Today, America is having a self-pity party—or maybe it's better described as a brawl. Whichever it is, the hysterical headlines about how to "pay for Katrina" given our crushing "national debt" fill twelve pages of Google News results. The Republican party is about to tear itself apart over the fiscal responsibility issue—to the delight of the hypocritical Democrats, who have conveniently replaced the Keynesian deficits-are-good argument with a far more politically sensible stance: Deficits-are-bad-when-we're-out-of-power.
Call me a party pooper; hysteria isn't my bag. What I have to offer instead are a few facts. To me, those facts are very encouraging news, but I don't think too many others are paying attention.
There are two economic results which are far more important than the dollar numbers flying around in the headlines and in the interparty and intraparty accusations. Those two results are:
• the debt burden (debt-to-GDP ratio), and
• the growth in federal tax receipts.
Both of those results depend heavily on a growing economy: when the economy (GDP) grows, it reduces the debt burden, and it increases federal tax receipts. Specifically: GDP growth reduced the USA's debt burden to 64.5% GDP in September, from 64.9% last month, and it is driving a trend in tax receipts that, if sustained, would soon close the gap with federal spending. In short: growth is having favorable effects on the debt burden and on the deficit.
Our debt burden, and how we compare with other countries, is shown in this month's National Debt Thermometer. The promising trend in tax receipts is shown in the chart below—including a hypothetical, Katrina-relief-driven blip I added to the federal spending trend.
Now that you've seen the chart, it should be clear that the easy, fun way to pay for Katrina is: Economic growth, sustained at its present level or better—because that's what causes the blue line (tax receipts) to skyrocket. How come it's not making headlines? How come the politicians are ignoring it? (I've been wondering about that for a long, long time, by the way.)
Can you think of any changes that would make the USA even more growth-friendly than it is today? Revenue-neutral tax simplification would be my first suggestion, but there are plenty more. The hard part is getting the conversation started, especially in the midst of all the hysteria.
Let's amend the Constitution
I'm running out of ideas for getting politicians and journalists to start talking about the debt-to-GDP ratio, instead of the raw dollars of debt. Just that one little change would force GDP and growth into the conversation. Maybe a Constitutional amendment is in order; something like this:
"Article XXVIII: Anyone who talks or writes about the raw dollars of debt, the raw dollars of deficit, or the raw dollars of interest payments, instead of debt as % GDP, deficit as % GDP, or interest as % of tax receipts, will have his ________ or her ________ chopped off in the town square within twenty-four hours after conviction of the crime. The Congress shall have the power to enforce this article by appropriate legislation, except the President shall have the duty to enforce this article when the violator is a member of the Congress."
(I'm open to suggestions on how to fill in the blanks above.)