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Fallout: The Financial Crisis

Economic growth is necessary to cut national debt

Marketplace Staff Nov 17, 2010
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Fallout: The Financial Crisis

Economic growth is necessary to cut national debt

Marketplace Staff Nov 17, 2010
HTML EMBED:
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TEXT OF INTERVIEW

Kai Ryssdal: There was another bipartisan deficit reduction plan released today, the second in as many weeks. There are various combinations of spending cuts and tax increases being bandied about out there.

But in his column today in the New York Times, David Leonhardt writes that cutting the deficit isn’t always about cutting the budget. Economic growth can help you get there as well.

David, good to talk with you again.

David Leonhardt: It’s nice to be on.

RYSSDAL: So this idea of cutting the deficit with economy growth — how does it work, what are the mechanics?

Leonhardt: Well when the economy grows, people make more money. And when they make more money, they also pay more in taxes. That tax money goes into the Treasury, and it makes it easier to pay off the national debt. That’s roughly what happened in the two decades after World War II, and again in the late ’90s. It wasn’t the only reason we were able to pay off the debt so well then, but it was probably the most important.

RYSSDAL: How much growth does it take to make a difference? If we bumped GDP by, you know, half a percent, is that going to do it?

Leonhardt: Oh absolutely. The good news is that it doesn’t take anything like 2 or 3 percentage points a year of GDP growth to make a difference. If we bumped growth up by half a percentage point over the next 20 years, we’d probably cut our deficit problem about in half. The bad news is that bumping up growth by half a percent a year every year is actually not so easy, by any means. There isn’t the secret formula for doing it; we don’t exactly know how to do it, we can make some guesses but it’s not that easy.

RYSSDAL: Well there have been a couple of proposals the past couple of weeks — deficit commissions on the Presidential Commission and another one today. What do they point to, and what do you like there?

Leonhardt: These are both bipartisan commissions and there’s a lot to chew on. I think the first thing that’s important to say, our deficit debate for most of last year or so has been maddeningly vague. And both of these commissions have put specific proposals on the table. I don’t love every aspect of each one, but I think it’s important to start by saying that. In terms of trying to push economic growth, there’s some good news and some less good news. The good news is they both push tax reform: the idea that we want to clean up our tax code and not have people and businesses waste so much time trying to qualify for different tax breaks. The bad news is I don’t think either one of them does enough to emphasize things like education and science, that over the long haul have really been wonderful drivers of economic growth. So I worry that things like that would get lost in the general rush to cut spending. They’d get cut along with a lot of things that in fact do nothing to promote growth.

RYSSDAL: Give me a couple of examples of things that do nothing to promote growth.

Leonhardt: I would guess that farm subsidies do nothing or approximately nothing to promote growth. I would guess a lot of the military spending we now do does nothing to promote growth, and probably does very little to protect us. I certainly think we can look at cuts of 10, maybe even 20, percent. And then there’s health care. Health care’s the big item; we spend by far more than any other rich country on health care. We don’t get, on the whole, much better results, depending on how you look at it — maybe we get a little bit better results. But certainly we don’t get the kind of results we should be getting for the amount of money we’re spending.

RYSSDAL: I was talking to a guy the other day who said, ‘As bad as it is now with the deficit and with concerns about government spending, it’s going to have to get worse. Our backs are going to have to get closer to the wall before anything substantive happens.’

Leonhardt: I agree with that. I think one of the ways you can see that is that right now no politicians are really willing to tell the truth about this. The people who are willing to say, ‘We can’t have Medicare, Social Security, the military and tax rates as they are’ are people who don’t have to run for office. They’re journalists like me; they’re people who serve on these committees who maybe used to have to run for office but don’t anymore. And so I agree that we’re probably not at the point yet where we’re actually going to solve this thing.

RYSSDAL: David Leonhardt writes the Economic Scene column for the New York Times. David, thanks a lot.

Leonhardt: Thanks Kai.

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