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The Kadlec Curve

Article by Matthew Denhart March 21, 2013 //   3 minute read

At the 4% Growth Project we've been examining how strong growth might narrow the federal budget deficit. But we're not alone.

Charles Kadlec, the founder of the Community of Liberty, has been developing a concept that some are beginning to call the “Kadlec Curve.” The essence of Kadlec’s argument is if we can accelerate the rate of economic growth, even by just a little bit, it would do wonders to lower the federal deficit. Citing Appendix B of the Congressional Budget Office’s publication, “Budget and Economic Outlook: Fiscal Years 2012 to 2022,” Kadlec writes:

…every one-tenth of one percent increase in the growth rate will reduce the federal budget deficit over the next 10 years by $314 billion.

The CBO has projected a new long-run annual average growth rate of just 2.8% for the next decade. But, as Kadlec tells us, by simply returning to an average annual growth rate of 3.1% — the long-run average annual growth rate of the U.S. economy since WWII — the 10-year budget deficit would shrink by over $900 billion.

Of course Kadlec himself is a believer in even stronger growth. He thinks our political leaders need to be debating how to increase growth to 4% per year. With growth at that rate for the next decade, Kadlec says the projected budget deficit would sink by $4 trillion.

Our own growth fellow, Ike Brannon, has looked at this question too. Preparing our “growth facts” back in February 2012, Brannon found that:

If the economy grew at 4% per year, we would see a 30% reduction in the 10-year budget deficit — subtracting almost $3.2 trillion from the projected $10.9 trillion deficit…

Brannon’s estimates suggest the effect of sustained 4% growth on the deficit is somewhat smaller than what Kadlec finds. Regardless, even Brannon’s smaller estimate is still remarkable. It tells us that we could eliminate almost a third of the projected deficit through growth alone. And that’s without even having to make politically-difficult cuts to current government spending.

Brannon and Kadlec are to be commended for showing how economic growth can solve even our most contentious policy challenges. Political leaders are starting to take notice. Recently Marco Rubio and Ted Cruz have cited the benefits of faster growth. Now we just need more leaders to adopt this same focus. If we make faster growth the primary objective of all new policy efforts, we’ll be surprised at just how quickly a strong economy can make the seemingly insurmountable challenge of the deficit a thing of the past.