Monday, June 13, 2011

John Taylor on Pawlenty’s 5% Growth for a Decade Claim

Tim Pawlenty may be getting a lot of criticism for his claim that we can achieve 5% growth for an entire decade but John Taylor argues that this “is not some pie-in-the-sky number”. It is a real stretch, however, especially once one looks at all the assumptions that Dr. Taylor has to make to get even close to this “aspiration”. Taylor starts with the recognition that the employment to population ratio is dismally low:

Currently the percentage of the working-age population (age 16 and over) that is actually working is very low at 58.4 percent. In the year 2000 it reached 64.7 percent, so that is at least a feasible number. Raising the employment-to-population ratio to 64.7 means an employment increase of 10.8 percent (64.7-58.4/58.4 = .108) or about 1 percent per year over 10 years, even without any growth of the population. Adding in about 1 percent for population growth (from Census projections), gives employment growth of 2 percent per year.

I have a couple of quibbles with this even if I earlier sang a similar tune. First of all – cutting government purchases now will likely mean less aggregate demand. I guess Dr. Taylor has joined Pawltenty is failing to recognize the Keynesian nature of the Great Recession. Secondly, I had been chastised by a few smart conservative economists for believing we could get back to a 64.0% employment to population ratio so this notion that 64.7% is feasible does seem like a stretch.

Taylor also seems to think we can get back to the 2.7% productivity growth witnessed during the “IT revolution” of the late 1990’s. Count me as being less optimistic. But his last paragraph is where this really falls off the cliff:

You can see how the types of pro-growth policies in the Pawlenty plan would work toward the goal by reducing spending growth enough to balance the budget without tax increases and thereby remove threats of a debt crisis; by lowering marginal tax rates to spur hiring and job growth; by scaling back unnecessary new regulations which impede private investment and higher productivity, and by restoring sound monetary policy to remove uncertainty about inflation or another financial crisis.

The Laugher Curve in its fullest glory! Pawlenty wants massive tax reductions which are not going to be offset by spending cuts in the real world. So his plan if enacted is likely to be deficit increasing. And at some point when we do eventually get back to full employment – this fiscal insanity will lead to crowding-out of investment.


TheTrucker said...

It seems to me that if you want full employment then you will have to provide medical insurance through MEDICARE or something similar for all persons. This implies that large employers will loose their ability to cut really good deals with the large insurance companies and therewith their ability to trap workers into low wage jobs at long hours. Another means of job creation is a highly progressive business tax that makes smaller corporations much more profitable than extremely large ones on a per share basis. This "reduction in scale" is less efficient. But that is exactly what is needed in the absence of a socialist state that does the redistribution more directly. And last but not least is the imposition of trade barriers that make offshoring unprofitable.

I think most rational people CAN understand these things if given the opportunity. It is hard to believe that so much effort is devoted to making these obvious answers seem economically perverse.

Anonymous said...

Taylor is a conservative Keynesian who had a leading role in Paul Ryan's plan. He's always believed that the deficit crowds out growth.

This is just Taylor's way of trying to glom onto something that has appeal and drag it back to Taylor's own focus on spending cuts. Of course Pawlenty is making a mistake muddying his message with a balanced budget.

Pawlenty's strength is that he can offer business tax cuts without looking like a rich asshole (that's where he beats Romney).

Exl Blogger said...

The problem is that you can't get high rates of growth without high marginal tax rates. Look at history. That's a simple fact. Sure, 5% growth would be nice, but it would take a much higher tax rate than would be politically acceptible.