Dealing with debt: America needs a growth experiment
Europe’s debt problems should inspire Americans to explore just how the U.S. will solve its own fiscal woes. I mean, no one is going to cut us a check like Germany and France just did for Greece. This is a topic I tackle in a piece I just wrote for The Weekly Standard. A few key points:
1) Cutting spending and raising taxes is a risky formula. It doesn’t have a great track record:
Since 1980, some 30 debt-plagued nations have tried to reduce their indebtedness through such austerity measures. In practically all cases, according to a new study by financial giant UBS, the increase in national debt was only slowed, not reversed, by such policy pain.
2) Trying to take more from rich people has its limits. Higher and higher income taxes or even wealth taxes create incentive to find tax havens and avoid productive work or capital allocation.
3) Cutting spending is better than raising taxes. Hey, I even have a study to prove it:
A 2009 study by Harvard University’s Alberto Alesina and Silvia Ardagna. It examined 40 years of debt reduction plans by advanced economies and found that “those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases.” They’re also associated with higher economic growth.
4) Less spending +more growth. This is my money graf from the piece:
But what if (a) government spending tracks current projections over the next 70 years, (b) government revenue as a percentage of GDP stays at its historic average of 18 percent, and (c) the economy were somehow to grow a bit faster than its 20th-century average, about 3.5 percent. Under those conditions, according a recent study by JPMorgan Chase, a much wealthier America (generating $100 trillion in tax revenue rather than $50 trillion) would be able to afford projected spending without raising taxes. The long-term budget gap would vanish. … Indeed, that is typically how successful countries in the UBS study managed to get their books in order; they grew their economies faster than they added debt. … Easier said than done, of course. … And there is no one policy to help make that happen. It will take a full-spectrum effort: lower taxes on companies and capital, pork-free spending on infrastructure and basic research (beyond health care), an education system that teaches students rather than feathering the nests of teachers’ unions. Every aspect of U.S. public policy will need to be optimized for economic growth.