A Lost Decade for U.S. Growth?

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Budget: Massive deficits as far as the eye can see mean more than just a lot of debt. They mean slower economic growth, fewer jobs and higher prices for decades to come. The only way out: sharp cuts in spending.

To say that the deficits of the current White House are extraordinary and unprecedented is almost to underplay the reality. From 2009 through 2012, we will add as much to the nation's debts as we did in the first 234 years of America's existence.

We're not among those who think deficits are always and everywhere a bad thing. Indeed, if kept small, deficits really don't matter. It's like carrying a small balance on a credit card. As long as it doesn't grow to crowd out other spending, it doesn't matter much.

But the coming wave of deficit spending is alarming by any measure. Over the next 10 years, according to number crunchers at the Heritage Foundation, the U.S. will rack up $13 trillion in debt - an amount nearly equal to our entire current economic output.

This year alone, the deficit will be an astounding 11.2% of gross domestic product, or $1.4 trillion. Over the next 10 years, the deficit will average 5% of GDP. That compares with an average of 2.4% from 1970 to 2008.

Why is this happening? A slow economy, of course, hurts revenues. But the true culprit is spending. In the postwar era, we spent an average of about 20% of GDP on the federal government. Over the next decade, it will average 23.5% - a real gain of 18% a year.

Soaring costs for Social Security and Medicare, the $787 billion "stimulus," $700 billion in bailouts and increased outlays virtually across the board have pushed spending out of control.

If nothing's done, the spending and deficits will have ruinous effects on our economy and standard of living by forcing taxes up. As a recent report from the nonpartisan Tax Foundation notes, just to close this year's expected deficit would require a tripling of tax rates for all taxpayers.

That's right: triple. Today, joint filers face tax rates that range from 10% to 35% of their income. To eliminate the deficit, the tax rates would have to soar to a range of 27.2% to 95.2%.

"There can be little doubt that the high tax rates necessary to balance the budget in the next several years would discourage all income-producing endeavors," says Tax Foundation Policy Director Bill Ahern, author of the report.

Some - like economist Paul Krugman - say the answer is still more stimulus spending, which would revive the economy, boost government revenues and thereby shrink the deficits. But this has been tried - and it failed spectacularly.

Remember Japan? After decades of rapid economic growth, in 1990 it entered a recession - which began, just as ours did, with a collapse in real estate prices and the stock market. Rather than slashing taxes, Japan decided to "stimulate" its economy - just as our $787 billion "stimulus" was meant to do.

Infrastructure spending was key. During the '90s, Japan increased spending on infrastructure from 6.5% of GDP to 8.3%, the equivalent of a 28% real rise in infrastructure outlays.

After 10 stimulus packages, Japan had little to show for its efforts. It was what economists call a "lost decade." During the '90s, its economy grew a paltry 0.5% a year - way down from a 3%-plus average in the preceding 20 years. And its net wealth plunged by $16 trillion, more than three times the size of the Japanese economy.

Japan does have one lingering legacy from this: a total debt of roughly 200% of GDP, the developed world's highest. This will hinder Japan's economy and, along with aging demographics, slow economic and productivity growth for the rest of this century. We'd be wise not to follow suit.

So what should we do? Start by cutting unnecessary spending. There is no rationale for it. It's absurd to suggest that taxing people and then wasting the money is a good idea.

The Government Accountability Office recently reported that upward of $100 billion in U.S. federal spending has no economic benefit at all. Private think tanks have identified upward of $700 billion in spending that serves no economic purpose. Let's cut it.

And to get the economy going again, try tax cuts. Looking at OECD countries from 1970 to 2007, a study by economists Alberto Alesina and Silvia Ardagna concluded: "Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases." Yes, we've said it before: Tax cuts work.

In fact, they have worked time and time again, here and elsewhere. Yet it's the one policy this administration refuses to consider. It's time to consider a change of course on our road to fiscal ruin.


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