Is the United States exceptional? Of course we are! Two hundred years ago we were one of the poorest countries in the world. We accounted for less than 1% of the world’s total GDP. Today our GDP is 23% of the world’s total and more than twice as large as the No. 2 country’s, China.
America became the wealthiest country because for most of our history we have followed the basic principles of economic freedom: property rights, freedom to trade internationally, minimal governmental regulation of business, sound money, relatively low taxes, the rule of law, entrepreneurship, freedom to fail, and voluntary exchange.
The success of economic freedom in increasing human prosperity, extending our life spans and improving the quality of our lives in countless ways is the most extraordinary global story of the past 200 years. Gross domestic product per capita has increased by a factor of 1,000% across the world and almost 2,000% in the U.S. during these last two centuries. In 1800, 85% of everyone alive lived on less than $1 per day (in 2000 dollars). Today only 17% do. If current long-term trend lines of economic growth continue, we will see abject poverty almost completely eradicated in the 21st century. Business is not a zero-sum game struggling over a fixed pie. Instead it grows and makes the total pie larger, creating value for all of its major stakeholders–customers, employees, suppliers, investors and communities.
So why is our economy barely growing and unemployment stuck at over 9%? I believe the answer is very simple: Economic freedom is declining in the U.S. In 2000, the U.S. was ranked third in the world behind only Hong Kong and Singapore in the Index of Economic Freedom, published annually by this newspaper and the Heritage Foundation. In 2011, we fell to ninth behind such countries as Australia, New Zealand, Canada and Ireland.
The reforms we need to make are extensive. I want to make a few suggestions that, as an independent, I hope will stimulate thinking and constructive discussion among concerned Americans no matter what their politics are.
Most importantly, we need to radically cut the size and cost of government. One hundred years ago the total cost of government at all levels in the U.S.–local, state and federal–was only 8% of our GDP. In 2010, it was 40%. Government is gobbling up trillions of dollars from our economy to feed itself through high taxes and unprecedented deficit spending–money that could instead be used by individuals to improve their lives and by entrepreneurs to create jobs. Government debt is growing at such a rapid rate that the Congressional Budget Office projects that in the next 70 years public money spent on interest annually will grow to almost 41.4% of GDP ($27.2 trillion) from 1.4% of GDP ($204 billion) in 2010. Today interest on our debt represents about a third of the cost of Social Security; in only 20 years it is estimated that it will exceed the cost of that program.
Only if we focus on cutting costs in the four most expensive government programs–Defense, Social Security, Medicare and Medicaid, which together with interest account for about two-thirds of the overall budget–can we make a significant positive impact.
Our defense budget now accounts for 43% of all military spending in the entire world–more than the next 14 largest defense budgets combined. It is time for us to scale back our military commitments and reduce our spending to something more in line with our percentage of the world GDP, or 23%. Doing this would save more than $300 billion every year.
Social Security and Medicare need serious reforms to be sustainable over the long term. The demographic crisis for these entitlement programs has now arrived as 10,000 baby boomers are projected to retire every day for the next 19 years. Retirement ages need to be steadily raised to reflect our increased longevity. These programs should also be means-tested. Countries such as Chile and Singapore successfully privatized their retirement programs, making them sustainable. We should move in a similar direction by giving everyone the option to voluntarily opt out of the governmental system into private alternatives, phasing this in over time to help keep the current system solvent.
In addition, tax reform is essential to jobs and prosperity. Most tax deductions and loopholes should be eliminated, combined with significant tax rate reductions. A top tax rate of 15% to 20% with no deductions would be fairer, greatly stimulate economic growth and job creation, and would reduce deficits by increasing total taxes paid to the federal government.
Why would taxes collected go up if rates go down? Two reasons–first, tax shelters such as the mortgage interest deduction used primarily by more affluent taxpayers would be eliminated; and secondly, the taxable base would increase considerably as entrepreneurs create new businesses and new jobs, and as people earn more money. Many Eastern European countries implemented low flat tax rates in the past decade, including Russia in 2001 (13%) and Ukraine in 2004 (15%), and experienced strong economic growth and increased tax revenues.
Corporate taxes also need to be reformed. According to the Organization for Economic Cooperation and Development, the U.S.’s combined state and federal corporate tax rate of 39.2% became the highest in the world after Japan cut its rates this April. A reduction to 26% would equal the average corporate tax rate in the 15 largest industrialized countries. That would help our companies to use their capital more productively to grow and create jobs in the U.S
Government regulations definitely need to be reformed. According to the Small Business Administration, total regulatory costs amount to about $1.75 trillion annually, nearly twice as much as all individual income taxes collected last year. While some regulations create important safeguards for public health and the environment, far too many simply protect existing business interests and discourage entrepreneurship. Specifically, many government regulations in education, health care and energy prevent entrepreneurship and innovation from revolutionizing and re-energizing these very important parts of our economy.
A simple reform that would make a monumental difference would be to require all federal regulations to have a sunset provision. All regulations should automatically expire after 10 years unless a mandatory cost-benefit analysis has been completed that proves the regulations have created significantly more societal benefit than harm. Currently thousands of new regulations are added each year and virtually none ever disappear.
According to a recent poll, more than two-thirds of Americans now believe that America is in “decline.” While we are certainly going through difficult times our decline is not inevitable–it can and must be reversed. The U.S. is still an extraordinary country by almost any measure. If we once again embrace the principles of individual and economic freedom that made us both prosperous and exceptional, we can help lead the world towards a better future for all.
Mr. Mackey, co-founder and co-CEO of Whole Foods Market, is a member of the Job Creators Alliance, a nonprofit devoted to preserving free enterprise.