Wednesday, June 30, 2010

Growth only way to avoid U.S. economic collapse

From James Pethokoukis via Instapundit:

Lucky this baby didn’t land during the G20 meeting! America’s fiscal judge, the Congressional Budget Office, has produced another nightmare report. The bad news: U.S. debt-to-GDP will hit 858 percent by 2080, roughly ten times today’s level. The “good” news: The economy would implode long before. But avoiding that fate requires just the right balance now between austerity and a push for real, private-sector led economic growth.


Of course, that’s the very debate dividing the U.S. and Europe right now. How deep should spending cuts be? How high should taxes go? Should the pain come sooner or a bit later? Even the Obama White House isn’t of one mind. Some top advisers, such as Larry Summers, see the weak recovery as an argument for more spending. Others, like exiting budget chief Peter Orszag, think it’s time to start slashing and hacking.

The CBO feigns agnosticism on such matters. Its job is to merely run the numbers, and let policymakers drawn their own conclusions. And the numbers are alarming. Under its most likely scenario – the one where politicians keep spending and otherwise acting like politicians — debt as a share of the total economy will reach 87 percent by 2020, 185 percent by 2035.

And the economy itself? Well, CBO computer models stark to get hinky at high debt levels. So director Douglas Elmendorf and staff just plug in an assumption that GDP keeps rolling along at a so-so 2 percent annually with 10-year Treasuries stuck at 3 percent. Both, the CBO admits, are highly unlikely.

But here’s the thing: To keep scary debt scenarios at bay, the more growth the better. If labor productivity, for instance, increased like it did in the 1960s — or 50 percent faster than CBO’s dreary forecasts — the debt load in a quarter century would be 25 percent less. Or this: If the economy were to grow a bit faster than its 20th-century average, about 3.5 percent, a much wealthier America would be able to afford projected spending without raising taxes. The long-term budget gap would vanish.

So growth helps a lot. Indeed, some 30 debt-plagued nations since 1980 have tried to reduce their indebtedness through such austerity measures. In practically all cases, according to a study by financial giant UBS, the increase in national debt was only slowed, not reversed, by such policy pain.

After all, it wasn’t just spending cuts that helped Canada — a favorite example of successful austerity — escape its 1990s debt trap. An export-led boom also helped grow the debt-GDP denominator. That would be a tough path for America to follow, but it can follow some other Canadian examples such as cutting taxes on companies and capital low. Spending cuts also seem to hurt growth less than tax hikes. There really is no other path

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