Real economic growth — driven by Schumpeterian innovation — can produce fiscal miracles. If nothing else, Rep. Paul Ryan’s Path to Prosperity demonstrates that reality. The budget Ryan put forward on Tuesday would balance in 2039. That’s a long time from now. The Chicago Cubs might even win a World Series by then.
But that forecast uses the lackluster economic assumptions of the Congressional Budget Office. And those assumptions assume Ryan’s sweeping tax reform would have no impact on growth. But numerous academic studies — plus common sense — suggest it would.
I can hear the screams from the left already: “Down with dynamic scoring.”
But consider this: A much-respected 2001 study found that eliminating the current tax code’s bias against savings and capital could enlarge the economy by 5-9% over the long run. And a 2004 study by Young Lee of Korea’s Hanyang University and Roger Gordon of the University of California, San Diego, found that “increases in corporate tax rates lead to lower future growth rates within countries.” And there’s many more where those came from. Smart tax reform can boost growth and tax revenue:
The Office of Management and Budget (OMB), for instance, estimates that if real GDP growth is higher by 1 percentage point in a given year, resulting in a higher trajectory for output and taxable incomes, the deficit will be $722 billion lower over a ten-year period. If that higher rate of growth were sustained throughout the ten-year period (say, due to a “productivity shock” like the changes in computer and information technology in the 1990s), the overall effect on the deficit would be orders of magnitude higher.
(And the CBO says that lower economic growth of just 0.1 percentage point each year could increase deficits by $310 billion over ten years.)
So on Thursday, Ryan reran the budget numbers assuming his policies would produce faster GDP growth that was 0.5, 0.75, or 1.0 percentage point above CBO’s economic forecast for the decade. Now, depending on which of those three scenarios you plug in, the budget would balance in 2019, 2021, or 2025. And debt as a share of GDP would fall to pre-Great Recession levels by the 2030s. (If we instituted Ryan’s Medicare reform plan in, say, 2015 instead of 2023, those numbers would get bumped forward even further.)
Even better, faster growth would boost job and income growth. It would accelerate America’s return to prosperity. Now, prosperity doesn’t just mean more consumer spending. It also means the ability to pursue happiness. It means having a true opportunity society. That’s kind of the point of the American Project, right?
Now, a growth agenda needs to go beyond tax reform (and I would advocate reform even bolder than Ryan’s). Education, immigration, infrastructure, and research policy all need to be seen from that perspective and play a role. But Ryanomics would be a huge and historic step forward.