The Politics of Deficits vs. the Politics of Growth

by Reihan Salam

While making the larger case that sluggish growth leads to rancorous politics, Annie Lowrey writes:

A ballpark estimate suggests that if the economy were to grow one percentage point more than expected in each year over the next 10, the deficit would shrink by more than $3 trillion. That would be more than enough to set the ratio of our debt to our annual economic output on a comforting downward trajectory. Moreover, it would happen without making cuts to a single program, like Medicare or food stamps, or without raising a single dollar of additional tax revenue. Even a much smaller boost to growth — say one-tenth of a percentage point per year, or even half that — would make Congress and the White House’s burden hundreds of billions of dollars lighter.

Raising U.S. GDP growth by 1 percentage point a year would be an extraordinary feat, for the reasons Brink Lindsey identifies in his essay on “Frontier Economics“:

Older, easier sources of growth are drying up and, as a result, the prospects for continued dynamism and prosperity hinge more than ever before on the pioneering entrepreneurial upstarts that explore and extend the technological frontier.

But increasing GDP growth by 1 percentage point a year is not outside the realm of possibility. Doing so, however, will entail taking politically difficult steps, like dismantling producer cartels in the private and public sectors. One important question is why anger over sluggish growth hasn’t been enough to drive reform efforts capable of overcoming the political resistance of the cartels in question. Part of the problem is that the major political parties have failed to articulate a reform agenda that would involve curbing the pricing power of medical providers, for the obvious reason that medical providers are well-represented in both major party coalitions. 

There is another obstacle, which is that it is not obvious that the median political influencer has suffered all that much from sluggish growth. Though U.S. growth rates are much lower than they had been during the 1948-1973 “golden age of economic growth,” our base level of material well-being is also substantially higher. As Scott Winship points out in a forthcoming article in Breakthrough Journal, slower growth from a higher base can nevertheless mean the same absolute gains in living standards:

Absolute growth exceeded early 1960s growth starting in the mid-1990s and dipped below those levels again during the recession. Absolute per-worker growth is exceeding early 1960s growth once more, even though absolute per-capita growth has not fully recovered. In contrast, as with produc- tivity growth rates, neither per-capita nor per-worker growth rates have returned to their early 1960s levels. Once the economy fully recovers, absolute growth measured per hour, per worker, or per capita and averaged over several years can be expected to permanently exceed the annual growth experienced during the Golden Age of the postwar American economy.

And this is part of the problem. The proceeds of growth are clearly unevenly distributed. If living standards continue to rise for the most politically engaged part of the population despite stagnant growth, the need for growth-enhancing structural reform will not be seen as particularly urgent.

Indeed, this could be part of why congressional Republicans are so fixated on deficits rather than growth. Though unemployment levels remain dangerously high, Republican-leaning groups tend to be older, non-Hispanic white, and male, and they tend to have high school diplomas or more. These are precisely the groups that have tended to have somewhat lower unemployment rates than other groups. To be sure, congressional Republicans often connect a growing debt burden to sluggish growth. Yet it’s hard to deny that the House GOP is identified far more with the cause of spending restraint than that of growth, or increasing the size of the denominator. Conservatives need to be aware of this dynamic, which risks alienating them from the broader electorate.

On a tangential note, structural reform, e.g., regulatory restraint and rollback, facilitating entry into cartelized sectors, streamlining social transfers to reduce implicit marginal taxes, shifting the tax burden from income to consumption, etc., is not the only route to higher growth. One short-cut would be to increase the size of the U.S. workforce by allowing for a larger number of prime-age immigrants, ideally skilled immigrants with a high degree of English language proficiency. Though we ought to take advantage of this lever, particular if doing so involves a larger shift from family reunification and towards a skills-based immigration system, but it won’t get us all the way to our goal, unless the influx reaches unprecedented levels.