1 What Will Determine Our Economic Future? Michael J. Boskin Tully M. Friedman Professor of Economics Senior Fellow, Hoover Institution Senior Fellow, SIEPR Stanford University Stanford Institute for Economic Policy Research Associates Meeting Stanford University June 4, 2015

Seven Big Questions On America’s Economic Future 1.Short-run outlook: cyclical or structural weakness? The Yellen FED, fiscal policy: risk in the exit from extreme measures? 2.Are productivity-enhancing technology gains weakening? Will the effects of technology and globalization on labor markets abate? 3.Will demography overwhelm our fiscal, economic, and global position? Will debt and taxes lead to Japanese or European-style stagnation? 4.Will our future labor force be well-enough educated? Will we have enough workers? 5.Will we reconcile energy needs, environmental concerns and economic growth, given North America energy revolution? 6.What will the future of international trade, finance and institutions, especially Europe, the BRICs, and Mideast look like? Plus war, terrorism, global instability 7.Are democracy and robust capitalism ultimately compatible? (N.B. Stanford scholars doing important work on all of these issues) 2

3 post WWII (1947-present) average = 3.2%

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U.S. GDP Growth Projections 5

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10 Will Demography Overwhelm Our Fiscal, Economic, and Global Position?

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Defense Spending as a Percent of GDP 12

How High Would Tax Rates Go? To finance projected spending on entitlement growth, marginal tax rates would reach 60-70% for many, higher still at the top 13

Will Our Future Labor Force Be Well-Enough Educated? 14 Source: OECD Program for International Student Assessment, Tests are given to 15 year-olds across 65 countries.

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16 N.B. U.S. also now the leading producer of natural gas

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21 World GINI Index sources: Xavier Sala-i-Martin, OECD, World Bank

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Agenda for Prosperity (1) Roll back the excesses of the welfare state, restore better balance between individual responsibility and incentives and social responsibility BEFORE it’s too late: Additional medium-run fiscal consolidation, enacted soon, and difficult to reverse, but phasing in gradually as economy recovers Long-run entitlement and tax reform: maintain strong incentives while reducing subsidies to the well off; broaden tax base to more economic activity and more people Social Security: indexing, retirement age Medicare: age, competition, premium support a la Ryan-Rivlin, Wyden-Ryan Tax: transition to broad based consumed income tax with lowest rates possible to raise necessary revenue; corporate tax: broad base, lower rate, territorial system (ideally integrated with personal tax) 23

Agenda for Prosperity (2) Budget reform: making programs more effective by eliminating, consolidating and modernizing; process reform; fiscal constraints; governance Make fiscal and monetary policy much more predictable and permanent, eliminate endless use of temporary features Human capital policy (education, training, and immigration) Trade policy: TPP, TTIP, Doha; NAFTA 2.0 and beyond Regulation policy, including more sensible financial regulation; regulatory budget => A more efficient, effective, predictable growth-oriented government strategy that uses policy interventions as a last, not first, resort 24

My Cautious Optimism (1) Previous “crises” Tendency to overstate the durability of the boom or bust 1960s: automation s: stagflation, OPEC, competition from Japan Recently, oil, China, fragile financial system But American economy adapted and policies corrected: Reagan, Bush ‘41, Clinton 25

My Cautious Optimism (2) Great American advantages: Best higher education system in the world Highly productive work force Deepest most liquid capital market (dollar global reserve currency) Most innovative companies, from IT to oil and gas Diverse population supportive of earned success, despite demagoguery North American energy revolution Less severe demographic pressure, and less bloated welfare state than other major economies But not immutable, e.g. K-12 anti-competitive forces and poor policy Test political capability to make serious, even existential, long-run decisions Churchill on America 26