America’s public-debt-to-GDP ratio is already higher than it has been since the 1950s. Writing in National Affairs, economist Donald Marron, who served as acting CBO director and a White House economic adviser under Pres. George W. Bush, says the most immediate objective of U.S. fiscal policy should be to stop that ratio from rising. He stresses that this would not require balancing the federal budget; indeed, it would be possible to run moderate deficits while simultaneously trimming the debt-to-GDP ratio, provided the economy was expanding at a fast enough pace.
Think of it this way: To maintain a constant debt-to-GDP ratio, we would have to maintain an identical deficit-to-growth ratio. For example, writes Marron, if we had a debt-to-GDP ratio of 60 percent and a deficit equal to 3 percent of GDP, then nominal GDP growth (that is, real growth plus inflation) would have to reach 5 percent in order to keep the ratio from increasing. The fact that such a humble aim — holding the debt-to-GDP ratio steady — seems so quixotic in the short run indicates the severity of America’s fiscal plight. Marron, who is now director of the Urban-Brookings Tax Policy Center, believes a practical, attainable medium-term goal should be to reduce the ratio to 60 percent by 2020. But over the long haul, he adds, even 60 percent would be unacceptably steep. From the mid–20th century through the early 2000s — until the Wall Street panic — the average ratio was roughly 40 percent.
Given the magnitude of our budget problems, it is unrealistic to think that tax hikes alone, or spending cuts alone, or economic growth alone, would be sufficient to fix them. Let’s say that real annual GDP growth averaged 3.8 percent over ten years. That hasn’t happened since the 1960s and 1970s, Marron reminds us, and it is very unlikely to happen in the decade ahead — but even with that level of growth, the federal government would still see only modest deficit reduction without serious fiscal reforms.
Tuesday, May 25, 2010
They can give you warnings ... if you want to listen.