The Conspiracy Against Economic Growth

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On July 11, Erskine Bowles, co-chairman of President Obama's Debt and Deficit Commission, made the following statement in a speech to the National Governors' Association annual meeting in Boston:

"We can't grow our way out of this. We could have decades of double-digit growth and not grow our way out of this enormous debt problem."

Mr. Bowles' assertion was widely reported. If you Google it, you get 2430 hits. The mainstream media treated it as a statement of the obvious, something that no reasonable person could disagree with. No one in the elite media said, "This is utter nonsense. Mr. Bowles should resign from the Debt Commission and devote his time to the study of arithmetic"-although this is, in fact, the logical response to Bowles' preposterous assertion.

Mr. Bowles' statement was almost certainly a reaction to the "Long Term Budget Outlook" (LTBO) released by the CBO on June 30. In the CBO's "Alternate Fiscal Scenario" (AFS) case (which they represented as being more realistic than their "Extended Baseline Scenario"), Federal debt as a percent of GDP rises from 62% in 2010 to 100% by 2023, and then to 146% in 2030. At the end of the projection period, in 2084, the national debt reaches 947% of GDP, with a budget deficit equal to 61.5% of GDP in that year alone. As the CBO rightly points out, such a budgetary path would be completely untenable.

Now, the minimum growth trajectory that would fit "...decades of double digit growth..." would be 10.0% economic growth for 20 years. If you plug these assumptions into the CBO's AFS case (keeping everything else the same), the faster growth would eliminate the budget deficit by the end of 2014 and pay off the entire national debt by the end of 2020. In fiscal year 2030, the Federal government would run a budget surplus of $16.6 trillion (in 2010 dollars), or 16.9% of that year's GDP. In fact, the interest on the government's accumulated surplus ($69.4 trillion in 2010 dollars, or 475% of 2010 GDP) would pay for more than 60% of government spending that year.

Now, why would a co-chairman of Obama's Debt Commission make such an absurd assertion, and why would no one in the elite media challenge it? I believe that it is because our political and media elites want a bigger, more intrusive, and more expensive government, and they want a Value Added Tax (VAT) to pay for it. Their strategy is to de-legitimize other alternatives-particularly faster economic growth-to the point where they cannot even be discussed.

An example of this "conspiracy against growth" is the CBO's LTBO itself. The CBO assumes that economic growth over the next 74 years will average 2.16%. While the CBO considers the impact of various assumptions on the trajectory of the national debt, it does not consider (or even mention) the possibility of higher growth. This is particularly striking because over the 74-year period from 1935 to 2009, America's real annual economic growth averaged 3.73%.

The difference between 2.16% growth and 3.73% growth is enormous. If you increase the growth rate in the CBO's AFS case to 3.73% (again, holding everything else constant), instead of Federal debt rising steadily from 62% of GDP in 2010 to 87% in 2020, 146% in 2030, and 947% in 2084, the debt would peak at 67% of GDP in 2012 and then begin declining. Without any spending cuts and tax increases, it would fall to 60% in 2020 and 52% in 2030. By 2052, the entire national debt would be paid off.

In addition to the CBO and the mainstream media, the conspiracy against growth includes the Social Security Trustees. In their just-released "2010 Annual Report", the Social Security Trustees assume an economic growth rate of 2.25% over the next 74 years. While they do present a "Low Cost Case" that features (among other things), a real growth rate of 2.93%, they make no mention of this case in their "Conclusions". The solutions discussed are confined to tax increases and benefit cuts. Later in their report, the Trustees present "sensitivity analyses" of their projections (of doom) against eight different variables, but none of these is the one variable that would have the most impact-the rate of economic growth.

The Medicare Trustees' 2010 Annual Report uses the same economic assumptions as the Social Security report. The 38-page "Overview" of the Medicare report makes no mention of the tremendous impact that higher economic growth would have on our nation's ability to afford our Medicare program.

The Republicans running for Congress this year must expose and denounce the conspiracy against economic success. Prosperity is possible, but not if our economy grows at 2.25% per year or less. A "Prosperity Plan" comprising stabilizing the dollar, revoking the Federal Reserve's authority to pay interest on bank reserves, and tax reductions on work, savings, and investment would yield much higher rates of growth than those assumed in the gloomy CBO LTBO.

The Bush tax cuts must be made permanent for everyone. Beyond that, the corporate income tax, the capital gains tax, and the death tax should be repealed. These tax changes would reduce the Federal government's "tax take" from the LTBO AFS case level of 19.3% of GDP to perhaps 17.0% of GDP. The reduction in tax take would be less than predicted by static analysis, because the tax take rises significantly during economic booms. It is reasonable to expect that the Prosperity Plan would yield an economic growth rate averaging at least the 3.73% sustained by the U.S. from 1935 to 2009.

Plugging the revised tax and growth assumptions into the CBO's LTBO model (with no spending cuts), we see that, at first, the tax cuts cause the Federal debt to be higher in the Prosperity Plan (PP) case than in the AFS case. In 2012, the debt is 72% of GDP in the PP case against 69% in the AFS case. However, after that, the much higher rate of PP economic growth asserts itself.

By 2016, the debt levels in the two cases are the same, at 75% of GDP. In 2020, the PP case yields a debt-to-GDP ratio of 81%, vs. the AFS case's 87%. The PP case's debt-to-GDP ratio peaks at 98% in 2034, while the AFS case debt ratio (which is 177% of GDP at that point) just keeps growing. The PP case brings the budget into balance in 2061, at which point the AFS case is running a budget deficit equal to an absurd 35.3% of GDP. The PP case pays off the entire national debt by 2075.

America does not need higher taxes, it needs more economic growth. Prosperity is possible, but the Republicans must make a decisive, public break from the conspiracy against economic growth.


Louis Woodhill (, an engineer and software entrepreneur, and a RealClearMarkets contributor.  


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