BWR on growth and the debt.

More great analysis courtesy of Vlad Signorelli at Bretton Woods Research, in partnership with Louis Woodhill. The chart below deserves wide circulation.


Notes on the Growth Scenario
Mar 14 2011

Given the stir our recommended reading "Paul Ryan Is Wrong" created among clients last week, we asked Forbes columnist and Club for Growth Leadership Council member, Louis Woodhill, to elaborate on the growth case in relation to the deficit and public debt from a technical perspective.

Below Louis explains how the CBO's doomsday Alternate Fiscal Scenario emerged. It was unveiled in June 2010 and has become the dominant projection for various studies on the subject, including President Obama's "Debt and Deficit Commission" and is routinely cited by Congressman Paul Ryan. It assumes an average annual growth rate of 2.16%. Woodhill, who is also an engineer and successful software entrepreneur, has done a yeoman's job working through the numbers and constructing a budget model that closely approximates the inputs and outputs of the CBO case. This allows different scenarios to be explored such as if the U.S. economy were to grow close to its historic norm of 3.5%.

His model in printable excel format is available upon request.

-Bretton Woods Research


Notes on the Federal Deficit, Debt & Faster Growth
March 12, 2011

Concern about Federal deficits and the mounting Federal debt escalated noticeably after the Congressional Budget Office (CBO) released its “Long Term Budget Outlook” (LTBO) on June 30, 2010. One of the cases they presented, their “Alternate Fiscal Scenario” (AFS), became widely cited in various studies and articles. The AFS was the basis for the work done by President Obama’s “Debt and Deficit Commission”, headed by Alan Simpson and Erskine Bowles.

The CBO's AFS predicted financial doom, with “Federal debt held by the public” rising rapidly and steadily until it reached an incredible (and unsustainable) 947% of GDP in 2084, which was the end of the CBO’s forecast period. As bad as this number was, it did not include the ongoing unfunded liabilities of Social Security and Medicare.

What was striking about that budget outlook is that it was based upon a single, very pessimistic forecast of economic growth, averaging 2.16% over the period. No cases were run on the sensitivity of the results to higher rates of economic growth. This was curious, since economic growth is the variable that has by far the largest impact on Federal finances.

On July 11, 2010, Erskine Bowles publicly asserted, "We can't grow our way out of this. We could have decades of double-digit growth and not grow our way out of this enormous debt problem." This statement prompted me to write a piece for RealClearMarkets entitled, “The Conspiracy Against Economic Growth”.

My article was based upon a financial model that I constructed using the CBO's numbers. The latest version of this model has the filename “Growth vs Spending Cuts LRW V6 031111”. The model includes the same dollar amounts of non-interest Federal spending assumed by the CBO alternative fiscal scenario. The model makes it possible to examine the impact upon Federal debt held by the public of changes in four variables: 1) real GDP growth; 2) the Federal “tax take” (taxes as a % of GDP); 3) real interest rates; and, 4) non-interest spending.

As expected, if the assumed GDP growth rate is increased to levels that are historically “normal” for the U.S. (3.5%), the debt/deficit problem goes away, whether or not spending is cut.

To illustrate this point, the following is a chart of the public debt as percentage of GDP for the next 73 years with a 2.16% growth rate as well as with an annual growth rate of 3.5%.

It is important to note that the model does not reflect the fact that higher economic growth would produce higher wages, which would eventually lead to higher Social Security costs. However, it also does not take into account the fact that higher economic growth would lead to lower costs for various “safety net” programs, like unemployment insurance, food stamps, and Medicaid.

Congressman Paul Ryan stated earlier this week on Kudlow & Company that faster economic growth cannot solve the financial problems of Social Security. This does not make sense. As a thought experiment, imagine that we woke up tomorrow and real wages had doubled. This would cause Social Security tax revenues to immediately nearly double, but outlays would rise only with a considerable lag. From this example, it is obvious that there has to be some rate of economic growth that would solve the problems of Social Security.

-Louis R. Woodhill

Wednesday round up.

The President’s deficit commission recommends spending cuts along with lower tax rates and elimination of deductions.

From August, Louis Woodhill exposes the commission’s low growth assumptions.

On The Kudlow Report, Don Luskin comments on how to play loose money and fiscal austerity:




At Forbes, Brian Wesbury and Robert Stein argue against quantitative easing.

In The FT, Alan Greenspan doubts the wisdom of a weaker dollar.

The WSJ editorializes in favor of trade liberalization to improve global imbalances.

A country's trade balance is simply an accounting identity that by definition matches the flow of goods and capital. Some countries export goods (a trade surplus) and also export capital to help other countries pay for those goods (a capital deficit). Others import goods (a trade deficit) while importing the capital with which to buy them (a capital surplus). Japan and Germany fall in the first category, the U.S. and India in the second. Either is perfectly normal.

The real problem is that for several decades many economies, especially in East Asia, have attempted to thwart these natural flows by running both trade and capital surpluses, and thus accumulating extraordinary levels of foreign currency reserves. Japan has done this for so many years that it is running a capital account deficit even as it sits on an enormous pile of U.S. Treasurys. China and South Korea do the same today.

This is where freer trade becomes so important. Trade barriers have long been a central policy tool for governments trying to keep their economies oriented toward exports. Trade barriers raise domestic prices by depriving consumers of the benefits of competition, while also artificially limiting their consumption options. Meanwhile, consumers and businesses aren't sending as much capital overseas to pay for imported goods.

On The NY Sun, Seth Lipsky defends Robert Zoellick from critics.

Cato’s Dan Mitchell worries the Fed is turning the dollar into a joke.

At NRO, Larry Kudlow links to Dan Mitchell’s latest video opposing tax increases:




In The Washington Examiner, Ralph Benko suggests ways to help the economy.

Thursday round up.

At The Washington Post, Fed Chairman Bernanke justifies yesterday’s decision to add $600 billion to the economy.

The NY Sun editorializes that the dollar’s value will predict the fate of the Boehner Republicans.

On The WSJ, Dan Henninger argues Republicans should focus on economic growth over spending cuts:




At Asia Times, David Goldman outlines why quantitative easing won’t work.

On NRO, Larry Kudlow suggests stopping bad ideas may be the best outcome of the Republican House.

The WSJ editorializes against quantatative easing:

The Fed first tried QE, as it's called, with $1.75 trillion of bond purchases starting in December 2008, but that was at the height of the financial panic when markets were frozen. The Fed's justification for this current round is that inflation is too low and growth too slow to reduce unemployment. The Fed promised to buy $600 billion in bonds for starters, and to keep buying until the rate of inflation rises, presumably above its 2% target.

This is a terribly risky strategy for what we expect will be little economic gain. The Fed hopes the policy will have the effect of reducing long-term interest rates by 25 to 50 basis points or more, but the 10-year Treasury bond is already near historic lows. Marginal business borrowers aren't worried about the price of money; they're worried about the vagaries of economic policy. QE2 only adds to this uncertainty, as the Fed expands its role into fiscal policy and credit allocation.

Meanwhile, Mr. Bernanke's monetary cowbell will flow into higher commodity prices and other assets, perhaps leading to more bubbles. It has already caused havoc around the world, as investors flee the dollar for other currencies. Dollar-bloc countries are already seeing an increase in their price levels and several are contemplating capital controls.

In The Financial Times, U.S. Rep. Paul Ryan (WI) emphasizes growth – including sound money.

On The Kudlow Report, Brian Wesbury sees the Fed funds rate as too low and likely to lead to inflation:




At Forbes, Steve Forbes suggests provisions to change in Obamacare.

From the Mises Institute, Austrian Robert Murphy challenges "60 Minutes" on taxes.

Australia’s you.com discusses the effect of tax rates on the Rolling Stones (H/T: Greg Mankiw):

The Stones are famously tax-averse. I broach the subject with Keith in Camp X-Ray, as he calls his backstage lair. There is incense in the air and Ronnie Wood drifts in and out--it is, in other words, a perfect venue for such a discussion. "The whole business thing is predicated a lot on the tax laws," says Keith, Marlboro in one hand, vodka and juice in the other. "It's why we rehearse in Canada and not in the U.S. A lot of our astute moves have been basically keeping up with tax laws, where to go, where not to put it. Whether to sit on it or not. We left England because we'd be paying 98 cents on the dollar. We left, and they lost out. No taxes at all. I don't want to screw anybody out of anything, least of all the governments that I work with. We put 30% in holding until we sort it out." No wonder Keith chooses to live not in London, or even New York City, but in Weston, Conn.

Of course, it wasn't just the taxman's pinch that forced the Rolling Stones to focus on the bottom line. They also got screwed by record labels. "In the early days you got paid absolutely nothing," recalls Jagger. "The only people who earned money were the Beatles because they sold so many records."

Thursday items.

On Forbes, historian and Econoclasts author Brian Domitrovic explains that dollar instability led to Social Security’s creation.

In The WSJ, Charles W. Kadlec suggests that after four decades of evidence, the floating dollar experiment can be ruled a failure.

From 1947 through 1967, the year before the U.S. began to weasel out of its commitment to dollar-gold convertibility, unemployment averaged only 4.7% and never rose above 7%. Real growth averaged 4% a year. Low unemployment and high growth coincided with low inflation. During the 21 years ending in 1967, consumer-price inflation averaged just 1.9% a year. Interest rates, too, were low and stable—the yield on triple-A corporate bonds averaged less than 4% and never rose above 6%.

What's happened since 1971, when President Nixon formally broke the link between the dollar and gold? Higher average unemployment, slower growth, greater instability and a decline in the economy's resilience. For the period 1971 through 2009, unemployment averaged 6.2%, a full 1.5 percentage points above the 1947-67 average, and real growth rates averaged less than 3%. We have since experienced the three worst recessions since the end of World War II, with the unemployment rate averaging 8.5% in 1975, 9.7% in 1982, and above 9.5% for the past 14 months. During these 39 years in which the Fed was free to manipulate the value of the dollar, the consumer-price index rose, on average, 4.4% a year. That means that a dollar today buys only about one-sixth of the consumer goods it purchased in 1971.

Interest rates, too, have been high and highly volatile, with the yield on triple-A corporate bonds averaging more than 8% and, until 2003, never falling below 6%. High and highly volatile interest rates are symptomatic of the monetary uncertainty that has reduced the economy's ability to recover from external shocks and led directly to one financial crisis after another. During these four decades of discretionary monetary policies, the world suffered no fewer than 10 major financial crises, beginning with the oil crisis of 1973 and culminating in the financial crisis of 2008-09, and now the sovereign debt crisis and potential currency war of 2010. There were no world-wide financial crises of similar magnitude between 1947 and 1971.

Concerning quatitative easing, WSJ columnist David Wessell asks, What Would Milton Do?




On NRO, Larry Kudlow reports the Federal Reserve may be backing off its plans for aggressive easing.

At Forbes, Steve Forbes predicts new technologies will make energy plentiful for decades to come.

Also on Kudlow, Stephen Spruiell and Robert Reich debate how to cut the deficit:




At Bloomberg, Amity Schlaes relates the death tax to the story of Secretariat.

On Forbes, AEI’s Alex Brill and Chad Hill analyze tax policy’s impact on growth.

Wednesday articles.

At RCM, Louis Woodhill makes the essential point that strong growth can overcome the national debt.

On CNBC, David Malpass suggests fiscal, not monetary, policy is needed to restore growth.

At the Peter Peterson-funded Fiscal Times, Bruce Bartlett does a great public service with a list of classic supply-side articles.

Larry Kudlow explains that printing money doesn't create jobs or investment.

On The Kudlow Report, John Tamny discusses the unstable dollar's role in the current malaise.

The WSJ editorial page opposes quantitative easing from the Fed, but cites fiscal policy as the primary obstacle to growth.

Curiously, The Journal also says, "The danger to this fragile recovery isn't that the Fed will repeat its overtightening mistake of 1937-38. With Mr. Bernanke at the helm, there was never even a remote chance of that." Of course, supply-side guru and Nobel Laureate Robert Mundell thinks it was precisely Bernanke's "overtightening mistake" that caused the financial crisis and the Great Recession.

At businessinsider.com, Ben Engebreth finds that tax revenue as a percentage of GDP has been fairly stable for 50 years, and that the rate of growth determines revenue.

Nathan Lewis made a similar point, here. As did David Ranson.

Brian Wesbury argues stimulus spending is ineffective.

At The Heritage Foundation’s Foundry blog, Kathryn Nix cites Art Laffer in defending lower tax rates.

Weekend edition.

Editors note: we're trying a new layout to improve readability. Constructive feedback welcome.

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John Tamny explains China's currency policy.

Henry Meers Jr. suggests the economy's problems stem from the unstable dollar.

David Goldman argues the Fed's potential deflation response is misguided.

The WSJ editorial board comments on the latest GDP numbers.

In The NYT, David Stockman critiques supply-side economics mixing Neo-Keynesian trade and fiscal deficit ideas with classical hard money ideas.

Meanwhile, Stockman's former boss Peter Peterson, is spending $1 billion to replace supply-side with balanced budget economics.

Conservative Keynesian Alan Greenspan denies that tax cuts can raise revenues and calls for reduced spending.

Tuesday items.

John Tamny explains that in recession, the money supply should contract.

On CNN, Steve Forbes debates Mort Zuckerman on tax cuts.

At The Kudlow Report, Forbes takes on Howard Dean.

From Fox News Sunday, Brith Hume defends lower tax rates.

U.S. Rep. Paul Ryan (WI) explains taxes and deficits to Chris Matthews.

Cato's Alan Reynolds disputes the one-job-for-every-five-applicants claim.

The Weekly Standard's Matthew Continetti correctly advocates a pro-growth agenda but omits the unstable dollar from his analysis.

Peter Beinhart marches to the progressive drum on tax hikes and deficits.

Supply-side critic Jonathan Chait advises congressional Democrats to extend middle class tax cuts only, forcing Republicans to filibuster, thereby restoring Clinton era tax rates.

In a 2008 paper, White House advisor Christina Romer and her husband find tax cuts to be stimulative.

Thursday items.

In The WSJ, Art Laffer argues unemployment benefits extends unemployment.

David Goldman analyzes the unemployed.

Larry Kudlow interviews Treasury Secretary Tim Geithner. Part 2 here.

From April, Dan Mitchell explains why raising taxes on capital is a mistake.

John Tamny reviews Austrian economist Thomas Woods’ new book.

Amity Schlaes cautions against listening to Depression predictions.

Peter Ferrara saw Obamanomics’ failure coming.

Karl Rove advocates a pro-growth agenda.

To maximize their gains, Republicans must go beyond promising to slash Democratic spending and reverse the Obama agenda (as important as these are). They also need to offer a competing agenda for increasing jobs and prosperity, and outline the concrete steps they will take to get back on the track for economic growth.

Paul Krugman fears his pro-growth advocacy will make him the left's Art Laffer.

Friday items.

The WSJ has a must-read editorial warning congressional Republicans to focus on restoring growth rather than fighting deficits.

What CBO's latest apocalyptic report doesn't stress is what we'd call the more important deficit in its forecast: the growth deficit. CBO predicts an annual rate of GDP growth of 2.2%. Yet since 1959 the U.S. economy has grown at an average rate of 3%, and during the 1980s and 1990s it was closer to 3.5%. The compounding effect of restoring this faster pace of growth would mean far more net national wealth and would certainly make debt repayment easier.

Even Mr. Obama's current spending level of 25% of GDP would be more manageable if the slow economic recovery weren't keeping tax revenue at unusual lows. In 2007, the economy threw off revenue of 18.5% of GDP. That fell to 14.8% in 2009 and may not be too much higher this year. The point is that there is no hope of balancing the federal budget without a return to higher levels of economic growth.

On The Kudlow Report, Art Laffer discusses gold, the dollar, and the economy.

The WSJ’s Kimberley A. Strassell doubts free trade is making a come back.

On MSNBC, The Washington Examiner’s Tim Carney suggests that Republicans blocking unemployment benefits is bad politics.

Paul Krugman continues to worry about reduced spending.

At NRO's Corner, Samuel R. Staley sees a lost decade coming.

My view is, with the Dow stuck at 10,000 and gold having quintupled since 2001, we've already lost this decade.

Thursday round up.

On The Kudlow Report, David Stockman wants full-fledged fiscal austerity (spending cuts + tax cuts).

Kudlow comments further on the discussion.

John Tamny analyzes Paul Krugman's solutions to the recession.

From last week, Alan Reynolds responds to Ezra Klein on stimulus.

In The WSJ, Seth Lipsky explains how much salaries have declined in terms of gold.

In an April interview, George Gilder hopes Tea Parties will stress tax cuts not spending cuts.

David Wessell reports free trade's comeback.

CEO Ziad K. Abelnour argues we need the rich.

National Review's Kevin D. Williamson regrets extension of the homebuyer's tax credit.

U.S. Rep. Scott Garrett (R-NJ) suggests Fannie Mae and Freddie Mac is the root cause of the subprime crisis.

Liberal economist Josh Bivens makes the case for growth over deficit phobia.

Former Treasury official John B. Taylor opposes the financial reform bill.

Thursday items.

The WSJ editorializes against capital controls in Asia.

David Goldman thinks small businesses are in trouble.

John Tamny predicts foreign blowback on U.S. companies for BP's treatment.

Michael Barone says spending cutters are popular with voters.

WSJ editorialists discuss the Fed’s easy money policy.

The McKinsey journal analyzes growth in Africa.

From the archive, here's Jude Wanniski on poverty in Africa.

Fiscal Times argues growth isn't enough to eliminate deficits.

At NRO's Corner, Andrew Stuttaford hopes Germany will abandon the euro.

Tuesday update.

In The WSJ, historian and "Econoclasts" author Brian Domitrovic discusses Europe's GDP problem.

Nathan Lewis analyzes the Russian flat tax.

On the Kudlow Report, Steve Moore recently debated the economy.

NRO's Reihan Salam counters Paul Krugman on the 1980s.

John Tamny argues emergencies such as the BP oil spill should not be nationalized.

Here's the Harvard study mentioned last week on spending and growth.

Weekend round up.

Steve Hanke compares economic policy in Greece and Estonia.

Don Luskin thanks China for holding onto its European government bonds.

Investors Business Daily sees slow economic growth ahead.

The Tax Foundation's Scott Hodge responds to Sec. Clinton's recent claim that the rich are under-taxed.

In The WSJ, Seth Lipsky discusses Edwin Vieira Jr.'s book on money, "Pieces of Eight."

The finished book begins with a quote from Justice Stephen J. Field's dissent in a legal tender case, Dooley v. Smith (1871), warning that arguments in favor of legal tender paper currency "tend directly to break down the barriers which separate a government of limited powers from a government resting in the unrestrained will of Congress."

Mr. Vieira believes the Federal Reserve is unconstitutional on, among other points, the same grounds that FDR's National Recovery Administration was found unconstitutional—namely that Congress had delegated too much of its own law-making responsibilities. He is less harsh toward Fed officials. "I don't basically attribute either greed, stupidity or evil to these people," who are "caught up in this extraordinarily difficult position," he says.

But Mr. Vieira believes the federal government has gone way past what would have been red lines for the Founders—and that we are now in a "race against time" over "which happens first, the crisis or the reform." He finds himself in an isolated spot. Those who want to secede from the Union don't call him, he says, because "I'm against secession." Nor do the paper money people, because "I point out that paper money is absolutely unconstitutional." The gold standard people don't call, "because I point out that the constitutional standard is silver."

Mr. Vieira offers this hope. "We're in a better position than the Founding Fathers," he says, noting they faced stagflation, dissension from those loyal to England, devastation from war in large sections of the country, and regional jealousies. "And they came together in Philadelphia, and they worked out this document—a work of practical genius." He considers it a wonder that, despite all the damage done to it over the years by politicians, "it's still with us and it contains the answers. It's right there."

Tuesday items.

John Tamny calls the Dodd financial regulation plan pointless.

At the Asia Times blog, David Goldman analyzes U.S. employment numbers.

At the Huffington Post, Keynesian Robert Kuttner makes a smart point that fiscal austerity does not lead to prosperity. Of course, he favors more spending stimulus to ramp up economic demand.

Right on schedule, congressional Democrats have rolled out a stimulus spending bill.

How do Republicans respond? With a growth package of their own focused on supply-side measures such as a stable dollar and lower taxes? Or do they focus on austerity, i.e. spending cuts, which is generally thought to be counter-stimulative?

Right now, most conservative commentary favors the latter approach. The Cato Institute even goes so far as to suggest spending cuts are stimulative.

But without a proactive growth message, the GOP risks appearing to have no answer to unemployment. And spending cuts in contraction/slow growth periods tend to be unpopular.

This is exactly what just happened in Britain, which is why despite Labour's unpopularity, once the electorate focused on the Tories' austerity program, the conservatives lost steam and failed to win a strong victory. Now they are stuck with a centrist coalition government that probably won't last 18 months.

Here's a Human Events' obituary for the greatly-missed Jack Kemp. It makes the point that:

Jack’s view of the world persuaded Republicans to stress hope, optimism and economic growth in their campaigns, rather than the dreary -- though sometimes necessary -- message of the need to cut government benefits and rein in the federal deficit. (Jack always wanted to lead with optimism, which he possessed in exuberant and infectious abundance.)

Because of Jack’s vision, Republicans could comfortably go before any group, including college kids, minorities and working men and women (both union and non-union), and, with conviction, tell them that the GOP had a terrific strategy to lift wages, expand employment and fatten retirement accounts. Far better than the tax, spend, big-government mantra of the Democrats, Jack insisted. And, under Reagan, it all worked.

And here's Jude Wanniski's Two Santas Theory for further context.