Sunday, January 13, 2013

what if? - REALLY, "WHAT IF?"

NYTimes | WE typically blame Washington for not doing more to help the economy grow. But what if we have it backward: What if it is the weak economy that is driving the failures in Washington?

That is what Benjamin Friedman, a Harvard economist who has studied the way slow growth frays societies and strains politics, thinks. “We could be stuck in a trap,” he told me last week. “We could be stuck in a perverse equilibrium in which our absence of growth is delivering political paralysis, and the political paralysis preserves the absence of growth.”

Consider how different our politics might be today if the economy had not collapsed in 2008 and not been mired in sluggish growth ever since. A ballpark estimate suggests that if the economy were to grow one percentage point more than expected in each year over the next 10, the deficit would shrink by more than $3 trillion. That would be more than enough to set the ratio of our debt to our annual economic output on a comforting downward trajectory. Moreover, it would happen without making cuts to a single program, like Medicare or food stamps, or without raising a single dollar of additional tax revenue. Even a much smaller boost to growth — say one-tenth of a percentage point per year, or even half that — would make Congress and the White House’s burden hundreds of billions of dollars lighter.

And consider how much better deficit reduction might feel to families in a growing economy, compared with a limping one. The recovery in the past year has delivered only sluggish wage growth, with much erased by inflation as more of a worker’s paycheck goes to paying for more expensive groceries, tuition bills and gas. The end of a payroll tax holiday was only one small portion of the fiscal deal the White House and Republican leaders brokered at the turn of the year. Yet it was enough to wipe out a full year’s worth of wage gains entirely.

Indeed, even before the economic crisis, middle-class incomes had stagnated, with the economy’s gains primarily going to a thin sliver of wealthy families. Then, of course, the crisis hit, forcing millions into unemployment and millions more into poverty. Given that reality, Democrats have fought for making the George W. Bush-era tax cuts permanent for 98 percent of households. Republicans have argued that nobody should have to shoulder the burden of tax increases at all.

“Everything is easier to do if the economy is growing,” says William G. Gale of the Brookings Institution. “If you want to cut spending, it is easier to do in an environment where people think they are going to have robust income growth and aren’t as dependent on government. In terms of taxes, growth gets you not just more income to tax, but taxpayers moving into higher rates.”