James Pethokoukis

Politics and policy from inside Washington

Growth is the key to US fiscal recovery

April 21, 2010

The Obama deficit commission has its first meeting next week. And when the panel  finally releases its report after the election, I am sure it will contain an unsurprising mix of tax increases and spending  cuts as a way of dealing with the deficit. But a new report from the  wealth management group at UBS  looking at public sector debt dismissed that policy prescription:

Although fiscal discipline is important, on its own it has rarely been enough to lower a country’s debt ratio. Fo example, since 1980 some 30 countries have undergone exercises in fiscal discipline and many of them have achieved significant reductions in their debt-to-GDP ratios.

However, the overall level of debt hardly ever diminished. At best, fiscal austerity helped to slow down the increase in debt, the actual reduction of the debt ratio was in practically all cases attributable to higher economic growth (often helped by falling interest rates and privatizations). Unfortunately, the growth outlook for the advanced economies is anything but encouraging over the medium to longer term, especially in comparison with the past two decades.

Now the UBS piece argues that the US will try to inflate its way out of its debt problems. Yet I think the report too easily dismisses the prospect for faster-than-expected economic growth. Remember that all those scary CBO deficit forecasts assume long-term growth of around 2 percent, less than two-thirds its historical average. That ability to generate high growth (or hinder it) is the lens though which every new government policy needs to be examined.

Comments

The growth of the last 30 years has been on the backs of slashing interest rates and an ENORMOUS build up of debt. Growth fuelled by debt, only made possible by the falling interest rates. Well, now there’s no where for interest rates to fall… all the tax cuts in the world can’t save the economy. It’s time to suck it up and prepare for having less and do what it takes to repair the economic structure. Otherwise, see you next crisis!

Posted by CDNrebel | Report as abusive
 

It’s also worth noting that Canada slashed its national debt over CDN$100 billion or more than 15% from 1992-2007 while our economy was growing every bit as strongly as America’s. And Canada is not an isolated case…

Posted by CDNrebel | Report as abusive
 

OK, economic growth for whom ?..the banks are fine, the people are out of work..

Posted by gramps | Report as abusive
 

CDNrebel, good points, there are still dividend rates that can fall, it is called ‘ploughback’, another name for going on a financial diet.

Posted by Ghandiolfini | Report as abusive
 

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