by Michael Boskin at The Wall Street Journal
Remarkably, President Obama will add more red ink in his first two years than President George W. Bush—berated by conservatives for his failure to control domestic spending and by liberals for the explosion of military spending in Iraq and Afghanistan—did in eight. In his first 15 months, Mr. Obama will raise the debt burden—the ratio of the national debt to GDP—by more than Reagan did in eight years…
In a study presented last month at the annual meeting of the American Economic Association in Atlanta, they conclude that, so long as the gross debt-GDP ratio is relatively modest, 30%-90% of GDP, the negative growth impact of higher debt is likely to be modest as well.
But as it gets to 90% of GDP, there is a dramatic slowing of economic growth by at least one percentage point a year. The likely causes are expectations of much higher taxes, uncertainty over resolution of the unsustainable deficits, and higher interest rates curtailing capital investment.
The Obama budget takes the publicly held debt to 73% and the gross debt to 103% of GDP by 2015, over this precipice. The president's economists peg long-run growth potential at 2.5% per year, implying per capita growth of 1.7%. A decline of one percentage point would cut this annual growth rate by over half. That's eventually the difference between a strong economy that can project global power and a stagnant, ossified society.
Such vast debt implies immense future tax increases. Balancing the 2015 budget would require a 43% increase in everyone's income taxes that year. It's hard to imagine a worse detriment to economic growth…
Former Senate Majority Leader Howard Baker famously called Reaganomics—with its defense buildup, tax cuts and budget deficits—a "riverboat gamble." (Which, by the way, worked out well.) Mr. Obama's fiscal strategy is more akin to the voyage of the Titanic. Let's hope he changes course soon enough to prevent disaster.
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