Cultivating Growth

http://www.nytimes.com/2010/11/17/business/economy/17leonhardt.html?emc=eta1

Here's a concept: everybody wants to "trim the deficit" by cutting spending - very timely: it puts us back to 1937 when doing that just made the Great Depression worse and the only thing that got our economy out of that was WW II.

Here's a concept: foster policies that encourage "more rapid GDP growth." We're guessing here that most members of Congress and the administration have some form of advanced education. If so, an aspect of that education would include some basic economics and some recent economic history.

In the late 1990s the U.S. government was running a budget "surplus." So, we went into the 21st century with a "surplus," not a deficit. What was going well then? The ECONOMY. It actually grew more rapidly than expected in the late 90s. The faster growth pushed up incomes and caused more tax revenues (from tax rates that had been raised) to flow into the Treasury.

As David Leonhardt points out (article attached), today's deficits are too large to be closed exclusively with growth. The baby boom generation is too big, and the rise in Medicare costs continues to be too steep. But, "growth" could make a big difference.

As several of you have pointed out to me, there is a NY Times "Deficit Puzzle" which was created as an interactive device to allow anyone to juggle the variables of the deficit and see what works to tame it and what doesn't. It asks you to find almost $1.4 trillion in annual spending cuts and tax increases by 2030. If growth were a half point faster than expected, the needed "savings" would instead drop to less than $700 billion.

So arguably the single best way to cut the deficit is to make sure that any deficit-cutting plan does not also cut economic growth.

So, in the short term, we should actually spend more. This is the point Warren Buffet and Paul Krugman made back when the U.S. stimulus plan was first enacted (they said at that time that it wasn't enough). As Alice Rivlin puts it: "We can do both. We can put money in people's pockets in the short run and trim government spending in the long run."

Here's a concept: one aspect of the Bowles-Simpson plan calls for a gradual 15-cents-a-gallon increase in the federal gasoline tax to pay for highways, mass transit and other projects. Now that would be a tax that directs moneys toward infrastructure where our crumbling highways and "bridges" are in much need of repair AND creates (or preserves) jobs where they're needed. We believe it was Mark Zandi who pointed out to both houses of Congress that there is a "spending multiplier" into the economy for this type of investment.

Stimulating growth: what a concept!