Could the US Benefit From Economic Planning?

By Travis Rayome

What makes a nation successful? By what metrics do we measure how well a nation is doing? Traditionally, gross domestic product (GDP) has served as an indicator of societal welfare. GDP measures economic activity, totaling up the numerous expenditures made by people, businesses, governments, and other parties. However, the use of GDP has come under scrutiny in the past century for not being a good measure of how well a society is doing, failing to account for inequality in income, prices, and general welfare for the average individual (van den Burgh 2007). Furthermore, GDP does not indicate wider economic health, as GDP as a measurement is far less correlated to economic stability than GDP as a theory (van den Burgh 2007). The United States GDP has been growing exponentially since the end of World War II, regularly hitting annual peaks that are hundreds of billions greater than the previous years. American GDP was at $27.94 trillion at the end of 2023 according to the Bureau of Economic Analysis, and despite this tens of millions are food insecure (Economic Research Service 2023), the average household is over $100,000 in debt (Experian, 2024 and Federal Reserve 2024), and about 1/3 of all Americans cannot afford to pay out of pocket for a $500 emergency (Federal Reserve 2022). In short, GDP is an inaccurate measurement of the welfare of society, as it does not give an accurate indication of the average person’s financial situation. 

As an alternative to GDP, a government’s competency in promising and fulfilling its obligations to its population could be a better metric of success. If a nation can accurately determine what sort of projects would best directly serve the public interest and then complete those projects, it can be considered successful due to its ability to serve its people effectively. When presidential candidates promise to accelerate GDP growth if they are elected, what they are actually promising is greater quality of life for the average American, which GDP is meant to represent in those instances. This means that the measures taken by that president to improve livelihood through GDP growth might be unsuccessful given that GDP is an ineffective metric of success. Several nations use other indicators to measure how well their nations are doing, such as New Zealand’s implementation of “wellbeing” indicators and funds in its budgets starting in 2019, but the principle is the same: public welfare is achieved through efficient processes with specific goals in mind.

Economic planning might improve a nation’s ability to provide welfare consistently. Economic planning is a centralized resource allocation to specific processes with specific goals, with a larger purpose to improve overall conditions. Economic planning is not so much concerned with economic stimulation (encouragement of market activity) as much as it is with ensuring economic equity (resources are allocated based on where they are needed). Planned economies require specific goals to meet in order to generate plans, meaning a government’s efficacy in improving conditions is much easier to interpret. While unplanned economies do have mechanisms of planning, they are often decentralized and tend to prioritize market mechanisms as the primary means of allocating resources. 

The Tax Cuts and Jobs Act of 2017 is an example of unplanned economics in action. The legislation was passed to generally stimulate economic activity among top earners through massive increases on deductibles and tax returns, slashing tax rates, and repealing wide swathes of regulations on business activity both domestically and abroad. This one act reduced corporate taxes by a total of around $1.3 trillion at minimum (Joint Committee on Taxation 2017). The policy was drastic, being the largest series of tax cuts since the 1980s, but not unprecedented. The Tax Cuts and Jobs Act was an application of the supply-side theory of economics. This theory is one against planning, believing that reducing regulations, taxes, and public spending improves overall conditions for everyone, as the lack of restrictions would encourage firms to spend more, allowing the market to naturally redistribute wealth among the population. 

The main issue, though, is that the supply-side theory has never been proven to work as intended. Mass deregulation and tax cuts have never been correlated with economic growth, and, if anything, have mainly contributed to periods of massive budget deficit, economic depression, and hardship for average Americans (Boushey 2019). A 2022 study found that all of the gains to C-corporations from the Tax Cuts and Jobs Act went to the top 10% of earners among those corporations, a group composed of owners, executives, and higher managers (Kennedy et al. 2022). This allowed executives alone to collect extra billions while the wages of the vast majority of their employees saw no change in earnings. 

The Tax Cuts and Jobs Act also increased the government budget deficit by around $164 billion in 2018, and is set to increase it by over $1 trillion total (Boushey 2019, and the Congressional Budget Office 2019). Tax cuts like this, in general, tend to not affect the conditions they promise to improve, failing to create new jobs, increase wages, generate new wealth, or maintain economic stability (Mitchell, 2023 and Mazerov 2018). If anything, they most reliably lead to decreased public spending and increased public debt (Mazerov 2018), which in turn leads to even fewer resources and opportunities available to workers while those at the top benefit heavily.

China, a planned economy, has taken a different approach to tackling its own issues with poverty. China has historically struggled with mass poverty, with the vast majority of the country living in underdeveloped, rural areas up until relatively recent years. The World Bank estimates that the worldwide extreme poverty population was about 1.8 billion in 1990, over 750 million of whom lived in China. The worldwide number, however, was reduced to 776 million in 2013 (Liu et al. 2019). Over 75 percent (about 800 million people) of the amount reduced is due to China’s poverty alleviation policies, which have improved the lives of more than half of the nation’s 1.4 billion people (World Bank 2022). 

This overwhelming upward mobility of China’s working-class population came as a result of intensive and persistent economic planning. The programs sought to target existing extreme poverty and prevent future poverty among historically underserved areas and groups while providing measures that would also still benefit those who were not a part of the target demographics. Researchers have identified two different types of alleviation: relief-oriented and development-oriented (Liu et al. 2019). Relief-oriented alleviation involves a direct distribution of resources, giving immediate support to areas that need them most to boost quality of life and implementing a guaranteed social security program (Liu et al. 2019). This ensures a basic coverage of needs as long-term development takes place. Development-oriented alleviation includes credit to households, universal healthcare, developing vital infrastructure such as roads, farms and factories, power grids, and buildings, land cultivation, technological investment, direct job creation, relocation, job training, and education, and ecological compensation programs (Liu et. al 2019, and Shu 2022). These policies are public investments, which sought to prevent poverty among future generations and bring the standard of living up significantly through direct action as opposed to relying solely on market mechanisms to do the same. In all, over 800 million people were lifted out of poverty in China over the course of about 40 years (World Bank, 2022).

Comparing the outcomes of China’s policies to the US and concluding that the US should use the same strategies would do both nations a disservice. China has a completely different history and economic system to the US; their policies were tailored to a completely different economic system and different economic conditions. It is not as though there is no precedent for economic planning within the United States, however. Many of the most effective acts in American history were economic plans. The New Deal, a series of policies passed under the administration of President Franklin Delano Roosevelt, has provided the modern United States with some of its most pivotal policies. As an economic plan, the New Deal was focused primarily on meeting the goals of public welfare, regardless of market mechanisms. 

The Social Security Act, passed in 1935, created a system that has enabled Americans aged 65 and older to retire from the workforce, provided those seeking work with sustenance, ensured financial security for single-parent households, and set the grounds for subsidized healthcare. Without it, according to an accompanying congressional report on the act, America would continue to face more “human suffering, weakened morale, and increased public expenditures” (Social Security Act, 1935). The Social Security Act was not passed to stimulate economic activity in the hopes that it would lead to better conditions, but instead to directly act on the needs of the American people.

 Other acts of the New Deal, the Rural Electrification Act and Housing Act of 1937, mandated, codified, and provided electricity for rural areas and quality/pricing regulations for housing. Of course, the measures were not perfect and there are still major problems with these policy areas today, but their codification and the central planning of the New Deal dramatically increased the standard of living for working-class and rural Americans with just those two acts and has raised the quality-of-life baseline for succeeding generations. The measures provided by the New Deal had not yet been provided by the United States’ unplanned economic model, and there was no guarantee that they ever would have been without it.

The primary difference between planned and unplanned economics, then, is not the form of the economy or the availability of resources, but rather the political will of a nation’s government. Unplanned economics prioritizes economic growth, focusing policies around stimulating market activity. This model, however, falls into many of the same issues as measuring quality of life via GDP. Market activity does not inherently indicate improved conditions. As seen in the stated purpose of the Social Security Act and in the results of the Tax Cuts and Jobs Act, the market can often leave behind low earners and be unable to provide resources adequately to all people. Economic planning, however, does not operate with the same methodology. Governments using economic plans calculate the most effective distribution of resources so the needs of the nation can be covered directly. This planning, given the examples of the New Deal and China’s poverty alleviation policies, has been proven to consistently provide and maintain higher standards of living for people around the world. To tackle the economic challenges of the 21st century, we might be able to look to economic planning as a potential component of the solution.

References:

Boushey, Heather. 2019. “Neither History nor Research Supports Supply-Side Economics.” Equitable Growth, July 12. https://equitablegrowth.org/neither-history-nor-research-supports-supply-side-economics/.

Bureau of Economic Analysis. 2024. “Gross Domestic Product, Fourth Quarter and Year 2023 (Second Estimate).” Bureau of Economic Analysis, February 28. https://www.bea.gov/news/2024/gross-domestic-product-fourth-quarter-and-year-2023-second-estimate.

Federal Reserve System. 2023. Report on the Economic Well-Being of U.S. Households in 2022. Board of Governors of the Federal Reserve System. May. https://www.federalreserve.gov/publications/files/2022-report-economic-well-being-us-households-202305.pdf.

Horymski, Chris and Experian. 2024. “Experian Study: Average US Debt and Statistics.” Experian, February 12. https://www.experian.com/blogs/ask-experian/research/consumer-debt-study/.

Joint Committee on Taxation. 2017. Estimated Budget Effects Of The Conference Agreement For H.R.1, The Tax Cuts And Jobs Act. United States Congress, December 18. https://www.jct.gov/publications/2017/jcx-67-17/.

Kennedy, Patrick J., Dobridge, Christine, Landefeld, Paul, and Mortenson, Jacob. 2022. “The Efficiency-Equity Tradeoff of the Corporate Income Tax: Evidence from the Tax Cuts and Jobs Act.” Yale Economics Department. October 31. https://economics.yale.edu/sites/default/files/2023-01/The%20Efficiency-Equity%20Tradeoff%20of%20the%20Corporate%20Income%20Tax.pdf.

Liu, Mingyue, Feng, Xiaolong, Wang, Sangui, and Qiu, Huanguang. 2020. “China’s poverty alleviation over the last 40 years: successes and challenges.” Australian Journal of Agricultural Resource Economics, 64: 209-28. https://doi.org/10.1111/1467-8489.12353.

Mazerov, Michael. 2018. “Review of Kansas Provides Compelling Evidence of Failure of “Supply-Side” Tax Cuts.” Center on Budget and Policy Priorities, January 22. https://www.cbpp.org/research/kansas-provides-compelling-evidence-of-failure-of-supply-side-tax-cuts.

Mitchell, David S. 2023. “Six Years Later, More Evidence Shows the Tax Cuts and Jobs Act Benefits U.S. Business Owners and Executives, Not Average Workers.” Equitable Growth, December 20. https://equitablegrowth.org/six-years-later-more-evidence-shows-the-tax-cuts-and-jobs-act-benefits-u-s-business-owners-and-executives-not-average-workers/.

Shu, Dongxin. 2022. “China’s Uniquely Effective Approach to Poverty Alleviation.” Advances in Applied Sociology 12.6 (June): 2015-18. 10.4236/aasoci.2022.126018.

The Social Security Act of 1935, H.R. 7260, 74th Congress (1935).

Van den Burgh, Jeroen C. J. M. 2007. “Abolishing GDP.” Tinbergen Institute Discussion Paper 07-19/3 (February 9). http://dx.doi.org/10.2139/ssrn.962343.

World Bank and the Development Research Center of the State Council, the People’s Republic of China. 2022. Four Decades of Poverty Reduction in China: Drivers, Insights for the World, and the Way Ahead. World Bank. https://thedocs.worldbank.org/en/doc/bdadc16a4f5c1c88a839c0f905cde802-0070012022/original/Poverty-Synthesis-Report-final.pdf.