Paper Economy - A US Real Estate Bubble Blog

Friday, February 22, 2013

Grow Your Way Out of Federal Largess?


Recently, a slew of know-it-all Keynesian policy junkie types have hit the media with suggestions that those in favor of limited government (or a merely a more limited version than the current incarnation) style budget cuts are dwelling too much on the numerator of the debt-to-GDP ratio and not enough on the denominator.

The suggestion being that we could easily turn around our insolvency problem if the government would simply focus on GDP growth and NOT on the growth of federal spending.

A quintessentially maniacal Keynesian solution indeed!.... Better, smarter government spending will stimulate GDP growth enough to reduce the debt-to-GDP!

Ha! What absurdly delusional times these are.

Reader... let's first establish a few basic facts and then take some time to absorb the chart below.

Nominal GDP has a trailing 20 average annual growth rate of 4.71% while the average growth rate for nominal federal government debt is 7.41%.

Right there you can see a problem, for the last 20 years, GDP has been growing at nearly half the rate of federal government spending.

But taking the Keynesian policy junkies contention seriously for a moment, let's assume that "smart" policy makers could manage to generate an 8% annual nominal GDP rate... a literal farce.... and kept the federal government spending pumping along at it's average 7.41%.

Even given this absurd growth assumption, debt-to-GDP would remain above 100% till 2018 and would still be at a level of 82% in 2050!! ... bear in mind, the debt-to-GDP averaged roughly 50% during the 40 years preceding 2008.

Sorry policy junkies, you can't grow your way out of it federal largess... and certainly not with MORE largess... bring on the cuts and LOTS of them!

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