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The 4% Solution: Unleashing the Economic Growth America Needs Hardcover


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Product Details

  • Hardcover: 368 pages
  • Publisher: Crown Business (July 17, 2012)
  • Language: English
  • ISBN-10: 0307986144
  • ISBN-13: 978-0307986146
  • Product Dimensions: 9.5 x 6.5 x 1.3 inches
  • Shipping Weight: 1.4 pounds (View shipping rates and policies)
  • Average Customer Review: 4.1 out of 5 stars  See all reviews (21 customer reviews)
  • Amazon Best Sellers Rank: #571,503 in Books (See Top 100 in Books)

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About the Author

The George W. Bush Institute is the policy research arm of the Bush Presidential Center and Library in Dallas, Texas.  

Excerpt. © Reprinted by permission. All rights reserved.

Chapter 1

Why We Grow

By Brendan Miniter

Economic growth is not an issue normally associated with the Pentagon. But on January 23, 2006, in a little-noticed ceremony, officials there handed the Defense Department’s Distinguished Public Service Award to then outgoing Federal Reserve chairman Alan Greenspan. The reason for the award: He helped unleash tremendous economic growth that had strengthened the country, led to new advances in science and technology, and demonstrated the power of a free and open economic system.

The importance of economic prosperity is hard to overstate. A growing economy produces jobs that allow workers to provide for their families, live comfortable and stable lives, and give back to their communities. A growing economy creates new opportunities for entrepreneurs. And it also creates the capital needed to support innovation and research in science and the arts. America’s economy has long produced the types of jobs that have enabled Americans to enjoy comfortable middle-class lives.

From the end of World War II until our recent “Great Recession,” the United States economy grew, on average, at a little more than 3% annually. At that rate the size of the economy doubles roughly every generation. There were, of course, recessions during that period. But nearly every economic downturn was followed by a period of significant growth. Over the past seventy years, the American economy has grown at 4% or greater about two-fifths of the time. The result has been a rapid transformation. Today most Americans have a substantially higher standard of living than previous generations. And they also carry with them an expectation for growth. Americans hold the optimistic view that it is natural for the economy to grow at a rapid pace year in and year out.

But survey the historical data stretching back long before World War II and you may be surprised to see that economic growth is a relatively new phenomenon. In an essay1 published before he won the Nobel Prize in Economics in 1995, Robert Lucas outlined the history of economic growth. His findings show that prior to the industrial revolution in the middle of the 18th century, per capita gross domestic product (GDP) growth had largely been flat around the world. Technological advancement had occurred, but the economic gains that were made were essentially offset by increases in population.

However, with the advent of the industrial revolution, economic growth managed to outrun population (industrialized economies grew, while birthrates declined) and the result was the rise of a middle class. Lucas calculates that the world economy grew at a fraction of 1% annually through the latter half of the 18th century, at about 1% annually on average through the 19th century, at about 2.4% for the first sixty years of the 20th century, and at about 4% annually after that.

Modern growth theory--the theory that looks at innovation and human ingenuity as engines for expanding the economy--is itself relatively new. Robert M. Solow, the economist often credited with advancing modern economic thought in this area, did much of his groundbreaking work in the 1950s and ’60s. Others, such as Lucas, have since developed alternative growth models, which have sparked research and debate among economists about the role of human capital, entrepreneurship, and other factors in economic growth. The short of it is that these are exciting times to be thinking about economics, growth, and the outer limits of human potential. There is a lot of cutting-edge work being done now. And it is reshaping what we know to be possible, while also forcing us to realize that much of what we have done in the past may have actually hamstrung the economy.

Consider the work of another economist who hasn’t won the Nobel Prize, but likely deserves such high honors: Gordon Tullock. Half a century ago, he worked closely with economist James Buchanan, who went on to win the Nobel for his work on something called public choice theory--a body of ideas that argues that rather than being driven by altruistic motives, government policies are often driven by hidden incentives. For example, government agencies have a strong incentive to spend all the money in their budgets, even if they have to spend it in wasteful ways, because not spending the money can lead lawmakers to cut those agencies’ budgets the following year.

The combined contributions of Tullock and Buchanan can be found in an often cited volume, The Calculus of Consent, which sorts through incentives that drive democratic systems and offers reasons why, for example, a legislature might back public policies that are not widely popular and may not even serve the greater public good. But perhaps Tullock’s most relevant work to discussions of economic growth has to do with what has been called “rent seekers”--those who seek special payment or privilege, usually from the government. His insight, accessible in a volume titled The Rent-Seeking Society, is simply that individuals or institutions often seek to profit by tilting the political landscape in their direction, rather than by creating real value.

This concept is critical to understand in today’s environment of large federal deficits and a stumbling economy. It’s often assumed that federal spending will stimulate the economy--after all, it pumps money into the system. But Tullock’s insight offers us an explanation into why government spending can actually be harmful to economic growth. Spending is funded by taxes, which pulls capital out of the productive economy. The destructive power of taxes is something that has been long discussed and seems to be well understood. Collecting taxes, however, is only part of the harm that public policies can cause. Rent seekers, as Tullock discovered, profit through the political process, not by producing a better or cheaper product. Their aim is to receive payment (or privilege) through government policy.

In some cases, rent seekers can look to gain privilege by lobbying for new regulations that, if imposed, would harm their competitors. In other cases, rent seekers can look to profit by receiving government payments or inflated prices thanks to government policies. Donald Boudreaux, an economics professor at George Mason University, brilliantly illustrated Tullock’s insight in the Christian Science Monitor in late 2008 by looking at Illinois governor Rod Blagojevich. At the time, Blagojevich was at the center of a corruption story involving naming someone to fill a vacant Senate seat.2 Boudreaux concluded that when the government can bestow a privilege or profit on someone there is a strong incentive for entrepreneurial people to spend their time figuring out how to profit off the government. “As Tullock first recognized (in a paper published in 1967),” Boudreaux wrote, “enormous amounts of resources--including human talent--are wasted in pursuit of government privileges.”

Not all payments or privileges provided by the government are problematic or even wasteful. But since the government uses a political process to decide whom it pays and how much, there is little incentive for rent seekers to push for greater efficiency or innovation. This is a problem in part because the public and the private sectors compete for the same financial and human capital. That is to say, they compete for the same pile of money and the same group of innovative entrepreneurs. So when the government spends a large volume of money, there is that much less money in the system for private entrepreneurs. And when the government has a wide variety of programs that businesses can profit from, without being efficient producers, it drains away talented entrepreneurs who would otherwise put their talents to work in the private economy. Think of it this way: When profits are relatively easy to make in government contract work, there are fewer innovators willing to spend their time and their capital developing the next new innovation that could revolutionize an entire industry.

If we place Tullock’s work next to the insights offered by Lucas, Solow, and Buchanan (among others), it is possible to imagine that the era of significant economic growth is only just beginning. If sustained economic growth is relatively new to human history, if many of the theories explaining growth are still being refined, and if Tullock is right that public policies can create incentives that hurt economic growth, then we may not yet know our full economic potential. We haven’t yet found out how fast the economy can run on a sustained basis if public policy is lined up with the right incentives to grow the economy.

There isn’t a clear consensus on the rate of growth that the country should shoot for. As this book came together, Lucas said to me in an email that he didn’t support the idea that sustained long-term 4% growth was possible for the United States. I understood his point to be that the world as a whole might grow at 4% or faster and some countries--including China--could far exceed that growth rate. But that was because many countries are racing to catch up to the United States. They are experiencing catch‑up growth, which is much easier to achieve because it involves adopting technologies and practices that others have already developed. It’s much harder to grow at an accelerated rate when you are leading the pack--when you are the one developing new technologies that everyone else will copy.

And he’s right to think so. The United States is much more likely to achieve the average growth rate it maintained from the end of World War II to the most recent economic downturn--a rate of about 3%--than it is to accelerate to a new long-term economic growth rate of 4%. That doesn’t mean that in the short run, the country won’t exceed that annual average--indeed it will have to grow at a rate that exceeds its long-term average rate of growth for a period of time just to return to the...

Customer Reviews

4.1 out of 5 stars
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It is well thought out and developed.
William J. Moore
Most of the contributions to this book are premised on the belief that the real engine of technical and economic progress is entrepreneurship.
J. Richard Johnson
Very good book about what this country needs to get back on track to economic well being.
Cat Woman

Most Helpful Customer Reviews

27 of 33 people found the following review helpful By Samuel J. Sharp on July 21, 2012
Format: Hardcover
This is a very good collection of essays that tackle many of our current obstacles to growth. Most of the authors admit that 4% growth is more aspirational than readily achievable, but that does not prevent them from offering honest and practical solutions. The opening chapters are more focused on discussing the history and causes of economic growth, and the roadmap to 4% growth begins at Chapter 6. Some of the proposed solutions (e.g. cutting corporate tax rates, allowing more high-skilled immigrants) are not novel, but the excellent chapter on Social Security is a good example of how some authors discuss the very serious nature of our problems while offering smart solutions that incentivize growth and make government policy fairer.

Most of the chapters are very short (Gary Becker's chapter on immigration in only five pages) and a few leave the reader wanting more. For example, Eric Hanushek's chapter on education notes that based on the data, replacing the bottom 7-12% of teachers by effectiveness with teachers at the average would move the U.S. to the top of educational achievement charts. But then the section concludes with, "The appropriate policies to achieve these changes in teacher quality are beyond this discussion." There is no chapter dedicated to healthcare which is a significant omission.

The book deserves 4 stars for providing such a good overview of what policymakers can do to improve our long term growth prospects, but some readers will wish the authors had more space to take on the issues in greater depth.
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5 of 5 people found the following review helpful By Dr. Joseph S. Maresca HALL OF FAMETOP 1000 REVIEWER on August 11, 2012
Format: Hardcover
The 4% Solution - Unleashing The Economic Growth America Needs by
The Bush Institute and Brendan Miniter is a treatise on growing the
economy beyond the 2.3% rate in recent years which is below the average
of the previous six decades. The authors look toward a 4% growth in
GDP on a sustained basis. The challenge is to grow economies at a
high level without high industrial pollution as a consequence.

The blueprint of the book unfolds by lowering the debt of the United
States and allowing hard workers to exploit opportunities. Past years
have shown that higher growth tends to reduce debt because higher
tax receipts are received in response to more people working. Economic
growth was greatest in the United States from 1950 - 2008. The highest
growth in GDP was in the United States, Great Britain, Germany, Italy
and Japan. Today, despite a host of challenges, prosperity in the
United States exceeds Europe by 40%.

The authors point toward the top professions as agents for boosting
the GDP. Along with the professions are highly educated people with
degrees; such as, PhD, Masters, Bachelors and Associates.

Computer related industries grew from $200 billion dollars
in 1977 to $1.6 trillion dollars by 2007. These industries
are telecommunications,systems design, data processing,
publishing, computer and electronic products and services.

According to the authors, the top United States exports are
operating leases, film, television, law, mining, engineering,
education, finance, medicine, equipment repair, industrial
engineering , consulting and travel.
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6 of 7 people found the following review helpful By J. Richard Johnson on August 24, 2012
Format: Hardcover
The 4% Solution is a collection of articles written by more than two dozen contributors, including five Nobel Laureates in economics and a number of other people, some with vast administrative experience. The preface is written by former President George W. Bush.

Its premise is this: If the United States could achieve a growth rate of four percent, it could aggressively retire a significant portion of the mountainous debt burden. Moreover, this could be accomplished in a couple of decades. Now, the historical average growth rate of the US economy averages around three percent, so a skeptical reader might ask, what's the big deal of one more percent in growth? If the skeptic knew some economics, he or she might ask further, is a four percent annual growth rate even possible? If you read this book, you will see that we would get a very large return from that extra one percent if we could attain it. James Glassman, the author of the book's introduction, writes that a quarter of our $13 trillion debt could be eliminated, if the four percent growth rate took off in 2017, by 2021 (p. xx). As for the four percent growth rate, the US already achieved that (or better) in 23 of the last 60 years. So it is at least a mathematical possibility. Moreover, if this growth rate were attained, it wouldn't have to last forever: Once the US is out of the weeds, its economy could settle back to its historical, sustainable growth rate of about three percent, and our grandchildren could live as well as or better than we do.

So how can we do this? There are many very interesting and reasonable tactics proposed by the authors, which cannot be considered in their entirety here. But underlying all of them is the core philosophy of the book, which I will try to represent momentarily.
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