Can America grow its way out of its debt problems? No

March 9, 2011

That’s the question CNBC’s Larry Kudlow asked House Budget Chairman Paul Ryan yesterday, which resulted in a fascinating exchange:

KUDLOW:  But what do you say to supply siders and others who argue–regarding Social Security, not health care–if you grow the economy in the next 50 years at 3 1/2 percent per year, which is the long-term growth since World War II, then Social Security will fix itself?

Rep. RYAN: No, it doesn’t.

KUDLOW: Now that doesn’t mean we shouldn’t have a personal account option and so forth, but that’s what they argue. If you grow the economy, growth, growth, growth, then we don’t have to slash benefits and the Republican Party will look better, not worse.

Rep. RYAN: Except, first of all, nobody is talking about slashing benefits. We’re not even talking about touching benefits for people in and near retirement. But we’ve run those numbers on growth and Social Security and they don’t catch up, because when you have more growth and you have more Social Security contributions, you have more expenses. The more you pay in, the more you get out. So growth, you cannot grow yourself out of our Social Security solvency problem. I’ve run those numbers with the actuaries. You do need to make some changes in Social Security benefit for the future generations to make this program solvent.

KUDLOW: But the actuaries say you can only grow at 2 percent for the next 50 years.

Rep. RYAN: No. But even if you run bigger growth numbers through the system, you still don’t fix the problem. I’ve run those numbers. I’ve run the 3 and 3 1/2 percent growth numbers through the system. We are kidding ourselves if we think we can simply grow ourselves out of our entitlement problems. We can’t. We have an $88.6 trillion unfunded liability with our entitlement programs, according to the GAO. Last year that was a $76.4 trillion problem. Every year we delay fixing these entitlement programs. We go about $10 trillion deeper into our unfunded liabilities.

Me:  This is actually a tricky issue.  As the CBO forecasts it, America’s debt-to-GDP ratio could top 700 percent by 2080. But drill down into that prediction and you find that the CBO has plugged in a rather dismal long-term forecast of U.S. economic growth, just 2 percent or so. That’s only two-thirds of the average U.S. growth rate since 1970. 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 to 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.

So Kudlow is correct — if you could find a way to meet those conditions.

But here is the problem with that math:

1) It, as Ryan alludes to, ignores that Social Security benefits are linked to income growth.  So higher growth equals higher benefits, though a quirk in how benefits are figured means faster growth could reduce the program’s short-fall by 25 percent or so.

2) Healthcare costs continue to increase at a rate faster than GDP growth. So you have to find a way to bring down spending, or healthcare will consume an ever bigger part of the pie and continually boost government spending (unless you reduce Uncle Sam’s role). This chart from the CBO tells is all:

THE

5 comments

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We can-in fact we must-grow our way out of the current debt. But we must implement entitlement reform to deal with the $100 Trillion and growing entitlement liabilities.

Gradual privatization of Social Security, and all other pension schemes, is essential.

Rule number one is you can’t let politicians have access to your retirement funds. They steal it and spend it every time. It is the scandal of our lifetimes and I can’t figure out why they aren’t being prosecuted for it. In the private sector you’d go to jail. They’ve done a very good job of hiding the mess they’ve made and transferring blame.

Posted by pduggan | Report as abusive

So, are you alluding to something being done about healthcare prices and drain on society’s fiscal solvency?
I can’t understand….the “elephant has been in the room!” for the past decade.
Healthcare is “killing” us with how this industry greeds so. Yet, nothing, nothing is even coming close to being proposed to stop this hog. Why?

Mitt Romney knows people will start pointing fingers at
HCA, that is why he (and the other privates) got HCA to float bonds last fall, piled the bond money into their own personal pockets, and NOW are having HCA (all laden with debt) sell stock to public investors, so they can cover the bond liability.
Then, let the mammoth corp get pinched. No skin off
this presidential hopeful’s back. Move on to the nation, and milk over there in new grass.

Will there be a place on this earth that this snake and gang will be able to live that isn’t ruined, dashed, milked, and ripped?

Posted by limapie | Report as abusive

[...] speech, 28 years later.When you get right down to the bottom of our fiscal problems, you find those ol’ debbils spending and entitlements.I realized, when I read this article on the old PBS “Omnibus” series, that I [...]

[...] http://blogs.reuters.com/james-pethokouk is/2011/03/09/can-america-grow-its-way-o ut-of-its-debt-probl… This entry was posted in Uncategorized. Bookmark the permalink. ← ‘Stealing from Social Security to Pay for Wars and Bailouts’ LikeBe the first to like this post. [...]

Privatize Social Security? Are you nuts?

You’d let the likes of the Wall Street Hedge Funds get
their corrupt hands on all that money? Hey, you think
the government is bad…OM goodness, OM goodness!

The dipping problem can be solved. Enact a law to halt this nonsense and make
sure Presidents like Obama can’t decide for themselves
if they’ll defend it or not.

Posted by limapie | Report as abusive

[...] the cash encouraging more folks to embrace Uncle Sam’s largess?” James Pethokoukis says we will not be able to grow our way out of our debt [...]

[...] the cash encouraging more folks to embrace Uncle Sam’s largess?” James Pethokoukis says we will not be able to grow our way out of our debt [...]

Your assumption that Real US GDP growth has averaged 3.0%+ growth since 1970 is a naive and incorrect assumption because the the rate of GDP growth has greatly diminished each decade since the 1960s. You can’t average inflated numbers from forty years ago with smaller numbers over the last 20 years and call that an accurate view of GDP growth. It is not. To prove my point, here are the average Real GDP growth rates by decade since the 1960s:
1960s: 4.44%
1970s: 3.26%
1980s: 3.05%
1990s: 3.20% (warped by two years of +5.0 fabricated and unnatural growth in 1998 and 1999)
2000s: 1.69%

Your view is simplistic and incorrect when an economy’s growth rates are fading.

Posted by tosenton | Report as abusive

Your logic is faulty re: averaging GDP growth since 1970. It would be like saying that a baseball player’s average batting average over 20 years was .300 when the reality is that his average was robust in his first 10 years and weak in his second 10 years:

First five years average: .340
Second five years average: .320
Third five years average: .290
Fourth five years average: .260

No major league baseball team would view this player as a .300 hitter in his last 10 years and if his agent was pedaling him as such he would be laughed out of every General Manager’s office in the league. The US economy is no different. The more robust 1970s, 1980s and even 1990s have nothing to do with today’s economy. And that history cannot be pulled forward to make today’s economy look better than it really is.

Posted by tosenton | Report as abusive