Several weeks ago I provided a short discussion on the real issues facing the nation and the economy. The key numbers to remember are these: the US economy needs to create at a minimum 2 million new jobs every year into the far distant future (for all intents and purposes, from now until 2050, when that number – 2 million per year - needs to start to climb), and the economy needs to provide 3% real growth every year – that is growth above any inflation rate or increase in size due to a larger population. Which leads to a simple question:
Is this growth rate possible?
In light of the fact that we was a nation have been hovering at 9.5% unemployment and 16.5% underemployment for a year and a half, and that job growth rates have been essentially flat or negative for much of the past two years, it is hard to believe that this kind of growth is possible.
History shows, however, that the nation did in fact sustain these types of numbers – on average – for its first 185 years. In short, this kind of growth is possible. That being said, has anything changed that might prevent that? The short answer is yes. Through most of the first 185 years of this nation the federal government was rarely more than 10% of GDP (with the exception of periods of war and shortly after the wars). In the early 1930s Federal spending rose above 20% and has climbed steadily since then, and since 1970 has been above 30% of GDP. (Totals of state and local government spending have averaged between 5 and 10%.)
What is the reason for this huge increase in government spending during the last 70 years? Predominantly it has been the rise of the so-called entitlement programs, which now comprise more than 2/3rds of the federal budget. Any successful program to grow the economy will require reducing the percentage of the GDP that is consumed by government (Federal, state and local), and that will mean paring back the entitlement programs.
There is also a ‘slight of hand’ here that is being played by the bureaucracies: those in favor of the entitlement programs insist that they are necessary because the economy is unable to provide for the individuals who are covered. Any reduction in the entitlement program would therefore mean people would be left ‘outside’ of society, as was the case of the poor of the depression of the 1930s.
But this misses two key points: first, it was a host of government decisions to increase Federal spending and Federal meddling in the economy that were the causes of the depression, and second, and most importantly, Federal entitlement programs of today, if transferred back in time with 1930’s technology, would have provided scarcely more aid then did those soup lines. Entitlement programs benefit today from a wide range of technological advancements that have materially improved everyone’s standard of living, mainly despite rather than because of government activities.
At the same time these government programs have a real negative effect – slowing job creation and leaving people – 3% of the working population – almost 5 million people – permanently unemployed.
Reducing the size and scope of entitlement programs necessarily entails some risk, and will inevitably cause pain to those who transition from the entitlement program to a newly created job. The immediate transition becomes the heart-wrenching, bad news story that makes the evening news. But just as lawyers will tell you that difficult cases result in bad law, heart-breaking situations result in bad economic policies. The fact is that sustaining the entitlement programs at their current size (10% + of the Gross Domestic Product) is to not only place a millstone around the necks of today’s workers, it is to drag down the future growth of the economy.
This nation will increase in population by nearly 140 million people in the next 40 years; 80 to 90 million new jobs are needed. (This does not include the tens of millions of new jobs that must be created as industries change and old jobs fade, requiring new jobs to replace the old). The Federal government, as well as state and local governments, must recognize that creating the stage for that job creation is their primary function, and all other functions must be subordinated to that function. Security, economic and monetary stability, and infrastructure are the key roles of government in stimulating the economy. It is to these tasks the government must devote its efforts.
