Deficits, growth and intangibles

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Over at Forbes, Bruce Bartlett has an cogent discussion of the federal deficit and debt (How Much Does The National Debt Matter?). In the piece, he talks about whether we can grow our away out of deficit. He is rather pessimistic about that idea--arguing that productivity growth cannot be large enough. He is especially hard on those who argue we need to cut taxes to spur growth:
it's highly unlikely that further tax cuts will do much to increase growth when they will add to the deficit and taxes are already at their lowest level as a share of GDP in almost 60 years--more than 3% of GDP below the postwar average. In any case, the biggest problem businesses have today is a lack of customers, not high taxes.
He goes on to note:
Recently some foolish bloggers have suggested that it would be better to default on the debt than raise taxes. That would, of course, cause tremendous hardship for millions of Americans because some $800 billion in Treasury securities are owned by private investors, almost $700 billion are owned by mutual funds, more than $500 billion are owned by state and local governments and more than $300 billion are owned by pension funds, among others. I tend to think that they won't take too kindly to the idea that raising taxes would be worse than paying them the money they are owed. In the end the debt must be paid, and we will have to raise taxes and cut spending to make sure it is.
I don't often agree with Bartlett, but I think he is probably right about how we are going to get ourselves out of this situation. The fact that some folks are actually talking about default shows the depth of the lack of understanding--and frankly scares me silly.

I would argue, however, that he may be too pessimistic about productivity. As the recent Economic Report of the President notes we have had strong growth in productivity--with some recent problems:
From 1996:Q1 to the last available observation (2009:Q3), it averaged 2.7 percent per year, almost equal to its rate over the immediate postwar period. But that rapid growth was concentrated in the first part of the period. In the first eight years (1996:Q1 to 2003:Q4), productivity growth averaged 3.3 percent; in the four years before the business cycle peak (2004:Q1 to 2007:Q4), it averaged only 1.7 percent.
We need to get back to the 3.3% (or even the 2.7%) rate. I do agree that across the board tax cuts are not the solution to the productivity question. Investment in intangibles is.

Unfortunately, such investments often take a long time to pay off. And it is easier to take the short run fix. An example of this is illustrated in a recent story in the Wall Street Journal Schools' New Math: the Four-Day Week. The story notes that kids still have the same number of classroom hours, in a compressed week. And it is unclear whether a four day week has any impact on learning, especially if the fifth day is supplemented by additional tutoring. But the mere idea of cutting back on investments in education runs counter to the direction we need to go to restore productivity growth.

As we confront the deficit issue, let us how we are not "penny-wise and pound-foolish." But if that was not the normal human response, we wouldn't have such clich├ęs in the first place. Not a comforting thought.

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This page contains a single entry by Ken Jarboe published on March 8, 2010 12:37 PM.

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