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Economic Growth as a Way out of Debt

The New York Times today has a front-page news analysis that reports on a startling (at least at the Times) idea to cut the deficit and thus tame the rapidly rising national debt: economic growth. Who knew?

This has, of course, been tried with great success before. In 1946, the national debt stood at $269 billion. That was almost 130 percent of GDP. Fifteen years later, the debt had risen a little (to $288 billion), but that was only 56 percent of GDP, thanks to the enormous growth in the American economy in the post-war era.

As the Times article points out, economic growth was one of the major components behind eliminating the deficits in the 1990s. The growth produced a gusher of federal tax revenues, which rose from $1.031 trillion in 1990 to $2.025 trillion in 2000, a 96 percent increase. But it was spending restraint after the election of a Republican Congress in 1994 that really turned the trick. Federal outlays were $1.460 trillion in 1994 and $1.789 trillion in 2000, a mere 22 percent increase, while federal revenues rose 61 percent in those years. A similar ratio of revenue growth to spending growth would bring the deficits down to a manageable level within a very few years.

The author, New York Times columnist David Leonhardt, is discussing a new plan, released today, that has been developed by the Bipartisan Policy Center under co-chairs Alice Rivlin, a former head the OMB under President Clinton, and former Republican Senator Pete Domenici. It can be found here. I haven’t had time to read it yet, but it has some sensible suggestions about taxes and one terrible idea, a 6.5 percent “Debt Reduction Sales Tax.” As money is fungible, there is no way to dedicate a portion of federal revenues to debt reduction. It would simply be another federal tax, and a regressive one at that.

Leonhardt acknowledges that the tax code is a big part of the problem:

Today’s tax code is a thicket of deductions, credits and loopholes that force people to change their behavior and waste time trying to avoid too large of a tax bill. A tax code with fewer deductions and lower rates — which, to be clear, is not the same thing as a tax cut — would instead let businesses and households focus on being as productive as possible. The potential to make good money would drive more decisions, and the ability to qualify for a tax break would drive fewer.

If this sounds familiar, it is because this was the very heart of Reaganomics 30 years ago. It is amusing that Leonhardt takes pains to ensure Times readers, before they come down with the vapors, that not all tax-rate reductions are tax cuts.

Along with the Bowles-Simpson plan, this one is worthy of study.



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