are the stagnant wages we're seeing and the virtual nonexistence of business investment.

In this connection, the Fed’s hyperaggressive and unprecedented monetary actions have not returned us to a sustainable trend-growth path, as quarter after quarter and now year after year, the economy seems to have fallen into a perpetual state of underperformance from both growth and price-stability standpoints. A variety of negative consequences could flow from these actions, particularly concerning inflation and malinvestment.

Thus, it is time to marshal outside forces to inject discipline into the equation. Anyone who thinks differently only need glance at the current fatuous debate over raising the debt ceiling. The most logical path at this point would be a constitutional convention, where a more rules-based approach could be contemplated on a variety of issues, including term limits, a monetary price rule, and tax and spending limitations.

This path would not require congressional involvement, as the will of the people, via the enthusiastic actions of 34 state legislatures (two-thirds of the states) would mandate such an event. This would be consistent with the long and storied tradition of strengthening our system of government through the amendment process. I am supremely confident that the Founding Fathers would agree that we have reached a point in our nation’s history that makes this approach essential to the long-term viability of our republic.

A version of this article appeared in the Atlanta Business Chronicle.

  • Jay Bowen is President and Chief Investment Officer of Bowen, Hanes and Company, Inc., an Atlanta-based investment counseling firm, and a Trustee for the Foundation for Economic Education (FEE).