Pethokoukis

A further response to Ben Domenech

I’ve been having this back-and-forth with Ben Domenech about reform conservatism and policy priorities. In particular, I don’t think much of balanced budget amendments or balanced budget fiscal targets. The ones I’ve seen have implausibly low spending assumptions.

But let me point out some math here: Run a federal budget deficit that is less than the growth in nominal GDP, and you will shrink the national debt as a share of the economy. From 1949 through 1974, the US slashed its publicly held debt as a share of GDP from 94% to 31%. During those years it balanced its budget just six times. Yet debt/output dropped dramatically thanks to low budget deficits and high nominal GDP growth of around 7%.

And as I have noted before, the original Paul Ryan “Roadmap for America’s Future”  proposed cutting debt/GDP by 30 percentage points over twenty years — all without ever balancing the budget or running a surplus. (And, by the way, Ryan used the slow-growth CBO economic forecast.) So obviously the strategy going forward should to maximize growth and minimize budget deficits. I think returning to the post-WWII, pre-Great Recession debt/GDP average of 37% is a reasonable, multi-decade target.

Now here is Brother Domenech today in his must-read, must-subscribe Transom newsletter:

As for the fiscal math: If you take the White House’s average annual gross debt growth assumptions for 2013-2018 (only 5.16% growth per year) and extrapolate that out until 2030, we would need GDP growth to average about 7.5% per year to get back down to the 2008 debt-to-GDP ratio of 70% by 2030. That is simply absurd. And that also anticipates ludicrously low White House debt growth assumptions for 2013-2018. Between 2000 and 2012, gross federal debt rose at an average annual rate of 8.5%. If those conditions repeat, we’d need annual GDP growth of 9.8% each year to get down to 2008 levels of debt-to-GDP. In the out years (2019-2030), the average annual GDP growth rate would need to exceed 12%. Just to stay below 100% debt-to-GDP throughout that period would require 5.3% average annual GDP growth under the rosy assumptions and 7.6% under the 2000-2012 assumptions. That’s quite a fiscal math test.

 

1. Domenech prefers to use gross debt rather than publicly held. Now 70% of GDP sounds high, but that’s not much high

2. I am not arguing that we don’t need to do anything about spending, only that we should be realistic. As I point out in a National Review column today, keeping spending only a couple of percentage points above its historical average will be hard work. Keeping budget deficits low, much less running surpluses, will also likely require revenue above historical levels. I think balanced budget amendments and superlow rate tax reform (or flat taxes) of the sort GOPers have been proposing make the math impossible.

 

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