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Want low deficits? Grow.

IMF economists Olivier Blanchard and Carlo Cottarelli offer a nice reminder on the importance of strong economic growth to low deficits:

Strong growth has a staggering effect on public debt: a one percentage point increase in potential growth -- assuming a tax ratio of 40 percent -- lowers the debt ratio by 10 percentage points within 5 years and by 30 percentage points within 10 years, if the resulting higher revenues are saved.

For a lot more deficit wonkery, see my Sunday column. For those of you who don't click on the link, the conclusions, based off a raft of numbers that the Committee for a Responsible Federal Budget worked up for me, are that you'll never get deficits under control if you don't get growth back on track; you'll never get deficits under control if you refuse to consider tax increases; and it would be wise to look for "two-fer" policies, like carbon taxes and health-care reform, that allow you to reduce the deficit and further another policy initiative at the same time.

By Ezra Klein  |  June 28, 2010; 9:00 AM ET
Categories:  Books  
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Comments

When the democrats in Mass don't agree with you, it's trouble. What has Brown been talking about? The deficit! Sen. Scott Brown (R-MA), "who only months ago was a little-known figure even within the tiny band of Republicans in the state Senate, not only catapulted to national stature with his upset US Senate victory, but is today the most popular officeholder in Massachusetts," according to a Boston Globe poll.

Brown outpolls such Democratic stalwarts as President Obama and Sen. John Kerry (D-MA) in popularity and "gets high marks not only from Republicans, but even a plurality of Democrats views him favorably."

Posted by: obrier2 | June 28, 2010 9:47 AM | Report abuse

grow?

I get it, and tend to agree that the best traditional way to reduce deficits is to create jobs and spur economic growth, and that stimulus is what causes that to happen the fastest.

But I wonder if growth-based economies are sustainable. Maybe there's a limit to how much we can grow, and we've reached it?

If in fact a growth model is not sustainable, then what do we do? Simply slash spending and raise taxes until the budget is balanced?

As a progressive I want less of a growth based economy. I want something slower and deliberate, and more thoughtful to the environment and other long-term issues, and I want it to be less profit (greed) driven.

My intuition tells me a non-growth model would be greener and would require less energy, and the inevitable spending cuts would neuter our military industrial complex's ability to wage war as much as it would reduce entitlements.

Maybe the turtle is really better than the hare?

I also wonder if there's so much corruption in the current system that most stimulus just ends up being stolen.

Posted by: Lomillialor | June 28, 2010 10:08 AM | Report abuse

Lom,

"But I wonder if growth-based economies are sustainable. Maybe there's a limit to how much we can grow, and we've reached it?"

The limit to growth is limited primarily by human innovation. In all probability, growth will continue for centuries and perhaps far longer still.

As we continue to innovate, we will continue to be able to produce more with less. If we keep the size of the pie fixed but use fewer ingredients, then we'll be stuck with ever increasing amounts of unemployed ingredients.

Anyway, rich societies care the most about the environment. Once you are rich, you can buy a Prius, food from local organic farms and cut a check to the Sierra club. Going from $25,000 to $250,000 worth of income doesn't increase your environmental impact by anywhere near a factor of 10. If that increase in income leads you to vote for people who advocate cap and trade, it might even mean less environmental impact.

Also, note that the worst polluter today is China. China will need to grow for decades to be as rich as the United States is today, and its emissions will increase as this growth occurs. Do we ask them to limit their output at $6,000 per capita? If we do ask this, can we really expect that they will listen to us? There is little the U.S. can do on its own to save the environment. Our nation is far too small a part of the world. We could stop emitting tomorrow and China and India would pick up the slack in a decade or two.

"My intuition tells me a non-growth model would be greener and would require less energy, and the inevitable spending cuts would neuter our military industrial complex's ability to wage war as much as it would reduce entitlements."

Potentially. I don't think we should massively restructure society on the basis of intution. Our intutions could be wrong. A country that would vote for this model might not like the military industrial complex. Of course, the military industrial complex might decide to maintain its size and take resources away from the (now smaller) civilian economy. The military could argue that other countries are continuing to grow, and to 'keep us safe' the militar must take an ever growing chunk of America's fixed output. It is conceivable that programs like Social Security and Medicaid will be deemed a waste and canceled because the money needs to go towards keeping the military competitive.

"I want it to be less profit (greed) driven."

This will never happen. Human nature will not change. Most of the good in the world - growing food, building homes, inventing new technologies and products - is done for profit. Socieities which ignore this have proven to be miserable places to live. I would rather live in Gordon Gekko's world than Mao's. There is no New Socialist Man.

Posted by: justin84 | June 28, 2010 11:06 AM | Report abuse

The deficit reduction game is great fun. It would be great if enough Americans were adult enough to have a reasonable debate about the "tough choices". We can blame the pols, but they are just telling us what we want to hear. We, the people, need to grow up. Speaking of growing up...

Please don't start another column with the phrase "When I was a kid" until you get a few grey hairs ;-). You must realize that a large percentage of Wash Post readers look at your baby face and laugh at that phrase coming from you.

Posted by: pundit115 | June 28, 2010 1:13 PM | Report abuse

It's not enough to prescribe "growth" to reduce deficits.

Growth in the oil industry won't do it, because they don't pay income taxes, despite being obscenely profitable. In fact, corporate growth in general won't do it, because half of corporations pay no federal income taxes at all, and the rest account for only a bit more than 7% of federal tax receipts.

The only way to reduce deficits through growth is to add jobs and raise the wages of those who have jobs, because individuals are the source of the vast majority of tax receipts.

It's important not to throw around the term "growth" loosely, in this context - unless you want your argument to be co-opted by that most Orwellian of organizations, the "Club for Growth".

Posted by: jimol | June 28, 2010 3:11 PM | Report abuse

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