December 11th, 2011
09:30 AM ET

Zakaria: The real burden on the U.S. economy

By Fareed Zakaria, CNN

President Obama gave an important speech in Kansas last week. Whether you agree with all of it or not, he has begun a national conversation about the economy and the role of government. That's what this election should be about. And in presenting his view, Obama shifted the economic conversation from deficits alone to the crucial issue of growth. After all, deficits matter because they could have a harmful effect on growth.

So the question we should all ask is: What would make this economy grow? What has stopped it from growing much over the last few years - indeed over much of the last decade?

One theory heard a lot these days is that the economy is burdened by excessive government regulation, interference and taxes. Cut them, the Republican candidates all say, and the economy will be unleashed.

It's a compelling picture, but the data simply do not support it.

The Organization for Economic Cooperation and Development (OECD) released a study last week measuring tax revenue as a percentage of GDP. Of the 30 countries studied, the United States came in 27th. Taxes are low in historical terms as well - the lowest since the early 1950s.

The Kauffman Foundation, which looks at the level of U.S. entre­pre­neur­ship, found that in 2010, 340 out of every 100,000 Americans started a business each month. That rate hasn’t changed much in the past few years; it is only slightly higher than in 2007, before the recession. Regarding regulations, Bloomberg News has crunched the numbers and found that the Obama administration has not reviewed or issued significantly more rules than its predecessors.

Or look at competitiveness. The World Bank publishes a report that looks at "Doing Business" across the globe. The U.S. ranks 4th in the world. The World Economic Forum does an annual ranking of overall economic competitiveness. The U.S. ranked fifth. In both these rankings, the countries that score higher are tiny places like Singapore and Finland, with populations often at 5% that of the United States.

And these rankings have not slipped much over the last decade. So where has there been change? Where have we slipped?

The answer is pretty clear. Only five years ago, American infrastructure used to be ranked in the top 10 by the World Economic Forum. Now we're 24th. U.S. air infrastructure has gone from 12th in the world to 31st - roads from eighth to 20th.

The drop in human capital is even greater than the drop in physical capital. The United States used to have the world's largest percentage of college graduates. We're now number 14, according to the most recent OECD data, and American students routinely rank toward the bottom of the developed world in international tests.

The situation in science education is more drastic. Even with the increase in college attendance over the past two decades, there were fewer engineering and engineering technologies graduates in 2009 (84,636) than in 1989 (85,002). Research and development spending has risen under Obama, but the basic trend has been downward for two decades. In percentage terms, the federal share of research spending - which funds basic science - is half of what it was in the 1950s.

In other words, the big shift in the United States over the past two decades is not a rise in regulations and taxation but a decline in investment - in physical and human capital. And investment is the crucial locomotive of long-term growth. In our interview, Michael Spence, the Nobel Prize-winning economist, pointed out that the United States got out of the Great Depression because of the spending associated with World War II but also because during the war, the U.S. dramatically reduced its consumption and expanded investments. People spent less; they saved more and bought war bonds. That surge in investment - by people and government - produced a generation of growth after the war.

If we want the next generation of growth, we need a similarly serious strategy of investment.

Read more on this in my column in The Washington Post this week. For more of my thoughts throughout the week, I invite you to follow me on Facebook and Twitter and to visit the Global Public Square every day.

soundoff (343 Responses)
  1. alidonfong

    New Gateway to Central Asia and Europe.

    With a
    population of over 180 million most of whom are well educated, english
    speaking, entrepreneurial, a cultural and social fit with Central
    Asians...Pakistan will now become the new face and gateway to Central Asia and
    Europe. Pakistan will thus span this region and provide the impetus for growth,
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    for Pakistanis who should now look forward to their new leadership role aligned
    with Central Asia and Europe rather than the Subcontinent. We wish them much
    success as they have sacrificed the most during the past 30 + years creating a
    new world order

    December 13, 2011 at 1:19 pm | Reply
  2. johnny

    I have been advocating all along the same answer for USA to rise above it's present pessimisticf doldrums. Michael Spence is practically and realistically brilliant.

    Americans must stop this old and prolonged , health wrecking, unaffordable habit of eating – and spending- more then they need.

    If the current 65% obese, fat, Americans cut down on their consumption – and start saving money wasted on them, USA is on the road to healing its economy and strengthening its financials.

    During the Grea Depression Americans were niec, slim and healthy, but after WWII ended fatness crept into American society again.

    December 14, 2011 at 12:34 am | Reply
  3. jim ward

    The important thing is to invest in profitable things. You can't blow it all on cash for clunkers or aid to some country who hates us. You ought to spend on something with returns.

    December 14, 2011 at 8:04 pm | Reply
  4. Roland

    A general comment that if an organization is mentioned and the results of their study, it would be nice to have a link to an abstract of the organization. Information as to their charter, mission and how they sustain their organization would help in deciding their purpose in conducting the study. I am sure we all can cite studies that make a case.

    December 18, 2011 at 10:39 am | Reply
  5. Oh, Really?

    The real burden on the US economy is the public sector unions and their obscene pensions.

    What do you think is killing Europe?

    It's the pensions.

    December 22, 2011 at 7:19 am | Reply
  6. Joel

    I don't hear people suggesting novel ideas to get us out of the doldrums. The truth is that we are not in a position to use government spending the way it was used in WWII due to the size of the debt, relative to the GDP. However, that doesn't leave us powerless.

    What we need is capital spending in the U.S. to create jobs. The way to get it is to fix the capital gains tax. Six months is not really long term capital gains, nor should people receive tax breaks on foreign capital gains.

    I propose that capital gains be taxed at 18% after one year, 16% after two years, 14% after three years, etc. until reaching zero. Furthermore, the capital gains tax rate should only apply in proportion to the percentage of assets that a company has within the U.S. These moves would have a big effect on where people put their money and how long they hold it there. The stock market would be more stable and companies would be encouraged to build within the U.S.

    It would take a populist movement to get this kind of change.

    December 23, 2011 at 2:33 pm | Reply
  7. ErnestPayne

    Hey Fareed. How is the war in Iraq going? Declared victory yet? You were all eager for the war before it started.

    January 24, 2012 at 6:02 pm | Reply
  8. homes in orcutt

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    July 25, 2012 at 10:05 am | Reply
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