America is languishing from historically low growth rates for the past ten years. These low growth rates restrict the growth of middle class income, jobs, and, most importantly, innovation. In the fourth quarter of 2015, our growth rate was less than 1% at .70%.
Our government and Wall Street are hyper- focused on the actions of the Federal Reserve Bank, known as the Fed.
Since the Great Recession, the Fed has maintained short-term interest rates at, or close to, zero. After six years of slow growth, many wonder why the economy is not returning to normal and why low interest rates do not stimulate growth.
Government cannot create growth, but can restrict growth with regulation and taxes. American growth from the founding has been the best in the history of the world because we are mostly free; but, unfortunately, big government makes us less free and less productive.
Since 2008, marginal tax rates have risen and new taxes have been created to support the Affordable Care Act. Intuitively, taxing the rich sounds fair, but the reality is that high marginal tax rates remove investment dollars from the private sector and expand the number of non-productive government regulators.
The administration has been creating regulation at the fastest pace in our history. Regulators have inundated every industry, from heath care, autos, dishwashers, to new consumer financial controls. We have all witnessed how federal interventions have virtually undermined the public school system.
Our corporate tax rate, the highest in the world, has spawned tax inversions. Major U.S. companies are now moving their headquarters to low tax havens, such as Ireland, with a corporate tax rate of 12.5 %, vs. the U.S. rate of 35% plus state income tax. Our government’s solution is to accelerate regulation to restrict inversions, rather than to reduce the corporate tax rate to a competitive rate.
It should be noted that Japan has followed this same pattern of high tax rates, lower interest rates, and endless government spending for the past 25 years. The result is massive federal debt, a slow growth economy, and reduced international competitiveness. Europe has followed the same prescription, with similar results but, thankfully, there is a solution.
Economies grow based on new private investment and innovation. Think of the impact of the iPhone introduced in 2008, and how it creates $200 billion in annual revenue and thousands of jobs. Google and Facebook have provided information technology for the world and changed the way we read, buy products, and communicate.
These are prime examples of what is known as Say’s Law, which is “supply creates demand.” Innovation and private investment are essential to reducing prices and expanding markets. iPhones are now available to billions of people worldwide.
Jean-Baptiste Say theorized that the growth of economies is not demand-driven, but growth is created by new and lower cost products and services. McDonald’s created huge demand in 1955 with a 15-cent hamburger, and now dominates fast food worldwide. As a result, a new, trillion-dollar industry has been created — eating away from home. We eat at grocery stores, fast food restaurants, at work, and from food trucks.
In 1925, Bell Labs made enormous investments in telephone technologies, resulting in international phone service at a modest cost. Today, electronics have improved service and lower costs, so virtually anyone can communicate worldwide.
Casual observation helps us validate Say’s Law. The big-box retailers have provided low-cost goods, stimulating demand for all types of consumer goods. We now have on-line vendors offering every product imaginable at even lower cost, delivered to your door by none other than FedEx, which did not exist when I was in college.
America has the opportunity to take full advantage of Say’s Law, and to create new demand and growth from investment and innovation. The requisites are: lower taxes, reduced regulation, and leaders to innovate. We must also focus on education, as innovators must have enormous knowledge to create the future world of ideas.
Small business, which creates the majority of new jobs, is especially challenged by government regulation, because financial and management resources are very limited.
Julian Simon wrote a book, The Ultimate Resource, on our greatest resource: the human mind. It’s time we rethink economic growth, and base it on Say’s Law, a concept that was theorized 200 years ago by Jean-Baptiste Say and whose insights we ignore at our peril.