February 18, 2011

A deficit of ideas

We cannot ignore economic growth in discussions of the national debt

In the past several weeks, the national political debate has become increasingly focused on reducing our massive debt. However, one important dimension of that problem has received very little attention: economic growth. While members of both parties still express concern about the slow pace of the current economic recovery, they seem to see further economic stimulus as an independent goal that conflicts with debt reduction. However, averting a fiscal crisis will be nearly impossible unless growth rates increase significantly. Current budgetary projections, which estimate that the value of the federal debt will soon rise to more than 90 percent of our gross domestic product, assume an average growth rate of 3.4 percent over the next 10 years. Since this rate would be higher than the average in any of the last five decades, we need to start thinking seriously about how to get the economy moving. But since we have to worry about the debt as well, we must stimulate the economy in ways that involve as little new net spending as possible.

One obvious place to start is the U.S.'s crumbling infrastructure. While public works like roads, bridges, and the electrical grid are obviously vital to economic growth, ours are in remarkably poor shape. The American Society of Civil Engineers periodically grades the nation’s infrastructure, and the average grade in its most recent report card (released in 2009) was a D. The need to rebuild our infrastructure has been further underscored by the many bridge collapses, power outages, and other disasters that have occurred in recent years. A serious effort to improve American infrastructure would be very effective in stimulating short-term growth, especially since contemporary unemployment is concentrated among construction workers affected by the housing market bust. Furthermore, because better infrastructure would raise the overall growth rate, well-targeted infrastructure spending could generate additional revenue and thereby help to lower the national debt.

“Well-targeted” is the key term, however—if infrastructure spending is to help provide the deficit-reducing growth that we need, we have to make sure that it is allocated to projects likely to improve the economy’s long-run growth potential rather than elected officials’ re-election prospects. The Obama administration’s proposed national infrastructure bank might help with this task. This body would be composed of experts from both parties who would be given a fixed sum of money to spend without political interference. They would be appointed for extended terms and would thus be able to think about the lasting impact of their decisions. Similar bodies have operated successfully in many states, so this option is worth considering seriously.

Another area to look at is the badly flawed American tax code. Two features of our tax system create unnecessary impediments to growth. First, the federal government taxes the most productive economic activity while leaving much of the least productive activity nearly untouched. Income earned through work, saving, and investment is taxed, but the U.S. lacks the broad-based consumption taxes present in many other developed nations. Instituting such a tax and using it to replace some or all of the revenue that existing taxes provide will give workers and firms incentives to be more productive, which in turn will help the economy grow faster. Second, the tax code is filled with provisions that provide tax breaks to individuals and firms who engage in specified economic activities. While some of these may be worthwhile, many are inserted to appease special interest groups aiming to subsidize transactions that benefit them. These advantages provide the groups who enjoy them with protection from competition, so they lack the incentive to constantly become more productive, which drives economic growth. The vast array of tax breaks that our system includes also deprives the federal government of revenue; a recent study by the Office of Management and Budget estimated that they actually cost $1.1 trillion annually. Eliminating many of these provisions would therefore enable the government to collect more revenue while also increasing the growth rate.

Some might defend the exclusion of economic growth from the debt debate by arguing that we need to confront the fact that reducing the debt will require a substantial amount of sacrifice. According to this view, trying to cushion the pain of that sacrifice by working to increase growth will make us take the debt problem less seriously by suggesting that we can get something for nothing. While there is some merit to this argument, it does not give sufficient weight to the difficulty of imposing shared sacrifice in a democratic political system.

Any politician who admits that his or her policies will make life harder for some citizens is more or less inviting a serious electoral challenge, and the history of efforts to reduce the debt suggests that most such challenges succeed. While we obviously cannot restore fiscal sanity without sacrifice, the task of convincing our fellow citizens to bear some of that sacrifice will be easier if we can make it a bit less burdensome.

Ajay Ravichandran is a third-year in the College majoring in philosophy.