Addition and subtraction still valid, Harvard economist discovers

Astounding fact uncovered by an economist–from Harvard, former chairman of the Council of Economic Advisers–who, despite the lengthy book-style title of a half-sheet newspaper article, is also a member of the WSJ’s board of contributors and whose article was published in the WSJ:

“Fortunately, a relatively small change in annual deficits would significantly shrink the debt ratio. With a national debt of 75% of GDP, a projected annual deficit of 4% of GDP would keep the debt rising to 100% of GDP. In contrast, a deficit of 1% would cause the debt ratio to decline year after year until it reaches 25% of GDP.”[1]

Arithmetic does work– no kidding, Sherlock!

This is the cherry on top of the article’s rehashing of tired stories about “cutting government spending,” raising eligibility age for Medicare, etc., etc., with effects visible soon, very soon, in…2020. A total of about $540 billion (aka, $0.540 trillion) per year will yield, in the best case, even assuming an instant ramp-up, $3.8 trillion in the 7 years to 2020—how does this significantly impact the debt level is left to the reader to figure out. With projected deficits of 4% of GDP contrasted with the author’s 3% of GDP “savings”, the result still is a (perpetual?) 1% growth in the US debt level. Clearly, something else must give–ceteris paribus strikes again…; and this without even discussing “the fundamental impossibility of extrapolating trends in economics,” ably described by another Harvard economist many years ago, Schumpeter.[2]

Now, US national debt is 73% of GDP, according to the CBO Wednesday.[3] At the much discussed debt ceiling level of $16.7 trillion which the President “will not negotiate with Congress,”[4] the implied expected 2013 GDP comes to about $23 trillion. To bring it back to 37%, as the author laments the US hasn’t since the good ol’ times before the dawn of the “economic downturn”, i.e., to about $8.5 trillion, the gap to fill is about $14.5 trillion.

Just to play along with the author for a moment at the game of tired old ideas, why not institute a one-time 60% tax on wealth? The Census Bureau indicates that, as of 2011, total US net worth was $40.2 trillion,[5] excluding home equity. About 63% of the US wealth belongs to 7% of the US households according to Pew Research[6]—that amounts to about $25.3 trillion. Just from those households, who allegedly benefited most from the “recovery,” also according to Pew the tax would yield (Pace, Bill O’Attainder!) an immediate $15.2 trillion, enough to cover the author’s gap.

The idea of a wealth tax in the US has surfaced a few times this year already.[7] While it may sound far-fetched, the practice does exist in Europe and Canada. While a one-time large tax is sure to raise howls, an on-going wealth tax, after a generous deduction, of course, could become a source of income to pay down some significant chunks of the US national debt. Wow! Fractions still work too…

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  1. Martin Feldstein. “How to Create a Real Economic Stimulus: Entitlement reform is key to shrinking the ratio of debt to GDP and making room for pro-growth tax cuts”, The Wall Street Journal, 17 September 2013, p. A17.
  2. An idea expressed in several works, for example, in, “Entwicklung”, Festschrift to Emil Lederer, 22 July 1932, transl. Becker and Knudsen, 2002
  3. Congressional Budget Office, “The 2013 Long-Term Budget Outlook,” 17 September 2013
  4. Steve Holland, Mark Felsenthal, “Obama says he will not negotiate with Congress on debt ceiling”, Reuters, 16 September 2013
  5. Alfred Gottschalck, Marina Vornovytskyy, Adam Smith, “Household Wealth in the U.S.: 2000 to 2011”, The US Census Bureau, no date
  6. Richard Fry, Paul Taylor. “A Rise in Wealth for the Wealthy; Declines for the Lower 93%”, Pew Research, 23 April 2013
  7. For example, Anna Bernasek, “Looking Beyond Income, to a Tax on Wealth,” The New York Times, 9 February 2013
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