The 5% U.S. GDP Growth Project

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Includes: SPY
by: Morgan Myrmo

"Coming together is a beginning, keeping together is progress, working together is success." - Henry Ford

The current U.S. GDP is growing at a declining rate when measured by post-recession GDP statistics. This is alarming as the U.S. currently employs the lowest historical interest rates in a time of relative domestic tranquility.

With a deep understanding of political economics, coupled with the low cost of communication, a high level of domestic education, enormous technological advances and a healthy domestic workforce, the United States is capable of employing a multi-tiered economic solution that would entail a short-term real GDP growth rate of 5%.

U.S. GDP Historical Trends: 1993-2013

Using the last 20 years of data, the following GDP statistics are derived from the U.S. Bureau of Economic Analysis and quarterly GDP is measured at an annual rate. The forward looking statistics use a 1.9% GDP Q4 2013 estimate.

  • 1993-2012 Mean Annual U.S. GDP Growth = 2.6%

The 20-year GDP growth trendline, as noted in the chart below, showcases that U.S. economic output has increased in a declining rate since 1993.

This time period saw intense economic swings that included both the dot-com and real estate bubbles. While the dot-com bubble slowed economic growth considerably, the real estate bubble that led to the global financial crisis (GFC) contributed to five quarters of negative GDP growth between Q1 2008 and Q2 2009.

To take a closer look at the current trend, one may use the recent five-year period, which includes negative growth from the GFC bloodbath. By looking at the GDP growth trend over this period, it appears that economic output has been expanding at an increasing rate.

In measuring the economic strength of the current bull market however, one must begin with Q3 2009, the first quarter of positive economic growth. In the 18 quarters from Q3 2009 to Q4 2013, the U.S. saw 17 quarters of positive GDP growth.

This bull market, however, is marked by the same trend as the 20-year declining GDP growth rate. Although it is slight, since Q3 2009 the economic expansion has grown at a declining rate.

When averaging the quarterly growth rate with the previous three quarters, one could find a smoother measurement of the current expansion that eliminates the one quarter of negative growth.

The trend of a slowing expansion remains apparent when measuring the GDP growth of the current business cycle on the above rolling measurement. To reverse this trend, GDP growth of 3.8% would be required in Q4 2013.

The average estimate of Q4 2013 GDP is only 1.9% however, which showcases that this declining growth trend is to continue into 2014. Other recent predictions include The Goldman Sachs Group, Inc. (NYSE:GS) at 1.5%, the Philadelphia Federal Reserve bank at 1.8% and WSJ economists at 2.2%.

The 5% U.S. GDP Growth Project

There are several reasons to be bullish on the U.S., stocks and economic growth. Current economic indicators such as job growth and continued positive GDP growth, coupled with the low cost of money and domestic tranquility, all point to support this theory. As such the S&P 500, as measured by the SPDR S&P 500 Index ETF (NYSEARCA:SPY), has achieved new all-time highs during several months of the 2013 calendar year.

To establish a domestic short-term GDP growth rate of 5% would be even a larger boon to the U.S. economy and would quickly lead to increased global economic expansion. With a booming global economy, asset prices would rise and unemployment would fall. In this rosy picture investors, business owners and workers would all win.

The Risks To Higher Growth

So what's to stop it? Government plays a leading role as political greed, infighting and self-serving interests currently prevent the evolution of advanced economic policies that would all but ensure rapid GDP growth.

While politicians move slow and serve themselves first, economic policy is held up. Other than monetary policy, which is determined by the Fed, most economic policies that would make a difference to GDP growth are priorities that can only be tackled on a national level.

The following five growth priorities, if addressed with national priority, would add enough growth to GDP to easily hit the 5% mark by 2015. These priorities address human capital, social stability, the risk incentive, economic integration and government spending.

Economic Growth Priority #1: Education, Increase Human Capital

On a domestic scale the United States is a leader in education. According to the Education Index, which is part of the United Nations Human Development Index and measures the mean years and expected of schooling in a country, the U.S. ranks well with a 96.1% score. Below is a sample of other nations, also, the scores ranged from 99.3% to 28.2% with developed countries all scoring above 80%.

Like a racehorse that hasn't eaten in a day, the U.S. is set for the win but has gaps in human capital that are sustained by skilled immigration. By lowering the costs associated with allowing such immigration, the U.S. could fill these gaps quicker, thus strengthening the economy.

Also, by allowing children of alien status citizenship, a new crop of legal immigrants would create a larger pool of talent that would work legitimate jobs, pay taxes, consume goods and thus lend a hand to economic growth.

Economic Growth Priority #2: Social Stability

The U.S. unemployment rate has dropped from 10% in October 2009 to 7.3% as of October 2013 and the U.S. Social Security system is stable for the time being. With short-term unemployment declining and a stable domestic Social Security system, economic activity will naturally rise. There are key threats to social stability however, which include the increasing domestic wealth disparity and the long-term stability of Social Security.

In addressing economic inequality, as measured by the Gini Coefficient, the gap between the rich and the poor is at an all-time high. According to the U.S. Census Bureau, the U.S. Gini Index was .477 in 2012, up 5.3% over the past 20 years. The range of the index is zero to one, where zero signifies total income equality and one represents total income inequality.

Such economic inequality may give rise to instability, which would come at the cost of economic growth. One example of social unrest reflecting the wealth disparity is a fast-food worker strike planned for December 5, 2013.

To solve the wealth disparity, the U.S. has had a progressive tax system as well as Federal minimum wage laws. These policies have not worked to reduce income inequality, which is the largest factor in wealth disparity.

The solution, for starters, is to instill financial education into the secondary education system. If the young are required to learn about saving, investing and rates of return, then they are more apt to have a greater amount of wealth in the future.

Other areas the government can help with income inequality is to pass economic and tax policy laws that encourage investment in domestic infrastructure and job creation. Simple strategies here include a U.S. tax holiday on the repatriation of foreign income, unemployment and welfare accountability, lower corporate tax rates and reduced taxation on investment income.

Economic Growth Priority #3: The Risk Incentive

The U.S. is a giant pool of human capital and the rewards of innovation and risk are completely safe and legal financial gain, yet high taxes threaten the risk incentive.

U.S. tax policy is inefficient, as noted by several economists and leading authorities such as Steve Forbes and Art Laffer. According to both Forbes and Laffer, a flat-tax system would create more jobs, investment and tax revenue. The increase in government tax revenue is seen here in the Laffer Curve.

In this regard, the government has an opportunity to increase revenues, investment and economic output at once. The current administration does not favor lowering corporate taxes or creating a flat tax system.

The country is able to hold with high levels of taxation due to several variables such as social stability and a lack of alternative nearby alternatives (as seen in Europe). However an efficient U.S. tax policy favors an increase in prosperity.

By implementing a flat tax, disbanding the IRS and enacting a cessation to the many tax loopholes, Americans would save money that could be used for consumption, savings and investment.

Inefficient jobs would be eliminated in this regard, such as IRS workers and many accountants and tax attorneys. The bump in GDP would likely be great enough to create enough productive jobs however, effectively outweighing this loss while moving the country towards economic efficiency.

Economic Growth Priority #4: Global Economic Integration

As a leader of the global economy, the U.S. is completely integrated with the rest of the world. With safe and easy travel, expedient shipping and a world-class network of communication, resource distribution is becoming more efficient by the year.

With low international tariffs and legal trade legal between most countries, the U.S. is able to import and export on a massive scale and to utilize comparative advantage.

Regarding trade, the U.S. is able to further increase economic output by creating a new economic policy to abolish all international tariffs.

By ending such taxation, imported items will cost less and increase U.S. purchasing power. With negotiations of simultaneous tariff reductions on both U.S. imports and exports, economic output will increase.

While there is a larger issue here, specifically an argument regarding American jobs, one must consent that mercantilism never worked. In this understanding, economists would note that job mercantilism via tariffs reduces global economic growth through an efficiency loss. In essence, job loss due to tariff eliminations would be offset by global efficiency gains, global job creation, a domestic GDP increase and thus a bump in domestic job creation.

Both global and domestic economic output can be increased by opting for a tariff-free world. In this regard, international taxation can be rendered obsolete if the global economic goal is increased expansion and aggregate utility. As the leader of the global economy, the U.S. is in the leading position to take down such trade barriers in the name of economic efficiency and global utility.

Economic Growth Priority #5: Government Spending And Stability

For a short-term, immediate fix to the global financial crisis, the U.S. government favored the Keynesian approach to increasing immediate economic output through government spending. Although it worked at what could arguably be the cost of an inefficient use of capital, government spending has not been restrained.

The U.S. economy has the potential to reign over unprecedented growth if lower government spending, lower regulation and lower taxes were to accompany current low interest rates.

In addition to a smaller size, the government must also remain stable to ensure future debt obligations are financeable and as such, financed at the lowest possible rates. Political infighting that threatens the function of the government itself should be contained in Washington, thus limiting the public cost to the free time of the politicians involved in such a dispute.

Conclusion

Through political agreement and swift changes to economic policy, the U.S. government has several avenues available that would positively influence economic growth. By creating a more efficient economy, U.S. nominal GDP growth could top 5% annually.

In an effort to put aside political differences, personal interests and short-term self-preservation, by coming together the government would actually increase total revenues and create problems on which social good to spend money on, rather than continually borrow to finance capital inefficiency. By exploring such avenues that prioritize economic growth, aggregate utility would increase, thus making people the ultimate long-term winners.

For an in-depth analysis regarding these five areas that the U.S. could influence higher GDP growth, please read Now Is The Time To Be Bullish (Part 3): The State Of The Political Economy, published October 30, 2013.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.