Growth and Grim Numbers

Even the New York Times editors can't help but conclude, after taking a look at first-quarter economic growth data, that "The Numbers Are Grim." In particular, this is what they find alarming: "the growth estimate remained stuck at an annual rate of 1.8 percent, compared with 3.1 percent at the end of last year....More troubling in the latest figures, consumer spending — the largest component of the economy — was especially slow. Stagnant wages and higher prices for gas and food are squeezing family budgets, while falling home equity hurts consumer confidence. That suggests more bad news to come."

In this instance, the Times is right: "Growth today is our biggest problem – but also our biggest opportunity," as Bret Swanson at Forbes observes. 

Swanson continues:

Economic growth...swamps every spending cut and tax rate increase. In 2010, U.S. GDP was $14.66 trillion. Today’s 2% growth rate, over the long-term, would yield output of $17.9 trillion in 2020, $21.8 trillion in 2030, $26.6 trillion in 2040, and $32.4 trillion in 2050.

But what if America committed to a bold long range growth goal? I’m no budget expert, but for a presentation to the National Chamber Foundation on May 24, I offered a few simple charts that tell the story. A 4% growth rate would mean almost $4 trillion in additional output in the year 2020, $10 trillion more in 2030, $21 trillion more in 2040, and an astounding $38 trillion more in 2050, when the economy would be more than twice as large had we kept growing at 2%. Over this period, with an arbitrarily chosen 20% tax-to-GDP ratio, a 4% growth rate would generate $109 trillion more revenue than a 2% growth rate.

But 4% is wildly optimistic, you say. Perhaps. The consensus long range projection is just 2.5%. Fine, what if we could bump growth to a measly 3%? We would still generate an additional $25 trillion in tax revenue over the 40-year period. Didn’t the Medicare actuary just tell us the program’s unfunded liability is $24.6 trillion?

Which is to say, the difference between financial solvency for entitlements (particularly Medicare) and insolvency is economic growth -- not differences in tax rates, or simply cutting out waste, fraud, and abuse. Even so, reforms are needed, particularly considering the current economic outlook. But one might think that since the Democrats don't have a Medicare plan, they'd really be trying to come up with a growth plan (beyond greater "investments" and higher tax rates) to save the entitlements, but it doesn't seem to be the case.

And while the Times is able to take a look at the numbers and accurately say that the outlook is "grim," it's their conclusions that are faulty, or misguided:

Republican lawmakers have responded to renewed signs of weakness with a jobs plan that prescribes more of the same “fixes” that Republicans always recommend no matter the problem: mainly high-end tax cuts, deregulation, more domestic oil drilling and federal spending cuts.

The White House has offered sounder ideas, including job retraining, plans to boost educational achievement and tax increases to help cover needed spending. But its economic team is mainly focused on negotiations to raise the debt limit, presumably parrying Republican demands for deep spending cuts that could weaken the economy further while still reaching an agreement on the necessary increase.

The grim numbers tell an unavoidable truth: The economy is not growing nearly fast enough to dent unemployment. Unfortunately, no one in Washington is pushing policies to promote stronger growth now.

Huh? Naturally, the Times fail to explain the Republicans' economic plan, but does it really believe the better option for the economy is a combination of "job retraining" programs, "boost[ing] educational achievement," "tax increases" and "rais[ing] the debt limit"?

In reality, Republican House majority leader Eric Cantor does actually have a grasp of the issue at hand -- and has even proposed a plan. As Larry Kudlow writes: