The Road to Freedom (19 page)

In addition to tax cuts and regulatory reform, growth requires that government spending be capped and cut. The current administration argues that government spending can stimulate long-term growth, but this claim is inconsistent with the evidence.
Chapter 5
showed that a 10 percent increase in government spending and taxation has the effect of reducing economic growth by up to 1 percentage point per year.
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There are three reasons government spending hampers growth. First, spending that is paid for with current taxes creates a drag on the private economy. Second, if spending is paid for by borrowing, this lowers the confidence of investors today who know that sooner or later it will have to be paid back. Third, when borrowed money is ultimately paid back, the taxes hurt growth in those future years.

Later in the chapter, I'll single out specific areas of government spending that need to be cut: entitlements and the
government payroll, in particular. But for now, it suffices to say that out-of-control government spending is hindering America's lasting economic recovery.

If there's one thing entrepreneurs hate most about government, it's unpredictability. The complaint about the current administration I hear more than any other from businesspeople is that they cannot invest with confidence because they have no idea what policies they will face. Not surprisingly, then, research has shown that policy uncertainty harms growth and has hampered our nation's economic recovery.
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Economists from Stanford University and the University of Chicago have calculated that between 2006 and 2011, entrepreneurs' inability to predict government policy has lowered real GDP by about 1.4 percentage points per year and lowered employment by around 2.5 million jobs.
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Entrepreneurs say they are staying on the sidelines because they don't know what the future holds in three principle areas: ObamaCare's health reforms, the Dodd-Frank Act's financial market regulations, and proposed tax increases. Repeal of ObamaCare and Dodd-Frank would help economic growth dramatically, as would extending the so-called “Bush tax cuts” while starting real tax reform efforts.

Finally, if we want to spur growth, the U.S. must get serious about immigration policy. America needs more talented people to come to our shores. Right now, the debate about immigration is completely misdirected. Most pundits and politicians continue to focus on illegal immigration. Meanwhile, they are ignoring the most destructive immigration policy of all: expelling foreign students and professionals after their student and temporary visas expire. Recent research shows that for every immigrant with education in science, technology, mathematics, or engineering, 2.62 new jobs are created for native-born Americans.
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To grow the economy, the U.S. needs to increase productivity, and in order to increase productivity, it needs a skilled and entrepreneurial labor force. Every student with a clean legal record who obtains a degree from an American university should automatically have the right to become a permanent resident. People who worry that those students will create unemployment for Americans are misguided. Skilled and talented immigrants create jobs, opportunity, and growth; they do not take them away.

One moral point on this last issue is worth making. We shouldn't forget that for almost all of us, immigration is our own family story. If you are glad to be an American, thank the immigrants who risk it all to come to the U.S.

Making the moral case for job creation is not hard: Jobs are not just a source of money for Americans; they are a ticket to earned success. High unemployment, especially when it is avoidable, is fundamentally unfair because it robs people of their potential fulfillment. It is especially harmful to the poor and the young, who have had fewer economic opportunities than others. As of November 2011, unemployment for the sixteen-to-nineteen age group is running at 23.7 percent, close to the highest teenage unemployment rate on record.
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Unemployment is also getting in the way of life's greatest joys, such as marriage, starting a family, and pursuing education. When the young are hurt by persistent unemployment, they delay many of these decisions.

On the current policy path, America will face permanently higher levels of unemployment, just like its social democratic European allies. A return to free enterprise principles would allow
America's entrepreneurs to create private-sector jobs. The choice, for millions of fellow citizens, is between welfare checks and paychecks. That is the moral choice between earned success and learned helplessness.

Here are the depressing facts about unemployment in America today that show the urgency of making better policy:

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Unemployment rose from 4.7 percent in January 2006 to 7.8 percent when President Obama took office in January 2009.
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By October 2009, unemployment reached to 10.1 percent, and hovered above 9 percent for a twenty-one-month stretch from May 2009 to January 2011—the longest such period since the Great Depression.
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As of December 2011, the unemployment rate was still 8.5 percent.
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•
Fourteen million is the official jobless number, but it isn't the one that matters. An additional 8.8 million people are involuntary part-time workers and another 2.6 million are “frustrated workers,” having quit searching for a job even though they would work if they could.
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Combined, these three groups total approximately 25.4 million people, or 16.5 percent of the labor force.

•
A 2011 nationwide survey found that 18 percent of young people said they delayed marriage due to job worries or unemployment; 23 percent delayed starting a family; and 27 percent delayed furthering their educations.
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When talking about job creation, we need to stay focused on three core principles.

First
, the government is terrible at “picking winners” in the economy. With the stimulus spending of the past several years the government has tried to dictate the parts of the economy that
deserve public-sector support, and the parts that don't. These policies usually lead to failure and hurt job growth.

Second
, the government must guard against special interests, including organized labor and the crony corporations with disproportionate access to government power. When special interests set policy or embed themselves in the government itself, job creation suffers.

Finally
, the government needs to keep its payroll to a minimum. Obviously, there is a need for a staffed public sector, but government jobs are not a good substitute for private-sector jobs when it comes to reducing unemployment.

AT THE OUTSET
of the current recession, the Obama administration's economists promised a swift decline in unemployment if only Americans would agree to large increases in the size and scope of government.
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We got only half the deal, though: government exploded, while unemployment stayed high. The government economists are scratching their heads, but there really is no mystery here. Businesses are not hiring precisely because of public-sector growth, excessive regulation, labor market interference, and tax complexity.

First, consider the massive growth in government regulation in the past three years. As we saw a moment ago, the Dodd-Frank Act has produced regulatory costs and uncertainty that are actively dissuading businesses from expanding, which means they are not hiring.
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The same is true of ObamaCare, which is discouraging firms from creating jobs because they do not know what the mandated cost of doing so will be in the coming years. Scrapping these programs is a primary job-growing priority, according to many economists.
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Government growth—even the creation of government jobs—also crowds out employment. This seems counterintuitive to a lot of people—a job created by government adds to total employment, right? Wrong. Economists have shown that the administration's stimulus spending created or saved 450,000 government jobs but destroyed or forestalled 1 million private-sector jobs.
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We saw in
Chapter 5
that every government job costs between 1 and 2.2 private-sector jobs. This is because of the detrimental tax and public debt effects on investment and confidence, as well as the fact that government tends to crowd out the more-productive private sector when engaged in the same basic activities.
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Downsizing the federal workforce will increase net American employment.

Another way the government destroys jobs while claiming to create them is by subsidizing favored industries. Take, for instance, the administration's “green jobs” initiatives—to subsidize companies that develop sustainable energy and products. These initiatives actually
destroy
jobs by diverting profitable private investment into public subsidies to industries that are not financially viable. Consider the case of the solar company Solyndra, which received $535 million in federal government loan guarantees. The U.S. Energy Secretary called the guarantees “part of President Obama's aggressive strategy to put Americans back to work.”
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Solyndra estimated that the complex covered by the government's support would employ 3,000 people. Instead, Solyndra went belly-up in 2011 (meaning zero new jobs). There are dozens of Solyndra-like boondoggles that are not yet in the news. Government efforts such as this should be abandoned and replaced with a pledge to get rid of
all
subsidies.

Reasonable people disagree about whether labor unions are a good or bad thing for America, on balance. But almost everyone knows that they increase labor prices and thus drive down hiring.
One of the worst things the government can do in periods of high unemployment, therefore, is to push the private economy toward greater unionization. Unfortunately, that is exactly what has happened. The administration's $787 billion economic stimulus package in 2009 was preceded by an executive order from President Obama strongly encouraging—in effect mandating—that government agencies only use unionized firms for large-scale construction projects.
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The administration's pro-union policies don't stop with the economic stimulus. Consider the recent activities of the National Labor Relations Board (NLRB) toward the airplane manufacturer Boeing. The NLRB filed a complaint against the company, in an attempt to coerce Boeing to move airplane construction from non-union South Carolina to union-heavy Washington State.
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While the case was litigated, four thousand workers in South Carolina sat idle during the worst period of unemployment in decades. (The case was dropped in December 2011, but not until Boeing agreed not to build another plant in South Carolina.
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) This sort of labor interference cripples job creation by making companies more hesitant to invest in new plants, keeping labor sidelined, and lowering productivity.

Tax reform is also essential to job creation. A simpler, more efficient tax code would allocate resources more effectively and stimulate economic growth. It would reward the most productive firms, not the cleverest accountants and the companies most closely tied to politicians. And it would draw investment to the United States. Employment markets would improve as a result.

In sum, the government is impeding the ability of entrepreneurs to create jobs. The solution is
less government
, not more. One practical way to do this, especially in the case of regulation, might be to require that the government issue an Employment
Impact Statement for new policies before they are enacted. Few issues are more important to the American people than jobs—and the government should know exactly how many of them will be lost as a result of raising costs on employers.

Most people see private debt as a moral issue. We've all known people who live beyond their means and fail to pay back their debts. We judge them harshly for being irresponsible and self-centered.

If debt is a moral issue at an individual level, it can be a moral issue at the national level, too. The U.S. is the world's most successful nation. Yet years of profligate government spending and poor planning have left America in a huge debt crisis. Unless it reduces deficits and stabilizes its government spending relative to the size of the economy, it will have just three choices: steal from future generations, inflate the currency to lower the real value of the debt, or refuse to repay those to whom it owes money. All these options are immoral because they are unfair: They harm others who have done no harm to America.

Many European allies are in economic crisis and will face austerity for at least a decade. The reason is simple: They lived beyond their means for years by borrowing to pay for current consumption and government services. Today, the bills are due, and the rest of the world is increasingly unwilling to lend them money. Americans have to choose whether to accept that same future or not. What kind of country will we leave our children? One that offers the opportunity we have enjoyed—or one that leaves our kids to foot the bill for the current generation's inability to curb government spending? In my view, the moral answer is obvious.

Here are a few facts that show how urgent it is that America fix its debt problems:

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The CBO estimates that, at the end of fiscal 2011, the federal government's gross debt is 100 percent of annual GDP.
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Economists find that countries rarely are able to recover from this crushing level of debt without falling into decline.
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America is at the edge of an economic abyss.