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Why the deficit commission should've focused on growth

By Ezra Klein

David Leonhardt picks up on one of my favorite points: The best way to reduce the deficit is growth. The numbers on this are just undeniable. "If the economy grew one half of a percentage point faster than forecast each year over the next two decades — no easy feat, to be fair — the country would have to do roughly 40 to 50 percent less deficit-cutting than it now appears," writes Leonhardt. Another formulation I like is Donald Marron's point that an extra percentage point of growth is worth $2.5 trillion in revenues over 10 years.

Now, the reality is that we don't know how to goose an extra point, or even half-point, of growth out of the economy. But that's still where the conversation should be. This is partly why I consider the cramped focus of the deficit commission a mistake. We should've had a broader commission looking at getting the economy back on track. Then there could've been recommendations to accelerate short-term growth (like the stimulus proposals that have appeared in the fiscal plans from both Rep. Jan Schakowsky and the Bipartisan Policy Center), reduce the deficit and put us on sustainable long-term footing (think tax reform, education reform, basic-research funding, etc).

It may not have worked, or passed. But then, you can say much the same for the Simpson-Bowles commission, which looks unlikely to report out a consensus proposal, much less pass it through Congress. And the reality is that liberals would be more likely to sign on to long-term austerity if it were paired with short-term stimulus.

By Ezra Klein  | November 17, 2010; 11:47 AM ET
Categories:  Budget  
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Comments

"Now, the reality is that we don't know how to goose an extra point, or even half-point, of growth out of the economy."

Ah! That's an easy one! We lower marginal tax rates on the highest 1% of earners!

Problem solved.

Posted by: ibc0 | November 17, 2010 12:27 PM | Report abuse

Its a fool's errand, private savings are created by govt deficits. Banks aren't lending, if Uncle Sam isn't putting Net Financial Assets into the economy (whether through new spending or the same level of spending but cutting taxes), the economy won't grow.
http://pragcap.com/mmt-101

Posted by: beowulf_ | November 17, 2010 12:32 PM | Report abuse

Another deficit-financed stimulus would increase demand temporarily but it wouldn't do anything for deficit reduction. The growth that is relevant to deficit reduction is moving out the long run supply curve, and on that count I dare say they did consider it when, for example, they called for a cut in the corporate rate. Search for "Do tax structures affect aggregate economic growth? Empirical evidence from a panel of OECD countries" and you'll find an OECD study that found that corporate taxes are the most growth-unfriendly taxes. It should be no surprise that today's Rivlin report also recommends a corporate tax cut. It's as settled a matter as matters can get in economics. But it is the hardest political sell because corporations don't vote and almost everyone thinks that if corporations pay, that means they don't have to.

Posted by: bdell555 | November 17, 2010 12:33 PM | Report abuse

"Now, the reality is that we don't know how to goose an extra point, or even half-point, of growth out of the economy. But that's still where the conversation should be. "

This is nonsensical. If we don't know how to magically boost growth, then we should focus on the things we do know how to do, i.e. reduce expenditures and increase revenue. Any extra revenue that comes from growth is a bonus and just helps reduce the deficit that much faster.

I realize you hate real life analogies to government policy, but it's like telling a family that's trying to pay off it's credit card debt to forget about budgeting, just focus on getting the breadwinner a big raise at work. It would be nice if it happens, but you shouldn't base your planning around it.

The deficit commission should plan around the idea that the current economy is the "new normal" for the foreseeable future while consumers are paying down debt and deleveraging and until that process is complete we aren't going to be seeing significant economic growth.

Posted by: jnc4p | November 17, 2010 12:41 PM | Report abuse

To Liberals:

Redistribution of wealth from earners and productives to leeches and unproductives does not gain you a point of growth.

Posted by: krazen1211 | November 17, 2010 12:50 PM | Report abuse

You know the commission's proposal to broaden the base and lower rates? The proposal you didn't like because it has the lower middle classes chipping in a few extra cents? That's a pro-growth element.

But otherwise, what jnc4p said. You can't build your deficit commission around hopes for extra growth.

Posted by: justin84 | November 17, 2010 1:12 PM | Report abuse

Yup! We grow by taxing the ultra wealthy even less and imposing higher tax burdens on doctors, lawyers, and engineers!!! Yay plutocracy!! Booo meritocracy.

Those lazy engineers and scientists... they need to stop leeching off the system and learn how to leverage debt. Now, that's a productive use of our nation's resources!

Posted by: will12 | November 17, 2010 1:19 PM | Report abuse

"The deficit commission should plan around the idea that the current economy is the "new normal" for the foreseeable future while consumers are paying down debt and deleveraging and until that process is complete we aren't going to be seeing significant economic growth."

Accept the current weak economic growth and high unemployment as part of the New Normal? The old folks will stay mad, the middle-aged will remain hesitant, and the youngsters will revert to the old normal of apathy. Brilliant strategy if the goal is a GOP sweep of the Senate and the WH in 2012.

Maybe the powers-that-be should stop trying to walk and chew gum at the same time. The half-solutions have not been successful. Work on economic and employment growth with a laser-like focus. They probably have a year at most before the presidential campaign begins to heat up and crowds out the big items on the agenda.

Posted by: tuber | November 17, 2010 1:20 PM | Report abuse

Ezra,

please explain to me how Rep. Schakowsky's proposal to tax businesses another $132 billion dollars will stimulate growth.

Posted by: visionbrkr | November 17, 2010 1:26 PM | Report abuse

"Pro growth" is as nebulus a concept as "uncertainty." Many think the comission's nominal tax cuts are pro-growth for instance. If you put 50 economist in a room you will get 50 different "pro growth" plans - of course no one is going to label their plan as anti-growth.

Posted by: chrisgaun | November 17, 2010 1:55 PM | Report abuse

chrisguan,

so do you think any single one of your economists in that room would have the audacity to state that $132 billion in tax increases is "pro growth" and not be laughed out of that same room?

Admittedly i didn't read too much of Ms. Schakowsky's plan but i don't remember seeing "nomial tax cuts" anywhere mentioned.

her plan is sheer stupidity plain and simple.

Posted by: visionbrkr | November 17, 2010 2:21 PM | Report abuse

"please explain to me how Rep. Schakowsky's proposal to tax businesses another $132 billion dollars will stimulate growth."

1. Corporations are sitting on a trillion or so dollars, unwilling to invest in a time of slack demand;

2. Take some of that hoarded cash, and put it to use getting people back to work;

3. People with jobs go out and buy more stuff;

4. Economy grows.

Clear now, visionbrkr?

Posted by: quickj | November 17, 2010 4:49 PM | Report abuse

There's a notable absence of analysis in this piece about how much additional growth is needed to make up for the additional deficits created by stimulus. Especially when stimulus money is wasted on non productive expenditures, or worse yet, spent on creating new and additional government jobs that the productive economy will have to support ad infinitum.

Posted by: bgmma50 | November 17, 2010 5:48 PM | Report abuse

quickj,

so you're saying basically that corporations if solely taxed on that amount would do nothing to evade the tax? We heard on here pretty frequently of the example of credit card companies flocking to the Dakota's for tax purposes and most corporations are incorporated in states like Delaware for tax purposes even though they have no business there but you think businesses would willingly hand over that trillion or so without question? Isn't that being just a little naive?

Posted by: visionbrkr | November 17, 2010 6:06 PM | Report abuse

"Corporations are sitting on a trillion or so dollars, unwilling to invest in a time of slack demand;"

On the other side of the balance sheet, corporations are also sitting on quite a lot of debt.

"Take some of that hoarded cash, and put it to use getting people back to work;"

Corporations don't maintain vaults with suitcases of paper money.

When a company talks about cash, what it is really referring to is money invested in safe, short-term vehicles or bank accounts.

The dollars labeled by corporations as "cash" are funding the federal government and other corporations via money market funds or bank deposits.

If we tax that "cash" away, the debt securities (or deposits) that were funding another activity (or bank loans) must be funded by another investor. As the next investor replaces the first, the pile of "cash" reappears.

More here:

http://www.hussmanfunds.com/wmc/wmc100809.htm

Posted by: justin84 | November 17, 2010 9:25 PM | Report abuse

I believe banks currently have about $1 trillion in excess reserves--money deposited by companies and individuals that normally would be loaned but is not.

Posted by: pjro | November 17, 2010 10:00 PM | Report abuse

You suggest that we grow the economy one half of a percentage point faster than forecast each year over the next two decades." By the economy, you mean the gross domestic product - i.e. the total amount of stuff we produce.

However, we live on a finite planet which is filling up with people and running out of resources. Who says we need to consume more stuff each year than we did the previous year? Do we need more stuff? Where will the raw materials come from to produce this stuff?

It is time to think carefully about what we need and encourage reuse.

Posted by: loeb17 | November 18, 2010 12:37 PM | Report abuse

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