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Economic Growth and Budget Deficits

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Wednesday, 17 November 2010 05:28

David Leonhardt has a good piece pointing out the simple fact that more rapid economic growth will substantially reduce the budget deficit. However he overlooks an important part of the story.

More rapid growth makes the country richer. In his hypothesized growth speed-up, the country grows 0.5 percentage points more rapidly on average over the next two decades. If this happened, then people would be roughly 10 percent better off on average in 2030 than under current projections. 

If people are wealthier, then the cost of sustaining the government would be less of a burden. For example, in this fast growth scenario if we had a tax increase equal to 1 percentage point of GDP in 2030 (a large tax increase), it would still leave people with roughly 9.0 percent more after-tax income than in the baseline scenario even without a tax increase.

In other words, if before tax income grows more rapidly, then after-tax income can increase rapidly even if a somewhat greater portion is diverted to the government in tax revenue. Since the deficit is often put as a generational issue, if workers 20 years from now enjoy much higher after-tax incomes than workers today (which they will in every plausible scenario), it is difficult to understand why anyone today should be troubled if workers in future decades will pay a higher tax rate.

Comments (4)Add Comment
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written by izzatzo, November 17, 2010 8:16
If people are wealthier, then the cost of sustaining the government would be less of a burden.


Increased wealth can't help much when so much of it is funneled to the upper one percent, who use it to make most political decisions for the country to concentrate wealth even more. It's not just the wealth itself anymore, it's the sheer overwhelming power it wields.

Particular poignant is the propaganda sponsored by the wealthy that deficts are suppressing growth and that future wealth accumulation will decline unless austerity intervenes.

The irony is so loud it's deafening, because Baker's message is actually a conservative one - that growth will cure the problem like conservatives say that nature will recover from the BP oil spill to produce wealth again.

The wealthy claim Keynesian deficit spending will kill growth that could produce more wealth, in part by making deficits even larger, but more important by exploiting the recession to redistribute even more income and wealth upwards to themselves.

Just look at what the Bush tax cuts alone are doing, $4T in a decade added to the debt and shifted to upper income and wealth. War spending and the upside of business cycles used to add wealth across the board. Not any more.
warped sense of obligation
written by frankenduf, November 17, 2010 9:14
i think that arguing about the welfare of future generations is folly during a current crisis- the ethical point of stewardship for future generations is perfectly appropriate under normal conditions- but when the current generation is suffering, than the moral obligation is to alleviate it now even by abrogating the 'claim' of future generations- this is because of the causal link between prosperity now fostering prosperity later- the mass of unemployed and career disruption will take an enormous toll on our future generations, if they are extended Japan-style- austerity during a recession under the guise of a moral stance is like taking food away from a mother to save it for her unborn child
Our Grandparents were not austerians, fortunately
written by Paul, November 17, 2010 9:22
Are we better off today because our grandparents ran up record deficits fighting WWII? I am happy that they "mortgaged" our future by winning the war, but no doubt today's RepubliCONs would have opposed FDR's war spending just like their grandparents did. America First!
A Questionable Assumption
written by Ron Alley, November 17, 2010 6:12
Why is anyone speaking of increased income in the next decade for young workers?

That contradicts history as we have lived it. Real incomes have shrunk over the past 20 years for the majority of the population.

Again I ask, how can anyone speak credibly of increased income for younger workers?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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