Policy: Economy

Interview: Economist Tim Kane on America’s economic power

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China,PennAve,Joseph Lawler,Economy,Analysis

Read an article about China’s economy, and you’re likely to learn that it’s been averaging 10 percent yearly economic growth since 1978, while America’s been averaging less than three.

What you’re probably not going to read, though, is that Chinese economic output per person — the metric economists watch most closely — is only about 12 percent of that of the U.S, according to the World Bank.

That’s a problem, worries Tim Kane, the chief economist of the Hudson Institute. The public has a false impression of China’s economic strength relative to America’s.

Kane, with Glenn Hubbard, the dean of Columbia’s business school and a former top economic adviser to president George W. Bush, went through 50 newspaper articles about China’s economy. Eighty percent of the pieces mentioned China’s catch-up rates of economic growth, but fewer than 10 percent mentioned China’s still-tiny gross domestic product per capita.

Kane and Hubbard decided to correct the record on economic power in a new co-authored book "Balance: The Economics of Great Power from Ancient Rome to Modern America."

“Glenn and I felt that the current conversation about economic power is thin gruel,” Kane said in an interview at the Hudson Institute’s D.C. offices.

“The whole literature on foreign affairs is loaded with phrases about power. Smart power, soft power, superpower. They’re not measurable concepts. There’s so much vagueness. So we wanted to add some teeth to that conversation.”

They added teeth by devising a new formula for economic power, one meant to give a clearer sense of countries’ relative stature than the usual statistics, such as gross domestic product. Kane and Hubbard’s measure of economic power reflects not only the size of a country’s economy, but also the rate of its growth and its productivity (how much output it squeezes out of its resources).

The good news for America, by this standard, is that China’s economic power is only 40 percent that of the U.S.

The bad news is that, for the first decade in “measurable history,” according to Kane, America’s power is trending down.

Kane insists that "Balance" is not “a declinist book, but it has some warning signs” for the U.S. He and Hubbard try to get to the bottom of what’s sapping America’s power in the hopes of sketching out a solution.

The loss of American power, Kane says, fits into a pattern of other major historical world powers losing their top status. Kane reels off the reasons countries lose “balance,” as suggested in his book’s title: “overcentralization or loss of federalism, political stagnation. There’s a superiority complex. There’s also behavioral concept called loss aversion: when countries or people are afraid of losing wealth, they become more protective of what they have and less willing to create new things. So there’s a downturn in innovation and a tendency for special interests to control the political process.”

To pin down the precise threats to U.S. dominance, Kane says, the two authors asked themselves, “who are the new Praetorians?

“The Praetorian Guard were a special set of Roman Legionnaires recruited to protect the emperor. But over the course of centuries, they became the kingmakers. And they would assassinate emperor after emperor after emperor, to ratchet up their own pay and benefits. So who controls the strings, who are the kingmakers, what special interests control our political process?”

Democrats might say that Big Business constitutes the new Praetorians, and Republicans might nominate Big Labor. Kane doesn’t disagree with anyone: “Those are both absolutely players.”

But the even greater concern “is the lack of entrepreneurship in our politics.” Up until recently, “you might even say political entrepreneurship was outlawed by federal election campaign laws. ... Literally, you couldn’t have a third party. Or, you couldn’t if you want to organize a group to be politically active and make independent expenditures. Contrary to the notion of free press, we had a huge federal bureaucracy that existed to authorize or punish you if you spoke in unapproved ways.”

Some recently interpreted "Balance" ’s call for greater political innovation as a call for a third major party, which would be an awkward development in light of Hubbard’s close ties to the Republican Party (he was an economic adviser to Mitt Romney’s presidential campaign and a member of George H.W. Bush’s Treasury Department, in addition to working for Bush 43). For his part, Kane expects a “renaissance” in political entrepreneurship “thanks to the Citizens United decision” in which the Supreme Court ruled the government could not restrict independent political spending by corporations or unions.

But the most concrete recommendation in "Balance" is not a call for undoing federal elections laws. It’s an attempt to address what the authors see as the most obvious imbalance in U.S. governance, namely fiscal imbalance.

To lower the debt, Kane and Hubbard propose a balanced budget amendment — but one different from the numerous plans that have failed to gain traction in Congress over the decades, and most recently since the 2010 mid-term elections in which the Tea Party rose to influence.

“I think that the early proposed fiscal amendments were good ideas in theory, but they were poorly designed for implementation. You might say they were cars with five wheels,” Kane says.

The problem with past balanced budget amendments is that they would limit federal spending to revenues every year, creating logistical difficulties. “Critics of those approaches say, ‘wait a minute, you don’t even know what your revenues will be until they’re actually collected, so your outlays have to be defined ahead of time.’ You can’t even make this work pragmatically,” Kane warns. “Every year, there would be a Constitutional crisis that would go to the Supreme Court” when Congress struggled to immediately raise taxes or cut spending to match revenues, which can be highly variable.

“What Glenn and I say is: instead of mandating a balanced budget amendment within one year, let’s put the constraint not on balance, but on expenditures.” Kane and Hubbard’s amendment would constrain expenditures by tying them not to the previous year’s revenues, but to a moving average of the previous seven years’ revenues.

“That helps you deal with business cycles, Kane says. If revenues collapse in the current year, “that’s OK,” because the spending cap is based on the revenues of the last seven years. “So it can be a countercyclical, but balanced, approach to fiscal constraints.”

The advantage of the Kane-Hubbard balanced budget would be that “ in boom years, the legislature wouldn’t be allowed to overspend. In a way, it’d be a perfect constraint, a much more elegant approach.” Furthermore, Democrats, who traditionally oppose balanced budget amendments “have no excuse not to support” this balanced budget. “It doesn’t say you have to have smaller government,” and it doesn’t say you have to cut spending during a downturn. “Let’s have something politically neutral so we can get a consensus,” Kane begs.

“Speaking as an American and especially as a veteran,” says Kane, a retired Air Force officer,  “America should always try to have the most economic power. I think it’s good for the world, and it’s good for America.” The point of "Balance" is to define economic power to give America “an honest warning sign if we start to fall behind” — and to suggest a way to regain lost ground when we do.

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