Former Minnesota Governor Tim Pawlenty, in a major economic speech last week, called for targeting a 5 percent economic growth rate, arguing that “such a national economic growth target will set our sights on a positive future. And inspire the actions needed to reach it.”
I disagree with the target, but agree with the aspiration. Five percent growth is possible in any given year, and may even be likely as the economy eventually recovers and America’s idle stocks of labor, capital, and technology are again fully utilized. Over the long term, however, 5 percent growth really isn’t consistent with a labor force that will grow by only around half a percent per year, with productivity growth required to make up the difference. Five percent is just too high a bar to reach. An aging population means slower labor force growth and, all other things equal, slower economic growth.
But it’s that aging population that also makes it so is important to focus on economic growth. When smaller populations of workers have to support larger populations of retirees, you need the workforce to be as productive as possible. It’s only by raising output that population aging doesn’t get to be a tug of war over resources between the old and the young.
My shorthand is that to support an aging population you want policy to encourage individuals to:
—Work more: Meaning more hours of the day and more weeks of the year;
—Save more: Meaning more participation in employer pension plans and higher contributions into them; and
—Retire later: which means not claiming Social Security at 62 like many people do today, but at 65, 66, or beyond.
This context makes clearer why I oppose relying too much on taxes to fix entitlements and the budget. Higher taxes mean that people will:
—Work less: Since they’ll receive less for each hour of work;
—Save less: Since they’ll have less money to save and less reason to save, since those taxes will support more generous entitlement programs; and
—Retire earlier: Since Social Security and Medicare benefits will look more generous relative to their after-tax pay when working.
Obviously the execution is a lot more complicated than this, but the basic logic isn’t. Economic policy shouldn’t be about a number, be it 5 percent or whatever, so much as about a sign: positive or negative. If you need a stronger economy to thrive then you want public policy to encourage the things that lead to a stronger economy, not a weaker one. And it’s there, more so than in the details, where Pawlenty’s on basically the right track.