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11.25.10

Grow Our Way Out of Deficits

Amid unprecedented political rancor, the right and left both agree on the need to fuel economic growth through entrepreneurship. Doug Schoen on a non-partisan path to debt reduction.

Two bipartisan proposals to manage and reduce the budget deficit were released last week—the first by former Republican leader Alan Simpson and former Clinton chief of staff, Erskine Bowles, co-chairmen of the Bipartisan Commission on Fiscal Responsibility and Reform, and the second from the Bipartisan Policy Center, led by former Senator Pete V. Domenici (R-NM) and Alice Rivlin, former budget director for both the Congressional Budget Office and President Clinton.

Each of these plans emphasize spending cuts and tax reform as a means of reducing the budget deficit and getting the national debt down to 60 percent of GDP.

The Bowles-Simpson plan calls for cuts in all excess spending—defense spending, domestic discretionary spending, entitlement spending, and spending in the tax code beginning in 2012 to bring spending down to 22 percent and eventually 21 percent of GDP, while the Domenici- Rivlin plan calls for a Social Security payroll tax holiday next year, cutting and simplifying individual and corporate tax rates, creating a new 6.5 percent national sales tax, and spending cuts including a four-year freeze on domestic programs, and a five-year freeze on defense.

But what is missing in both plans is an emphasis on the centrality of economic growth as both a means of reducing the deficit and emerging from this prolonged period of economic weakness.

If economic growth were a half point faster than expected each year over the next two decades, the needed annual spending cuts and tax increases would drop by 40 to 50 percent.

Policymakers should take heed of The New York Times' David Leonhardt's call this past Wednesday to "make sure that any deficit-cutting plan does not also cut economic growth."

In order to recapture America's historic growth rate of at least 3.3 percent we need a pro-growth strategy that focuses on cutting funding for programs that do not spur economic growth and increasing funding for those that do.

A pro-growth, pro-entrepreneurship agenda can unite the left, right, and center at a time when they are irrevocably moving in different directions.

How then can we guide the economy back onto a strong growth path?

To cultivate economic growth, policymakers in Washington must put forth a practical, achievable and pro-growth agenda to remove barriers to growth and generating a stronger, healthier and more competitive economy.

Specifically, they should:

• Declare a payroll tax holiday for new businesses so they can invest in new jobs.

• Expand the federal research and development tax credit to businesses that invest in research and development, and increase research grants to small businesses that are developing new technologies.

• Grant a two-year extension of the Bush tax cuts for those making more than $250,000, and a permanent extension of the cuts on incomes of $250,000 a year and below.

• Immediately make permanent the option for businesses to fully expense capital costs.

• Reform immigration policy, granting citizenship for foreign students graduating from American universities and other immigrants who want to start new companies and create jobs.

• Extend the Small Business Innovation Research program, and expand lending through the Small Business Administration's loan program to encourage more start-ups and enable small businesses to hire and train more workers.

• Jumpstart the economy by investing in green technology and create new jobs and make the United States a leader in clean energy manufacturing, especially solar, and expand the innovation and development of renewable energy.

• Create a National Infrastructure Bank as proposed by President Obama in his 2008 campaign. This bank will take infrastructure decisions out of the hands of politicians and out of the world of pork barrel politics, end the infamous "bridges to nowhere," and make infrastructure decisions that contribute to growth.

Moreover, we must provide new incentives to entrepreneurs and small businesses.

It seems the most overlooked economic reality in Washington today is that nearly all new net job creation in the United States occurs in firms less than five years old. It's been this way, statistically, since 1980: the brash young start-ups become the behemoths of tomorrow. Many of the most successful among these companies—stalwarts such as Microsoft, Genentech and CNN—were founded during recessions or bear markets.

Put simply, entrepreneurs and the new businesses they start represent our nation's best hope of emerging from this prolonged period of economic weakness. Faster growth requires even more successful startups.

Research by the Ewing Marion Kauffman Foundation—whose work is focused on economic growth and entrepreneurship on an absolutely nonpartisan basis—shows that in virtually every recession, it is the small business sector—that creates the jobs that bring the economy out of recession—and the entrepreneurs—who pursue new business ideas, undertake risk, invest their own capital, and create new firms—that are the most important actors in the drama of job creation.

Over the past few years, the Kauffman Foundation has probably been the singular voice  emphasizing the need to promote growth, entrepreneurship, and economic development as a means of trying to reduce the deficit.

Schramm's Law, which Forbes Publisher Rich Karlgaard rightly credited to Carl Schramm, president and CEO of the Kauffman Foundation, focuses centrally on the promotion of entrepreneurship as the key to restoring America's economic growth and can be used as a blueprint to guide the economy back onto a strong growth path.

Earlier in the year, Schramm participated in President Obama's White House jobs summit, where he was one of the most articulate and ardent advocates of a pro entrepreneurship economic policy. Recently, Schramm has been praised by Karlgaard, an ardent supporter of supply-side economics, and The Washington Post's Steven Pearlstein, a traditional liberal Democrat, who said that Schramm's commitment to "studying and nurturing entrepreneurship" as president of the Kauffman Foundation and ability to "rebuild bridges" makes him an ideal candidate for Commerce secretary.

The case of Carl Schramm is illustrative not only for its thinking but that a pro-growth, pro-entrepreneurship agenda can unite the left, right, and center at a time when they are irrevocably moving in different directions.

There is broad consensus from the center left to the center right that we have to get control of our deficit to remain competitive at home and overseas. But what there has been insufficient recognition of is the centrality of economic growth—an approach that can unite people of different views to achieve a fundamental national goal.

Douglas Schoen is a political strategist and author of the upcoming book Mad as Hell: How the Tea Party Movement is Fundamentally Remaking Our Two-Party System to be published by Harper, an imprint of HarperCollins on September 14. Schoen has worked on numerous campaigns, including those of Bill Clinton, Hillary Clinton, Michael Bloomberg, Evan Bayh, Tony Blair, and Ed Koch.