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The growth agenda we need

By Lawrence Summers,February 10, 2013

There should be little disagreement across the political spectrum that growth and job creation remain America’s most serious national problem. Ahead of President Obama’s first State of the Union address of his second term, and further fiscal negotiations in Washington, America needs to rethink its priorities for economic policy.

The U.S. economy grew at a rate of 1.5 percent in 2012. Last week, the independent Congressional Budget Office projected that growth will be only 1.4 percent during 2013 — and that unemployment will rise. While the CBO says that growth will accelerate in 2014 and beyond, it nonetheless predicts that unemployment will remain above 7 percent until 2016.

A weak economy and limited job creation make growth in middle-class incomes all but impossible, add pressure to budgets by restricting tax revenue and threaten essential private and public investments in education and innovation. Worse, they undermine the American example at a dangerous time in the world.

We can do better. With strains from the financial crisis receding and huge investment possible in energy, housing and reshored manufacturing, the United States faces a moment of opportunity unlike any in a long time. The economy could soon enter a virtuous cycle of confidence, growth and deficit reduction, much like it did in the 1990s. But this will require moving the national economic debate beyond its near-total preoccupation with federal budget restraint.

Yes, fiscal restraint is necessary in the medium term to contain financial risks. But unlike in the 1990s, when reduced deficits stimulated investment by bringing down capital costs, fiscal restraint cannot be relied on to provide stimulus now when long-term Treasurys yield less than 2 percent.

A broader growth-centered agenda is needed to propel the economy to its “escape velocity.”

First, as the president has recognized, the budget cuts implicit in the sequester scheduled to begin in March should not be reduced but spread over time. The economy is already taking a significant hit from increases in payroll taxes. Sudden across-the-board slashing of military and civilian spending will hurt the economy and seriously damage military readiness.

Second, the president and Congress should fix a firm year-end deadline to address the international aspects of corporate tax reform. We are in the worst of all worlds: U.S. companies have nearly $2 trillion in cash sitting abroad because of tax burdens on bringing it home and the perception that relief may be on the way. Ideally, the international tax system should be reformed in a way that is revenue-neutral but increases the attractiveness of bringing foreign profits home. This would be accomplished by replacing the current high rate of tax levied only on repatriated profits with a much lower tax levied on all global profits. If such reform is not going to happen, this should be clarified so business does not keep planning for an amnesty that will not come.

Third, no American, regardless of his or her ideology, should be satisfied with the way the nation’s housing finance system is working. After a period when cheap mortgages were too available, the pendulum has swung too far; a lack of finance is holding the economy back. The clearest evidence is the growing number of lower- and middle-income families paying rents to the private-equity firms that own their homes at rates far above what a mortgage would cost.

Fannie Mae and Freddie Mac, the government-sponsored housing enterprises, have historically provided support to the mortgage market in difficult times. It is high time they be forced to step up and support would-be lenders. Ultimately, government support for owner-occupied housing should be curtailed, but now is not the time.

Fourth, the transformation of the North American energy sector needs to be accelerated. This will have economic and environmental benefits. Those who will decide whether to approve the Keystone XL pipeline, which would run between the tar sands of western Canada and Nebraska, need to recognize that Canadian oil not flowing to the United States will probably flow to Asia, where it will be burned with fewer environmental protections.

Natural gas exploitation, too, could bring huge environmental benefits. Replacing coal with natural gas has much more scope to reduce greenhouse gas emissions than more fashionable efforts to promote renewables. A period of record-low capital costs and high unemployment is the best possible time to accelerate the replacement cycle for environmentally untenable coal-fired power plants. More generally, the production of natural gas and its use in industry should be a substantial job creator for years to come.

More could be added to this list, including innovations in regulation and finance with respect to infrastructure investment. Unlike deficit reduction, in which all the choices are painful, measures to spur growth can benefit all Americans as well as help the federal budget. Growth and job creation are, after all, ultimate ends of economic policy. They as much or more than fiscal issues should become the focus of our national economic conversation.