The federal budget goes up every single year, no matter who is in the White House and regardless which party controls Congress. The national debt recently topped a record $22 trillion, and annual budget deficits are projected to top $1 trillion a year starting as early as next year and continue over a trillion a year as far as the eye can see. If so, there is a major debt crisis looming!
If there’s no way politicians are going to reduce federal spending (until we hit the next debt crisis), then maybe we should look at whether we could grow our way out of debt. Mainstream economists assure us that this is simply not possible, but let’s look at what it would take anyway. You may be surprised.
Most economists and even the Congressional Budget Office (CBO) believe that the US economy will only grow by an average of 2% or less going forward. Averaging sustained growth of 2.5%-3.0% is simply not possible, they tell us. But at least the CBO makes annual forecasts on our debt levels as if we could achieve those levels of growth.
Keep in mind that the US economy grew at the rate of 3.1% last year based on this morning’s first estimate of 4Q GDP, the best showing since 2005. Yet economists will tell us that such a rate is not sustainable. Maybe they’re right, but what if they’re not.
Let’s start with a chart based on the Congressional Budget Office’s own projections about what would happen to our national debt at various growth rates in the economy going forward, illustrated below as the Debt-to-GDP Ratio.
Before we get to the chart, keep in mind that it only considers “debt held by the public” which is nearly $16 trillion, whereas the total national debt is over $22 trillion, but for illustration purposes, we’ll go with it.
The CBO estimates that if GDP growth continues to average only 1.9% (blue line) as it did during the Bush/Obama administrations, the debt-to-GDP ratio on debt held by the public will explode from 80% of GDP today to nearly 160% over the next 30 years.
However, if the economy were to grow at 2.6% (red line) on average, which is less than it did over the last year, the debt-to-GDP ratio would actually fall slightly over the next 30 years. That’s an amazing difference!
And what if the economy were to grow at 3.0% (green line) on average, which is just fractionally higher than it did last year? In that case, the debt-to-GDP ratio would plunge to less than half its current level. Wow!
Let’s think about that for a moment. If we know that Congress is going to continue to spend more than we take in every year, and if we assume that will not change, then our only solution is to focus all of our attention on keeping economic growth at current levels or higher.
This is a no-brainer in my opinion!
Yet economists tell us that this is simply impossible to sustain, and maybe it is – but we just did it! As noted above, the economy grew by 3.1% last year thanks to tax cuts, deregulation and sharply higher consumer confidence and spending. Let’s keep it up!
And let’s not forget that the economy grew by 3.8% on average during President Clinton’s eight years in office, 3.7% during President Reagan’s two terms and well over 3% for the 20th century as a whole (despite the Great Depression).
How about we do everything we can to see the current economic growth continue? Assuming the bureaucrats in Washington continue to spend more than we take in every year, this is the best thing we can do.
Faster economic growth should be the policy fixation of our elected officials. Anything that grows the economy faster today — like the tax cuts — will pay off in spades over the decades to come. Higher growth now with greater productivity and innovation, means a higher living standard for Americans in the future. Let’s not forget that the prime beneficiaries of faster growth today are our children, grandchildren and their children.
Will it happen? I don’t know. I’m not that optimistic, especially if the Democrats win the White House next year. If that happens, I would expect the tax cuts to go away and heavy government regulation will return again.
In any event, it is great news to know that there is a possible way out of the coming debt crisis.
It remains to be seen if we’ll take it.
I agree there is a way. This was something that was suggested by Rep. Paul Ryan before he became Speaker of the House a few years back and decided that it was more important to debate against those who were on his side. Unfortunately, unless there is enough political will to do the right thing, it never gets done right. And this is the road map.
Just remember that a few years ago, 0bama said that the Trump-like growth we are witnessing was a thing of the past, and that the United States had to become accustomed to falling behind. He was wrong then, and most of the current naysayers are wrong now.
Several economic studies suggest an even higher growth rate if we encourage the switch to sustainable energy. That would require an extra million trained workers over and above what a status quo power system implies. No telling how much a market based, capitalist system can do if let alone to do it!
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