Arrogance Surplus Leads to Government Excesses

July 14 (Bloomberg) — What helps business? President Barack Obama seems to think putting a complaining executive on a prestigious committee is the answer.

That's what Obama did when he responded to Verizon Chairman Ivan Seidenberg's complaint about policy uncertainty with invitations to chat and a seat on a committee studying exports. Democrats think that the way to help business is to create a small business fund, at least according to legislation proposed by Senate Finance Committee Chairman Max Baucus.

Nobody knows what Republicans think about business. To judge by its chatter this week, the Grand Old Party solution for business has something to do with curtailing the distribution of medical marijuana.

The problem for all is that business isn't an identifiable person, group or company. Good policy is what might be called humble policy. It starts with admitting what we don't know. That includes who will lead growth in 2011 or 2012, where that person lives, and how he or she will get capital. Humble policy then goes on to concentrate on trying to let our economy become that broad space that future businesses and industries still unknown, might find inviting.

Humble policy is, of course, hard for a U.S. Congress to get its head around. Policy, in lawmakers' minds, is all about knowing and crafting smarter law. Lawmakers are arrogant in their certainty that voters will never accept policy that doesn't reward voters like Pavlov's dogs. Lawmakers are also certain that they shouldn't be seen to write law that will help the rich in the future. But again, there is that mistake: they are assuming they know who the rich will be.

First Step

But to the plan. Humble step No. 1: Permanently set tax rates lower for all. That means keeping the dividend tax low, keeping the top income-tax rate at 35 percent and sustaining the capital-gains rate at 20 percent or lower. Cutting the corporate tax would help the U.S. compete with the rest of the world.

Even better would be to pass the plan of the humble congressman, Republican Paul Ryan of Wisconsin. The Ryan plan advocates abolishing taxes on capital gains and dividends, and reduces the top marginal rate on income taxes to 25 percent.

Lower taxes would increase growth. When President George W. Bush and Congress lowered dividend and capital gains rates taxes, they increased gross domestic product by 0.25 percentage point. When President Bill Clinton and Congress lowered the capital gains rate in the 1990s, growth likewise increased. The revenue from the cuts were in both incidents higher than static analysis from federal offices predicted.

Cutting Regulation

Cutting regulation, including the new health-care mandate, would generate the missing jobs that are driving our political and policy debates. It is the definition of arrogance to assume employers can afford the modern mandates.

The next humble step would be to set policy to benefit the overall economy, not any specific group. The Obama administration's new emphasis on exports is misguided. Promulgating export policy may help one politician through one election cycle. But overall, emphasizing exports ignores that exports may not be the area in the U.S. economy where growth will be most productive. Therefore export politics misallocates economic resources.

Plenty of lawmakers tell themselves they are too clever to back exports. Instead they want to target help to entrepreneurs, and offer, of course, a specific definition for what an entrepreneur is. But doing this, they begin to commit the same error as the export mercantilists.

Dropping Stimulus

The third humble policy is demanding a serious commitment from lawmakers to abandon fiscal stimulus. Stimulus spending represents an even worse misallocation of resources than export promotion. Optimal of course would be if Washington used savings it gets from abandoning stimulus to pay for the supposedly impossible task of maintain the Bush tax rates.

The fourth humble move is up to voters. It is to reduce expectations about entitlements. This would be easier to do if the fifth and final requirement were met: electing lawmakers or hiring government advisers with an ability to demonstrate humility.

One such humble hero in the wings is Mitch Daniels, Republican governor of Indiana. Daniels spent time in the second Bush administration as director of Office of Management and Budget, so he knows the details of crafting, say, a humbler Medicare policy. Ryan, the congressman, may also meet the humility criterion.

Right now there's little evidence of humble vision in Washington. At a hearing on the future of taxes in the Senate Finance Committee this week, for example, the debate will range from extending the Bush rates for some to extending them for all to extending them for none. Any other possibility, deeper cuts for example, will be ridiculed because it won't fit the pay-as-you-go budgeting regime. And tax cuts never will meet that standard, goes the argument, because lawmakers will never be willing to make the offsetting spending cuts.

Even as it is ridiculed, humble policy still is worth laying out. Doing so reminds us that what is failing us isn't our economy, but our politics.

(Amity Shlaes, senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.)

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