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What 4% Growth Would Mean For America
The editors of the 4% Growth Project asked Bush Growth Fellow Ike Brannon to look into 10 things that would happen if the U.S. economy grew at 4% each year in real terms for 10 years.
Growth Fact #1 of 10: If the economy grew at 4% per year, we would create 10 million additional jobs during the next decade, returning the economy to full employment through growth alone, with no rise in government spending.[i]
Growth Fact #2 of 10: If the economy grew at 4% per year, the government would collect more than $3 trillion in additional revenue over the coming decade,[ii] matching the revenue that the Administration proposes to generate by raising income tax rates on the highest earners and allowing some business tax cuts to expire.
Growth Fact #3 of 10: 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[iii] and making our budget look less like Greece’s and more like Germany’s.
Growth Fact #5 of 10: If the economy grew at 4% per year, an additional 3,000,000 people would rise out of poverty over the next decade, reducing the burden on government safety nets by $200 billion.[vi]
Growth Fact #6 of 10: If the economy grew at 4% per year, there would be a 1.2 percentage point increase in the aggregate savings rate, making $300 billion available[vii] for investment in plant, equipment, and new technology, and laying the groundwork for future economic growth. This is roughly twice what the U.S. spends each year maintaining and expanding its roads.[viii]
Growth Fact #7 of 10: If the economy grew at 4% per year, there would be about 20,000 fewer robberies and 250,000 fewer instances of larceny during the next decade,[ix] resulting in safer communities and a better environment in which business can flourish.
Growth Fact #8 of 10: If the economy grew at 4% per year, charitable contributions would increase by $200 billion over the next decade, improving health care, the environment, and the arts, with $28 billion more in donations for education alone.[x]
Growth Fact #9 of 10: If the economy grew at 4% per year, developing countries would see stronger growth as well, with increased tourism, imports, and foreign aid from America adding almost an entire percentage point to their annual average growth rates.[xi]
Growth Fact #10 of 10: If the economy grew at 4% per year, U.S. households would be able to buy an extra $8 trillion worth of goods and services in the next decade.[xii] This amounts to over $70,000 per household, or the equivalent of a year’s income for the median household.
At 4% economic growth per year, our current unemployment rate would fall to 7.7%. Almost 80% of those who are currently unemployed would then have jobs, along with millions of discouraged workers returning to the labor force.
See Bureau of Labor Statistics: “The Employment Situation — January 2012,” News Release, 3 February 2012.
[ii] In just three years of 4% annual growth, with no new taxes, the economy would generate 7.3% more than CBO’s current projections.
In fact, a one-year, temporary increase in economic growth of one percentage point (to a 4% annual rate from the forecasted 3%) in 2012 alone would ultimately produce over $400 billion in additional revenue, approximately equal to the revenue that the Office of Management and Budget estimates would result from allowing the Bush income tax rate reductions to expire for small businesses and individuals in the top two tax rates.
Furthermore, this projection of increased revenue understates potential tax revenue, because we know that sustained economic growth can produce progressively larger increases in tax revenue that invariably exceed the forecasts by CBO and OMB. For example, tax revenue grew 50% from 1996 to 2000 (a period with average annual GDP growth over 4%) and 44% from 2004 to 2007 (when GDP growth exceeded 3% annually), neither of which were predicted by CBO or OMB.
See “Fiscal Year 2012 Analytical Perspectives, Budget of the United States Government,” Office of Management and Budget, Table 3-1. Note that the revenue gains rise substantially over the decade from the additional growth, so we cannot say $300 billion per year but $300 billion on average. The table is available at: http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/spec.pdf. Look at Table 3.1, page 24, column 3.
Two things to note: First, we are limiting our discussion of tax rate increases solely to the top 5% of earners (which is in the Administration’s proposed budget), but we are ignoring additional tax increases proposed on the top 5% of earners via the phase out of various deductions they have available. Second, to get the three years, we actually start with 2014 and not 2013.
If there were a temporary increase in growth to 4% for just one year, it would create a higher base for future growth and thus impact revenue in subsequent years. The gains in 2013 from that one-year increase would be $292 billion, but it would have an increasing impact on revenue in future years. “Historical Budget Tables,” Congressional Budget Office, 2011.
[iii] This assumes other things do not change. See “Fiscal Year 2012 Analytical Perspectives, Budget of the United States Government,” Office of Management and Budget, Table 3-1; Gordon Gray, CBO January Baseline: Behind the Numbers, American Action Forum publication, 7 February 2012, http://americanactionforum.org/topic/cbo-january-2012-baseline-behind-numbers, which uses the CBO alternate analysis as its baseline, which is their projected deficit if the provisions expiring in 2013 remain in the law; http://www.gfmag.com/tools/global-database/economic-data/10395-public-deficit-by-country.html#axzz1mTVbpT2q.
[iv] This would benefit high-growth exporting industries (for example, technology and pharmaceutical companies, as well as a host of manufacturing companies). See Chinn, Menzie, “Incomes, Exchange Rates and the U.S. Trade Deficit, Once Again,” Center for Global, International and Regional Studies, 22 December 2002. 2010 export figures are from the CIA World Factbook.
[vi] This amounts to a 7% reduction in the number of Americans (46.2 million) currently living below the poverty line, according to the U.S. Census. Those who emerge from poverty enjoy better health, longer lives, and a generally higher standard of living. As a consequence, government and private charities can redirect their energies toward other economically beneficial endeavors. See Gittell, Ross & Edinaldo Tebaldi: “Poverty in U.S. Metropolitan Areas: What are the Key Determinants and What is the Role of Local Fiscal Structure?” Public Finance and Management 10(3), 2010. 2010 poverty figures are from the U.S. Census Bureau.
[vii] A higher savings rate means more money available for investment by companies in plant, equipment, and technology, laying the groundwork for future economic growth — creating a positive feedback loop. People would save more and have more money for their retirement; interest rates for their retirement houses might be lower, too. See Deaton, Angus & Christina Paxson, “Growth and Saving Among Individuals and Households,” Review of Economics and Statistics 82(2), 2000.
[ix] For example, savings from decreased auto theft alone would amount to about $150 million per year. (According to the FBI, auto theft amounts to 20 percent of all larceny. We have estimated an average car price of $30,000). Economic growth increases opportunities to succeed in legitimate business and makes crime less attractive. Additionally, a lower crime rate reduces the amount of resources that need to be devoted towards incarceration, allowing such funds to be directed to more productive uses.
[x] Higher levels of charitable giving increase the standard of living for the poor in the form of food, shelter, clothing and medical care. See Heinemann, Friederich, “Voluntary Giving and Economic Growth: Time Series Evidence for the U.S.,” Center for European Economic Research, Discussion Paper 10-075, 2010. Charitable giving figures are from the Giving USA Foundation’s “Annual Report on Philanthropy for the Year 2010.” Heinemann estimates an income elasticity for charity of 1.32, and charitable giving for 2011 was approximately $300 billion. The report also estimates that 14% of donations go toward education.
[xi] Economic growth in the developed world flows outward, so a strong U.S. economy is good for the rest of the world. See Fardoust, Shahrokh & Zhou Jiang-Ping, “Scenarios for Growth in the 1990s,” World Bank Working Paper No. 834, 31 January 1992.
[xii] Consumption constitutes roughly two-thirds of GDP in most years, a remarkably stable percentage. Two-thirds of the added GDP resulting from the difference between 3% and 4% growth amounts to approximately $8 trillion from 2013-2022 (note the significant compounding effects when the economy grows consistently at 4%).