Michael Boskin, Tully Friedman Professor of Economics at Stanford University and Senior Fellow at the Hoover Institution, wrote a paper recently that’s worth a good long look this week. He examined how our national debt, especially the ratio between our debt and our Gross Domestic Product, influences the growth of our economy. You can get a copy of his work here (PDF link) and I highly recommend you do so. Here’s his initial premise.
While temporarily desirable in war and recession, large deficits potentially cause two separate but related problems—shifting the bill for financing the current generation’s consumption to future generations and crowding out of private investment. Thus, deficits are more problematic during economic expansions, if they reduce domestic investment and hence future income, when the national debt is high or rapidly rising relative to GDP, and when they finance consumption, not productive public investment.
In short, our economy has two types of money: government and private. Government money only comes from the private sector and, once removed from it, becomes far less useful because it is disbursed inefficiently (and, often, corruption is endemic). Private money, on the other hand, multiplies itself and flows where the economy most needs it at any given moment.
Our problem right now is that the national debt, especially the ratio of debt to what the entire country produces every year — the Gross Domestic Product — is climbing far past our ability to sustain it. When that ratio increases, it pulls money from the private sector into government. Now, that may seem an obvious point but the transfer of wealth from the private sector to government has a far greater effect than we can see immediately. First, let’s look at the ratio — where it is now and where it’s headed under President Obama’s watch. Right now, the big debt drivers are the large entitlement programs: Medicare, Social Security, and Medicaid. Says Boskin:
OMB provides a baseline long-run estimate based on President Obama’s policies as implemented and proposed, including his tax increases, health policy and, importantly, the absence of cost growth slowing Social Security and Medicare reform.9 After roughly doubling from the end of 2008 to 2014, then briefly leveling off, the ratio exceeds 90 percent in about 20 years, 100 percent soon thereafter, and then keeps rising.
Here, now, is where the concrete numbers are important. Boskin noted a study that found that for every 10 percent increase in the debt/GDP ratio, we lose 0.17% in economic growth per year. He took that figure and extrapolated how large an impact that would have on the economy if we continue the government’s current “everything will be fine if we just raise taxes on rich people” program.
By 2050, the higher debt ratio brings growth to a halt under the “continuation of Administration policy” scenario. The level of GDP is 30 percent lower than if the debt had not soared and the policies had not continued. That’s most of a generation of per capita income gains wiped out or, put another way, it is as large as the gap between American and lower Western European per capita incomes. Under the “reverse course, stabilize debt” policy scenario, the decline in income is “only” 12 percent. That is most of a typical decade’s worth of real per capita income growth.
In other words, if we follow the Democrats’ plan, our economy will be 30% smaller than it would be if we had a smaller, more responsibly-sized government. If we manage to freeze the debt in place, we can limit the damage to a 12 percent smaller economy than we’d ordinarily have. Of course, this strongly implies that if we put a plan into place that reduces the debt in a reasonable number of years (and there is an array of plans from which we can choose), we can cut that GDP reduction even more and perhaps even eliminate it completely.
Mind you, these numbers are not merely abstract. They represent smaller earnings per family. In other words, a high national debt means that you and your family will have less money in the future. The rampant spending of today’s politicians means you spend more today in taxes and earn less in the future because of a slower economy. The debt is a double-whammy of misery that not only affects your children because they will have to pay that money back at some point, but leaves them in a worse position from which to build their lives. I’m sure we’d all appreciate a paycheck 30 percent larger than it is right now. That’s what we could have if we cut government.
But the situation will only get worse unless we stop right now. We have already done a certain amount of damage and we can not repair it. Our debt is large — over $16 trillion dollars — and we’ll need a few years to whittle it down to a manageable size. Likewise, our economy is far from healthy. Economic growth may not reach 4 percent a year, which is really where we need it to be, for a long time. We don’t notice what our debt really costs us because we don’t see the money fling out of our bank account, but it is and it will continue to do so for such time as our debt is as high as it is.
The answer, folks, is pretty simple. Shrink government and unleash the incredible power of private money. Let job creators do what they do best without having to seek permission of government bureaucrats first. Stop trying to manage every aspect of the economy with rules that should have been tossed in history’s dumpster decades ago. Let people manage their own affairs, spend their money as they wish, find their own paths to prosperity and happiness. Turn the economy up to 11 and the government to a number a lot smaller than we have right now and reclaim our future. The alternative is, well, pretty bleak.
Failing to rapidly begin bending the long-run debt-GDP curve down risks a growth disaster, whose severity could be much worse even than the recent deep recession and tragically anemic recovery. Left unchecked, it eventually risks a lost generation of growth, a long-run growth depression.
There’s your future, if we do nothing. I don’t want that. Neither do you. So let’s change it.
