All together now… a big round of applause for our hardworking elected mis-representatives in Congress.
They narrowly avoided what would have been the first-ever U.S. debt default by reaching a compromise on the debt ceiling level with only hours to spare.
Excuse my sarcasm, but our country’s fiscal problems are still far from over.
You see, the estimated $2.5 trillion in savings from the deal represents a mere drop in the $14 trillion bucketload of federal debt.[ad#Google Adsense 336×280-IA]Moreover, all the spending cuts and tax increases in the world won’t magically restore financial order in America.
What we really need to do is jumpstart our economy. So much so, Congress’ only priority should be restoring economic growth.
Let me explain why…
Why $2.5 Trillion in Savings Still isn’t Enough
“The basic issue is that the United States is on an unsustainable fiscal track.”
So says Dean Maki, Chief U.S. Economist at Barclays Capital.
Even if the $2.5 trillion in savings is realized over the next decade, we’re still on course to borrow another $10 trillion over the same period.
But of course, Washington would like us to believe that a combination of tax increases and spending cuts can reduce the amount of borrowing required over the next decade.
Don’t buy what they’re selling!
The truth is, lawmakers don’t have much leeway to prevent it from happening. If they cut spending too much, or raise taxes too high, our already fragile economy could grind to a halt.
Recall that second-quarter GDP already checked-in at an anemic 1.3% annual growth rate. Any missteps at this point could send the economy into a tailspin.
And if that happens, all bets are off. We’ll need to borrow even more money to sustain ourselves. (For example, it’s estimated that the two recessions we’ve endured over the last decade prompted an extra $3 trillion to $4 trillion in government borrowing.)
So if higher taxes and less spending aren’t the solution, how should we tackle this precarious debt situation? It’s simple, really…
It’s All About the Economy, Stupid!
The real cure to our fiscal woes boils down to nothing more than economic growth.
After all, the quicker the economy grows, the more money Americans make and the more tax dollars the government collects.
As a result, the government has more cash to pay down our debt. Then it won’t have to rip it from America’s most successful people via taxes, or strip it from necessary government programs, like defense.
The idea that economic growth holds the key to restoring fiscal order may sound overly simplistic. But I assure you it’s not. And history proves it…
Following World War II, the U.S. federal debt hit its highest level on record, checking in at a whopping 122% of GDP.
Four decades later, though, the debt had dropped to 33% of GDP.
How did that happen?
It wasn’t because some special committee figured out how to slash spending. Or a small percentage of Americans volunteered to pay more than their fair share in taxes.[ad#article-bottom]It was because the American economy grew at an impressive rate.
In fact, GDP more than tripled to roughly $7 trillion over that period!
The same thing happened in the 1990s. We went from a deficit to a surplus on the back of an impressive economic boom, particularly in the technology sector.
Bottom line: More than anything, America needs economic growth – not more taxes or less spending – to escape from its current fiscal mess.
However, it’s one thing to say we need economic growth… but another to actually create it. So now that I’ve laid the groundwork, in tomorrow’s issue I’ll share three simple initiatives that Congress can (and should) work on immediately to achieve just that. So stay tuned!
Ahead of the tape,
— Louis Basenese[ad#jack p.s.]
Source: Wall Street Daily