Where’s the Growth?

The topic du jour, spurred, no doubt by the discussions of the federal budget and debt ceiling, is federal debt. Here’s Phil Gramm’s and Michael Solon’s sally at the Wall Street Journal:

Growth deniers are declaring that America’s economy has lost its ability to grow at 3% above inflation. If that’s the case, maybe we should go back to where we lost 3% growth and retrace our steps until we find it. For only with 3% or higher growth does America experience measurable progress in poverty reduction, strong job creation and income growth. If 3% growth is irretrievably lost, so is the American Dream.

Did America actually experience 3% real growth to start with? Yes. In the postwar era, the U.S. averaged 3.4% annual growth from 1948 through 2008. We averaged 3% growth for half of the George W. Bush presidency (2003-06). From 2009-12, the Obama administration, the Congressional Budget Office and the Federal Reserve all thought they saw 3% growth just around the corner. If the possibility of 3% growth is gone forever, it hasn’t been gone very long.

America enjoyed 3% growth for so long it’s practically become our national birthright. Census data show that real economic growth averaged 3.7% from 1890-1948. British economist Angus Maddison estimates that the U.S. averaged 4.2% real growth from 1820-89. Based on all available data, America has enjoyed an average real growth rate of more than 3% since the founding of the nation, despite the Civil War, two world wars, the Great Depression and at least 32 recessions and financial panics. If 3% growth has now slipped from our grasp, we certainly had it for a long time before we lost it.

So poor was our economic performance during the Obama presidency, with its 1.47% economic growth, that now many Americans believe 3% growth is gone forever. The CBO has slashed its 10-year growth forecast to a measly 1.8% per year. If we never see 3% growth again, our grandchildren may point to 2009 and say, “That was when the American economy ran out of gas.”

Not to be left behind, in his regular Washington Post column Robert Samuelson, too, complains about the debt:

A new study by Paul N. Van de Water of the left-leaning Center on Budget and Policy Priorities makes this clear. On the one hand, government gets bigger. In 2016, federal spending totaled 20.9 percent of gross domestic product (GDP), our economy. By 2035, this will be 23.5 percent of GDP, Van de Water projects. That 2.6-percentage-point gain may seem tiny. It isn’t. It equals almost $500 billion in today’s dollars. (Remember: The U.S. economy has a $19 trillion GDP; one percentage point is $190 billion.)

At the same time, much of government is projected to shrink. The simple answer is that the increases for the elderly overshadow the losses for everyone else. Look at the table below. It measures the major categories of federal spending as a share of GDP in 2016 and Van de Water’s estimates for 2035. (Using the share of GDP eliminates the effect of inflation between the two years.)

The elderly enjoy big gains in Social Security, Medicare and “other health spending.” Meanwhile, defense spending drifts toward its lowest level since 1940. Other domestic programs (the FBI, the national parks, regulation) could face crippling defunding. The same holds true for “other entitlements” (food stamps, unemployment insurance).

Note also that, despite the cuts and a large tax increase, there remains a big 2035 deficit running into the hundreds of billions.

Here’s the table to which Mr. Samuelson refers:

To put that into perspective, present state, federal, and local government spending already exceeds what it was at the height of World War II as a percentage of GDP and there’s no end in sight.

That’s not a painless increase. Deadweight loss results in less economic growth than would otherwise be the case as does financing the deficit via debt.

Trimming the federal budget would require ending foreign adventurism and cutting defense spending correspondingly, making the commonsense reforms to Social Security Retirement Income suggested in Mr. Samuelson’s column, and slowing and/or reversing the growth in healthcare spending. Increasing median wages by curbing immigration of low wage workers and creating a tighter labor market would help, too, as would depending less on consumer spending and imports, incentivizing business investment, and more exports. As long as the party of small government that won’t cut government faces it off against the party of big government but, sadly, not of good government, the prospects are bleak.