The Laffer Curve In Practice—An Untold Fiscal Menace
At lunch this week an unusually intelligent and well-informed friend (i.e. a conservative) reminded us that when it comes to America’s massive budget deficits and soaring public debt, “growth” is where it’s at. The implication was that the fiscal math of incremental GDP growth, such as 4% per annum versus 3%, is so potent over a 10-year horizon that it is and must remain the fiscal remediation tool of choice.
Indeed, there was even a suggestion that if the GOP is not going to take on the the $34 trillion of cumulative spending for Medicare and Social Security over the next 10-years, which Speaker McCarthy has made abundantly clear it will not touch, then doubling down on the “grow your way out of debt” theory is the only hope.
Alas, it is not really any hope at all. It wasn’t valid when Art Laffer peddled it way back in 1981, and after 40 years of relentless fiscal deterioration, it is thoroughly wrong-headed today.
In the first place, there is currently no budget headroom to experiment (again) with a dangerous fiscal theory that is inherently deficient in terms of the basic math, as we amplify below. But unlike 1981, when the public debt was just 30% of GDP and had been coming down for decades from the WWII peak, the public debt ratio today is at 100% of GDP and heading drastically higher owing to the massive “structural” deficit that is now built into the Federal budget.
Expressed in dollar terms, the 10-year deficit, which as recently as 2017 was projected at $10 trillion, now stands at $20 trillion under CBO’s latest Rosy Scenario projections, while a realistic forecast would be $25 trillion of new red ink. And it heads out into the wild blue yonder from there.
Thus, by 2033 the annual baseline deficit is $2.9 trillion and 7.3% of GDP, which is a condition that essentially causes the fiscal equation to go “tilt” thereafter. That’s because interest on the debt and baby boom retirement spending at that point races further and further ahead of current law revenues.
Stated differently, we are probably heading toward Fiscal Armageddon already. Another big tax cut predicated on the Laffer Curve and gobs of extra growth would only guarantee it.
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