America’s Growth Agenda
The Trump administration’s massive deregulation effort coupled with enactment of the Tax Cuts and Jobs Act passed in December 2017, has already done wonders for the U.S. economy.
As highlighted in this issue’s trend #3, there are now more open jobs than there are “unemployed” people. Wages are increasing, and consumer and business confidence is rising with them. Preliminary estimates show real second quarter GDP growth to be 4.2 percent and the Trends editors predict it will be revised higher.
As highlighted in our July 2018 issue, Americans are already recognizing the benefits of the administration’s pro-growth agenda as represented by bigger paychecks, lower taxes and more opportunities.
In the area of deregulation, the Trump administration has been particularly aggressive in halting costly Obama-era regulations that were in the pipeline as of January 2017. And it has also been focused on minimizing the number of new regulations it creates. For instance, in 2017, most agencies issued dramatically fewer regulations than in 2016.
To-date the most effective regulatory shifts have been those associated with the North American Energy Revolution. In 2019, regulatory changes will pave the way for massive infrastructure projects. Private sector projects will move ahead as the ROI becomes more certain. Meanwhile public sector projects with bipartisan Congressional support will move ahead funded by the sale of superfluous government assets.
In the regulatory sphere, a great deal can be done without involvement from Congress. So, as the administration fills the final positions in the executive branch and appoints more growth-friendly Federal judges, this process will accelerate. Most likely these executive and judicial appointment will become easier in 2019, as the partisan make-up of the Senate becomes increasingly conservative.
Tax policy is just one component of a broader plan to reindustrialize the United States. That’s why the first round of tax cuts in 2017, was aimed primarily at business. The primary objective was encouraging capital investment and reshoring. We can already see how this has paid off in the form of the huge Foxxcon plant in Wisconsin and the enormous investments made in the U. S. petrochemical industry.
The next phase of “tax relief” will focus more on the individual, with emphasis on investment and saving. This is particularly important when you consider that many Boomers, most Xers, and all-but-a-few Millennials lack the level of retirement savings needed to maintain a reasonable lifestyle.
Former Speaker of the House, Newt Gingrich, confirms that the administration sees deregulation and tax relief as two legs supporting a pro-growth agenda. However, he argues that a third leg is coming which will make the new American economy “rock solid.”
That third pillar is economic innovation, which will enable the private sector to find new breakthroughs which will make our lives better and make government itself more efficient and effective. That means that we’re no longer simply talking about making government smaller; we’re talking about making it highly cost-effective.
The bureaucratic systems we have across the public sector were designed for the Mass Production era. Over the past 30+ years, their de facto mission has been to grow and perpetuate themselves. Shrinking the current systems would only render them underfunded and ineffective. Instead, the objective is to replace them with modern systems for the Digital Era, which are lean, responsive and effective.
Consider one particularly egregious example. The Pentagon opened in 1941 to house nearly 30,000 people who managed a global war with manual typewriters, carbon paper and filing cabinets. There were no copiers or fax machines. Generating a single report required a group of people to draft it, a group to type copies, a group to distribute the copies, and a group of people to file them in the appropriate filing cabinets. And that primitive system supported a fighting force that was over 5-times the size it is today.
Now, consider how many people a private business would cut out when it shrank by 80% and replaced manual typewriters, carbon paper, and filing cabinets with iPads, personal computers, and fiber-optic networks. Yet, there are still nearly 30,000 people working in the Pentagon, today.
The technology has changed, but the Pentagon system has not innovated. The bureaucracy is still the 1941 size, moving at the 1941 pace. Figuratively speaking, we should be able to turn the Pentagon into a triangle, and (at a minimum) 40 percent of the building should be turned into a national defense museum. The result would be a leaner, more responsive defense apparatus that would make Americans safer at a dramatically lower cost to taxpayers.
As highlighted in the August 2018 issue, health care could also greatly improve the lives of Americans while saving a tremendous amount of money, by supporting innovations in health care practices and business models. This means creating incentives for healthcare providers to adopt “best-of breed” business models from around the world. Organizations like HCCI and AtlasMD, demonstrate that the cost of hospitals and primary care practices could be cut in half, if world-class “best practices” were adopted!
One initiative under consideration, would enable value-based contracting for government and private health-care providers. Other policies would mandate incentives toward good outcomes, better health, and lower costs, and truly standardized electronic medical records across all health systems.
Speaker Gingrish, cites another opportunity in changing the way we think of bio-pharmaceuticals. Instead of thinking of new medicines and medical research as being costly, we need to think about the economic benefit of curing expensive illnesses, like heart disease, cancer, and diabetes.
Why? Simply put, healthy people are more productive and the added economic value of these productive people will pay for the cost of developing and producing these drugs. Consider just three examples:
1. From 1970 to 2000, treatment for coronary heart disease greatly improved. As a result, more than 1 million peoples’ lives were saved, and they have added $1.6 trillion per year to our economy. This means that the additional economic output generated from coronary heart disease treatment improvements alone is roughly 40% as big as total (public and private) health-care spending in the United States.
2. Every time we decrease cancer mortality by 1 percent, it amounts to $500 billion in increased productivity, decreased treatment costs and other savings. So, curing cancer could be worth up to $50 trillion. And,
3. Alzheimer’s disease will be one of our most expensive challenges, going forward. If, by 2025, we were able to find treatments that would simply delay the average onset of the disease by five years, we would reduce the annual cost of treating it by $376 billion by 2050. The good news is that, as of mid-2018, there were 105 new Alzheimer’s drugs currently in testing.
The administration’s “innovation agenda” is important because it will make life better for Americans and it will also provide a path toward a balanced budget.
We have only highlighted examples in health care and national defense because they make up 27 and 16 percent of the federal budget, respectively. Yet, there are many other opportunities to streamline, innovate and improve across the entire federal system.
Given this trend, we offer the following forecasts for your consideration.
First, over the next two years, the administration will ramp up issuance of pro-growth regulations, particularly if it loses control of the House of Representatives.
In its first year, the current administration shelved unissued regulations developed in the latter portion of the Obama administration. It also worked with Congress to withdraw numerous Obama-era regulations. Then, in 2018, the Trump administration began issuing new regulations of its own. Some of these will certainly be challenged in court, but as more conservative judges join the courts, these regulations are more likely to stand up under judicial review. By 2021, the Trends editors expect the $2+ trillion in annual regulatory compliance costs to fall rapidly, further boosting economic growth.
Second, the next big step in President Trump’s economic revolution will be to index the capital gains tax, beginning in fiscal year 2020.
This bold step will dramatically accelerate economic growth, liberate capital, boost investment, and reward those who have had faith in investing in the American economy. The proposition is quite simple. With inflation, nominal values go up even if real values don’t. As a result, you can owe taxes on your investments ? even when their real value has declined. Former Treasury economist Gary Robbins estimates that starting to index capital gains for inflation, this year, would, by 2025, create an additional 400,000 jobs, grow the U.S. capital stock by $1.1 trillion and boost annual GDP by roughly $500 billion. That all translates to an additional $3,600 for the average household. And fortunately, experts “believe that the Treasury has administrative discretion to reinterpret ‘cost’ to take into account the economic reality that a ‘gain’ attributable solely to inflation adds nothing to the taxpayers real wealth or purchasing power. The term ‘cost’ is subject to more than one reasonable interpretation and is readily amenable to a construction that takes account of inflation. Furthermore, “the Internal Revenue Code does not require that the ‘cost’ of an asset be measured only as its original price, meaning there is no reason Treasury could not construe it in today’s dollars. And,
Third, a major component of the administration’s innovation program will involve the first wholesale reorganization and downsizing of the executive branch since the presidency of Harry S. Truman.
Mick Mulvaney, Director of the Office of Management and Budget has been working on this earth-shattering proposal since the 2016 election. From what we can tell this plan to reorganize the executive branch is incredibly promising and a successful transition will pay economic dividends for decades to come.
1. Fox News. June 22, 2018. Newt Gingrich. Beginning the Innovation Agenda.
2. Fox News. August 8, 2018. Newt Gingrich. Index Capital Gains Taxes Now.
3. Brookings Institution. June 29, 2018. Connor Raso. Where and why has agency rulemaking declined under Trump.