The 4% Solution: Reaching potential through growth

Posted: July 15, 2012

Economic growth is not an issue normally associated with the Pentagon. But on Jan. 23, 2006, officials there handed the Defense Department's Distinguished Public Service Award to then-outgoing Federal Reserve Chairman Alan Greenspan. The reason for the award: He helped unleash tremendous economic growth that had strengthened the country, led to new advances in science and technology, and demonstrated the power of a free and open economic system.

The importance of economic prosperity is hard to overstate. A growing economy produces jobs that allow workers to provide for their families, live comfortable and stable lives, and give back to their communities. A growing economy creates new opportunities for entrepreneurs. And it also creates the capital needed to support innovation and research in science and the arts.

From the end of World War II until our recent "Great Recession," the United States economy grew, on average, at a little more than 3 percent annually. At that rate the size of the economy doubles roughly every generation. There were, of course, recessions during that period. But nearly every economic downturn was followed by a period of significant growth. Over the last 70 years, the American economy has grown at 4 percent or greater about two-fifths of the time. The result has been a rapid transformation. Today most Americans have a substantially higher standard of living than previous generations.

But survey the historical data stretching back long before World War II and you may be surprised to see that economic growth is a relatively new phenomenon. In a brilliant essay published in 2004, Nobel economist Robert Lucas outlined the history of economic growth. His findings show that prior to the Industrial Revolution in the middle of the 18th century, per-capita gross domestic product (GDP) growth had largely been flat around the world.

Modern growth theory is itself relatively new. Robert M. Solow, the economist often credited with advancing modern economic thought in this area, did much of his groundbreaking work in the 1950s and '60s. Others, such as Lucas, have since developed alternative growth models. The short of it is that these are exciting times to be thinking about economics, growth, and the outer limits of human potential. There is a lot of cutting-edge work being done now. And it is reshaping what we know to be possible, while also forcing us to realize that much of what we have done in the past may have actually hamstrung the economy.

Consider the work of another economist who hasn't won the Nobel Prize, but likely deserves such high honors: Gordon Tullock. Perhaps Tullock's most relevant work to discussions of economic growth has to do with what has been called "rent seekers" — those who seek special payment or privilege, usually from the government. Tullock's insight offers us an explanation into why government spending can actually be harmful to economic growth. Rent seekers, as Tullock discovered, profit through the political process, not by producing a better or cheaper product. Their aim is to receive payment (or privilege) through government policy.

Not all payments or privileges provided by the government are problematic or even wasteful. But since the government uses a political process to decide whom it pays and how much, there is little incentive for rent seekers to push for greater efficiency or innovation. This is a problem in part because the public and the private sectors compete for the same pile of money and the same group of innovative entrepreneurs. When profits are relatively easy to make in government contract work, there are fewer innovators willing to spend their time and their capital developing the next innovation that could revolutionize an entire industry.

Many of the chapters in this book offer specific ideas for how to spark immediate and substantial economic growth, but let's first consider one important aspect to growth not factored into economic arguments often enough.

Economic growth isn't an end unto itself. Growing the economy is a vital task for this generation because of what economic growth produces: a better life for millions upon millions of Americans and hundreds of millions of people across the globe. There is a certain virtue to prosperity. It inspires people, removes pressures that lead to embitterment and division, and allows us all to step back and get a healthy perspective on what is actually important in life.

The Pentagon was right in 2006 in believing that a vibrant, strong, and free economy makes for a vibrant, strong, and free nation. Prosperity brings with it material gains, but it also strengthens communities and allows all of us to reach our greatest potential. There is an imperative to grow.

Brendan Miniter is the editor of “The 4% Solution: Unleashing the Economic Growth America Needs,” from which this excerpt was taken; it will be released Tuesday. E-mail Brendan Miniter, the senior editorial director at the George W. Bush Institute, at bminiter@yahoo.com.

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