December 23, 2012
As the fiscal cliff looms, and politicians debate taxes and spending, we see news of economic hope. Friday’s print and electronic editions of The Gazette carried uplifting headlines, including:
• “State’s jobless rate drops to 7.7 percent”
• “Springs foreclosure picture continues to brighten”
• “U.S. economy grew at 3.1 percent in summer
• “U.S. home sales surge to highest level in 3 years”
A business story by Gazette reporter Ned Hunter started like this: “The Santa business, like the overall economy, is slowly bouncing back.”
The article told of a growing Santa demand at malls and private parties, which could be some strange indicator of improving economic welfare.
While 3.1 percent growth is relatively good, and may explain improvements in housing and employment, the magic number is greater than 3.3 percent growth in the U.S. Gross Domestic Product. That is the annual growth rate this country’s economy has averaged since World War II.
“That’s because 3.3%-plus growth, sustained over multiple years, and not just captured in a quarterly spike, sustains a positive feedback loop,” wrote Richard Karlgaard, for Forbes, in October of 2010. “Investors feel good and start pulling their money out of non-productive assets like gold. Employers feel good and start hiring. Consumers feel good and start buying. That’s what real 3.3%-plus growth would do for America, and what sickly 0% to 3% growth can never do.”
As Karlgaard explained, Americans are accustomed to robust growth and feel miserable when the economy grows too slowly. A growing population is a double-edged sword. It can spur economic growth, as more consumers can result in more sales and production. But population growth without corresponding economic growth can result in economic misery, as static supplies of goods, services and commodities are rationed, through price inflation, to supply the growing base of consumers.
Economic does not something that results from consumer demand alone. If it did, this would be simple. We could take from the wealthy and give to the middle class and poor. Recipients would spend the cash, thus creating demand that could be filled by companies that create jobs.
Problem is, money taken from successful taxpayers to fund government is money no longer available for investment into growth ventures.
“The single most important contributor to a nation’s economic growth is the number of startups that grow to a billion dollars in revenue within 20 years,” said economist, attorney and multi-subject professor Carl Schramm, as quoted by Forbes.
Schramm explained that our economy must facilitate the startups of at least 75 ventures each year that will become billion-dollar earners within two decades in order to maintain growth of 3.3 percent or more.
Most startup ventures fail, which means investors must put extraordinary amounts of money at risk to create even a few big-growth companies. The more the investor class spends on government, the less it has to invest in startup ventures that are essential to the growth we need for employment gains, a vibrant housing market and all other manifestations of prosperity. History tells us that rising tax obligations reduce investments in growth. Yes, our country has enjoyed prosperity under high tax burdens — as in the Clinton years. Arguably, that’s because of lagging results from earlier investments.
The somewhat positive headlines we’ve seen this week may be fruits of President Barack Obama’s decision two years ago to extend the George W. Bush tax cuts. We’re relatively certain that higher taxes on success will not lead the successful to invest more heavily in growth. We fear it may lead them to shelter more capital in safe, non-productive assets — just as the economy was beginning to improve. Without vigorous economic growth, coupled with better control of government spending, we stand no chance of emerging from debt. We cannot tax and save our way out of the federal government’s mess. We can only grow and save our way out.