Growth only way to avoid U.S. economic collapse

June 30, 2010
another nightmare report. The bad news: U.S. debt-to-GDP will hit 858 percent by 2080, roughly ten times today's level. The "good" news: The economy would implode long before. But avoiding that fate requires just the right balance now between austerity and a push for real, private-sector led economic growth. " data-share-img="" data-share="twitter,facebook,linkedin,reddit,google" data-share-count="true">

Lucky this baby didn’t land during the G20 meeting! America’s fiscal judge, the Congressional Budget Office, has produced another nightmare report. The bad news: U.S. debt-to-GDP will hit 858 percent by 2080, roughly ten times today’s level. The “good” news: The economy would implode long before. But avoiding that fate requires just the right balance now between austerity and a push for real, private-sector led economic growth.

Of course, that’s the very debate dividing the U.S. and Europe right now. How deep should spending cuts be? How high should taxes go? Should the pain come sooner or a bit later? Even the Obama White House isn’t of one mind. Some top advisers, such as Larry Summers, see the weak recovery as an argument for more spending. Others, like exiting budget chief Peter Orszag, think it’s time to start slashing and hacking.

The CBO feigns agnosticism on such matters. Its job is to merely run the numbers, and let policymakers drawn their own conclusions. And the numbers are alarming. Under its most likely scenario – the one where politicians keep spending and otherwise acting like politicians — debt as a share of the total economy will reach 87 percent by 2020, 185 percent by 2035.

And the economy itself? Well, CBO computer models stark to get hinky at high debt levels. So director Douglas Elmendorf and staff just plug in an assumption that GDP keeps rolling along at a so-so 2 percent annually with 10-year Treasuries stuck at 3 percent. Both, the CBO admits, are highly unlikely.

But here’s the thing: To keep scary debt scenarios at bay, the more growth the better. If labor productivity, for instance, increased like it did in the 1960s — or 50 percent faster than CBO’s dreary forecasts — the debt load in a quarter century would be 25 percent less.  Or this: If the economy were to grow a bit faster than its 20th-century average, about 3.5 percent, a much wealthier America would be able to afford projected spending without raising taxes. The long-term budget gap would vanish.

So growth helps a lot. Indeed, some 30 debt-plagued nations since 1980 have tried to reduce their indebtedness through such austerity measures. In practically all cases, according to a study by financial giant UBS, the increase in national debt was only slowed, not reversed, by such policy pain.

After all, it wasn’t just spending cuts that helped Canada — a favorite example of successful austerity — escape its 1990s debt trap. An export-led boom also helped grow the debt-GDP denominator. That would be a tough path for America to follow, but it can follow some other Canadian examples such as cutting taxes on companies and capital low. Spending cuts also seem to hurt growth less than tax hikes. There really is no other path.


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“It is increasingly clear that no matter what party is in power, so long as our national security needs keep rising, an economy hampered by restrictive tax rates will never produce enough revenues to balance our budget, just as it will never produce enough jobs or enough profits. Surely the lesson of the last decade is that budget deficits are not caused by wild-eyed spenders but by slow economic growth and periodic recessions, and any new recession would break all deficit records.” John F Kennedy 1960

Posted by pathtotyranny | Report as abusive

That quote from Kennedy is all nice and fine, but at that time, the United States was still running occasional budget deficits. In 1951, 1956, 1957, and 1961, the U.S. ran annual surpluses, and throughout the early 1960s was never more than about 1-2% of the GDP. Economic upticks and downturns can explain 1-2% budget deficits.

However, starting with Johnson in 1967-68, the deficits began to build, and except for a couple of low deficit years mixed in, the U.S. ran deficits of about 3-7% of GDP every year up until the late 1990s when the dotcom bubble finally gave us two brief years of surplus. After that, it was back to big deficits.

In other words, we haven’t been eliminating deficits even in years of robust economic growth, and we’ve been running up huge deficits during downturns. That math is simply not sustainable in the long term because it is impossible to grow an already-developed economy that much to trim an amount equal to 4-5% of the GDP from the deficit every year. Yes, enough growth would solve everything, but so would a magic wand. Unfortunately, I’m about as likely to wake up and find a magic wand in my hand as we are to see the economy sustain 3.5% growth every year for the next decade or two. The United States was only able to sustain that growth post-WW2 thanks to brimming pension funds and the Social Security trust. Pension funds provided huge piles of money for corporations to reinvest, and Social Security provided the same for government spending. Now, however, we have to start paying that pension money back, which means that it will no longer be there to invest. Without all of the money that helped fuel post-WW2 investment, where is the growth going to come from? Quite simply, it’s not going to come from anywhere. As long as we have an aging population, the U.S. is going to see a tepid economy that will be lucky to average 2% growth every year. In fact, in about 10 years, we will be lucky to see 1% growth per year, and average growth dropping that low will send deficit and debt projections spiraling in the wrong direction.

Posted by blert | Report as abusive

Finally we are seeing Collapse in the mainstream media. What does this mean? It’s only being said in places like tiny Vermont, but Collapse is the breakdown of the unsustainable U.S. Empire: the largest, most brutal, most environmentally destructive empire of all time.

Vermont secessionists utterly reject the infinite growth paradigm as a key to the future, just as we led the opposition to the 1803 Louisiana Purchase, the national embargo of 1807, and the War of 1812. New England secessionists also expressed their opposition to a military draft at the Hartford Convention of 1814. Abolitionists in New England urged northern states to disengage from the Union.

What we have in common is a commitment to sustainable economic development, local food & energy production, to bring home the Vermont Guard troops from Afghanistan and Iraq, and to return Vermont to our status as an independent republic as we were until 1791.

Posted by RobertWagnerVT | Report as abusive