RSSWant to Solve the Debt Crisis? Grow the Economy!
Publius | April 26, 2011
The economic illiteracy of the President and his allies has been astonishing in the lead up to the debt ceiling and 2012 budget battles. Front-and-center in the debate has been “tax increases on the rich” as a primary factor in fixing our debt and deficits at a time when it would be devastating to any hope of economic recovery. The President and congressional democrats speak of how “we can’t afford” the current tax rates as though some rule of the universe requires government to spend a given amount of money each year to ensure the earth continues spinning on its axis.
At best tax increases raise revenue in the short-term only to stifle long-term growth and prosperity. At worst tax increases now would crush the investment outlook of small businesses and large corporations who would otherwise be growing their companies and creating jobs. The tax-and-spend rule of the universe, perhaps better described as a religious belief, does not consider the long-term economic condition of the country. Rather the focus of this rule is on the axiom that the utmost value be placed on “fairness” with little concern, if any, for economic freedom.
Since 2006 Senator, and later President, Obama has consistently promoted an economic agenda that is anti-growth. As a Senator in 2008 and President in 2009, Mr. Obama either voted for or signed into law every penny of the FY2009 budget that included the $410 Billion omnibus spending bill, the stimulus debacle, and tripled the highest budget deficit in previous history. In addition to his reckless spending policies, the President spent his first 18 months forcing Obamacare through Congress, shutting down domestic energy production, nationalizing large portions of the financial and auto industries, and sneaking through Chris Dodd and Barney Frank’s financial reform. It’s no wonder that he and Congressional Democrats couldn’t find the time to pass a budget in 2010!
None of these redistributive agenda items have worked to grow the economy or bring down unemployment, yet the Democrats led by the President continue to fight to maintain Washington’s addiction to spending. The new half-truth that is being pushed is that “spending cuts alone” won’t fix America’s financial problems. The statement is true but not for the tax-hiking reasons the Democrats provide. In addition to major cuts in federal spending, the most important way for the country to reduce the risks posed by Washington’s fiscal irresponsibility is to grow the size of the United States economy.
There are two ways to illustrate the effects that economic growth can have on the debt. First the democrats and the President are saying that the government needs to “raise revenue.”
Let’s say that the United States’ GDP for 2010 was $14.7 Trillion. Growing the economy by a mere 4 percent would add $588 Billion to U.S. output. Since 1960 the federal government has collected between 15-20 percent of GDP as tax revenue; let’s use 17.5 percent. So that would mean GDP growth of 4 percent – alone – would result in an extra $102.9 Billion of additional revenue – in one year – to the Treasury that the federal government would not otherwise have had. Consistent growth at this rate would compound the output and thereby the additional tax revenue in the future. Four percent was chosen because it is the rate at which the economy needs to grow in order to create the amount of jobs necessary for a sustainable recovery. Imagine if the economy were to grow 6 percent.
In addition to extra revenue flowing into the Treasury, another important effect that GDP growth has on the debt and deficits is one of proportions. The national debt and fiscal year deficit figures are often expressed as a percentage of GDP in order to gauge the financial health of the country and the soundness of U.S. credit. If these figures get too high, then the debt – in and of itself – begins to reduce the amount at which the economy is capable of growing.
However, as GDP grows in size, the debt and deficits as compared to GDP shrink. So the strength of the larger economy increasingly makes the debt more manageable with one important caveat: the federal government’s spending must not continue to outpace the growth in GDP. To truly have the desired effects, the federal government must also cut the amount it is currently spending each year until the deficit gets back to the historical range of 3-4 percent of GDP – or lower to make up for lost ground.
Coming out of major recessions, the historical average GDP growth rate for 8 quarters following the previous peak is roughly 4.5 percent. In the twelve quarters since the U.S. economy peaked in December 2007 the economy has grown only 0.3 percent when adjusted for inflation. At the same time the deficit has grown from just over 1 percent of GDP in 2007 to about 9 percent in 2010, and the debt has gone from around 65 percent of GDP to above the critical 90 percent mark in 2010. This crisis of spending has put pressure on the United States to change course or risk the possibility of being unable to meet its obligations.
President Obama tries to shift the blame for these numbers on his predecessor, but upon entering the Oval Office in 2009 he was responsible for wrapping up the FY2009 budget. The President added in the $410 Billion omnibus spending bill and the ever-popular $787 Billion stimulus bill, which drove the deficit up to a staggering $1.4 Trillion. President Obama’s FY2010 deficit was $1.3 Trillion and FY2011 is projected to be back up to $1.4 Trillion.
In addition to more than $5 Trillion in new debt, the Democrat controlled legislative and executive branches have added mountains of new regulations, much of which is yet to be written after the passage of Obamacare and financial reform. With this kind of track record coming from the federal government in recent years, it should come as no surprise that the economy has failed to grow a single percentage point since its peak in December of 2007. Yet now all of a sudden the President and his allies in Congress expect the country to take their plans to fix the problems they created seriously.
If the President were serious about fixing the fiscal crisis, or if he and his staff were in any way competent in economics, he would understand that the best and only sustainable solution to the country’s deficit and debt problems is to grow the size of the economy. And the best environment for economic growth is one where taxes are low and regulation is limited. Couple an economic growth policy with cuts in federal spending and the multitude of problems surrounding the debt crisis begins to shrink.
Continuing Washington’s addiction to spending and forcing the so-called “rich” to finance it, will only continue to make the problems worse and put at risk the financial position of the country at large. That is an unacceptable prospect and history will judge this generation harshly for it. Given that, the message to the President and Democrats must be clear: It stops now! “Yes we can” cut spending and grow our way out of this problem!
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2 Responses to “Want to Solve the Debt Crisis? Grow the Economy!”
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Grow the economy! Who?
Government, how? GBush, Obama, post-Obama?
Tax breaks – done, since GBush – results?
Financers – what did Greenspan admit as failed FED – hands-off – approach.
Again, private sector – business, banks, WallStreet? Go boys! Oh, you’ve been “going” for about 15yrs – results? GBush tax breaks for 9+yrs – still got them – still sitting and waiting for “something.” What else can you do – that you don’t want US-gov to do – that you are not doing?
Private sector – you want to fix it – not Gov?
That’s you, as in above – ok, do it – do it for the past 3+yrs, don’t want a “middle, lower class job recovery? That’s where your cash comes from!
That’s all they ask, a job, not cash-by-hand – or, for the past 10+yrs.
Who killed the jobs?
Grow the economy! Who? People with an economic clue. Definately NOT Democrats
Government, how? GBush, Obama, post-Obama? As bad as Bush was at times he is 1000x times better than Obama
Tax breaks – done, since GBush – results? Yes, done. And with great results until the Democrats took over the pursestrings in 2007.
Financers – what did Greenspan admit as failed FED – hands-off – approach. The FED was hands of under Greenspan? You are joking right? Greenspan meddled in the economy on a weekly basis.
Again, private sector – business, banks, WallStreet? Go boys! Oh, you’ve been “going” for about 15yrs – results? GBush tax breaks for 9+yrs – still got them – still sitting and waiting for “something.” What else can you do – that you don’t want US-gov to do – that you are not doing? Looks like you are just babbling. Again the economy under President Bush and a Republican Congress (as liberal as they were at times) was gangbusters. Only Bush and the Republicans forsaw the banking crisis and the Dems filibustered and blocked them proceedurally at every turn. You cannot rewrite history
Private sector – you want to fix it – not Gov? Government fixes nothing. it only takes and breaks. It is a necessary evil that only liberals put their full faith into.
That’s you, as in above – ok, do it – do it for the past 3+yrs, don’t want a “middle, lower class job recovery? That’s where your cash comes from! You cannot have a recovery for any Americans regardless of class until you stop separating Americans by class and commiting war against those you deem to be wealthy.
That’s all they ask, a job, not cash-by-hand – or, for the past 10+yrs. Again, everything was good until Democrats took over Congress and then the White House.
Who killed the jobs? People without a clue. People like you.