Towards a dynamic economy

Writing in Newsweek, James Manyika, Susan Lun and Byron Auguste -- all three of whom have senior positions at the McKinsey consulting firm (Mankiya is director of the McKinsey Global Institute) -- have an extremely good piece on the creation of economic dynamism:

How exactly do we foster economic dynamism? Twenty years of McKinsey Global Institute research shows that the mix of sectors within an economy explains very little of the difference in a country’s GDP growth rate. In other words, dynamism doesn’t turn on whether an economy has a large financial sector, or big manufacturers, or a semiconductor industry, but instead on whether the sectors are competitive or not.

Instead of picking winners and funneling subsidies to them, countries must get the basics right. These include a solid rule of law, with patents and protections for intellectual property, enforceable contracts, and courts to resolve disputes; access to finance, particularly for startups; and an efficient physical and communications infrastructure.

Once the basics are in place, the key is ensuring strong competition within sectors. Governments can encourage this by minimizing the barriers to entry and exit in an industry, opening their markets to trade, repealing subsidies and regulations that favor incumbents, and breaking up monopolies. They can create greater transparency in heavily regulated sectors such as health care and power generation. They can also nurture human talent by providing workers with the ongoing education and skills needed to adapt to 21st-century jobs.

One can't help but notice that the measures prescribed are almost the polar opposite of the economic agenda pursued by the Obama administration, whose approach has largely consisted of an aversion to free trade, subsidies and government assistance for favored companies, as well as a hugely complicated healthcare bill endorsed by many of the established interests.

Rather than clarity and transparency, we have been given 1,000+ page legislation which only muddies the picture. Instead of change and dynamism, the administration has promoted measures which delay needed corrections in the housing market while labor sector movement is stymied by extensions of unemployment benefits.

Here's what an economic agenda based on the principles outlined by the McKinsey authors might look like:

• Full air travel privatization: privatize airports, air traffic control and security in order to realize greater efficiencies while eliminating restrictions on foreign ownership of US airlines and their ability to compete on US routes. Sign as many open skies agreements as possible.

• Repeal the Jones Act to lower sea transport costs.

• Allow Mexican trucks to operate on US highways, lowering land transport costs.

• Pass outstanding free trade agreements with Colombia, Panama and South Korea.

• Repeal Obamacare. In its place pass legislation that would (among other measures) allow for health insurance companies to compete across state lines in order to boost competition.

• Eliminate the US Postal Service's monopoly on the delivery of first class mail.

• Eliminate farm subsidies and quotas on the importation of agricultural products such as sugar.

• Halt government assistance to the housing sector through the privatization of Freddie Mac and Fannie Mae. Eliminate the Federal Housing Administration.

• Eliminate all subsidies and tax breaks both for "green tech" firms as well as fossil fuel based development to encourage competition on an even playing field.

• Passage of a flat tax which eliminates all tax deductions and loopholes for favored companies.

This is just off the top of my head. There is much that can be done, it's just a matter of will.