Politics: Balancing the budget is as "easy" as 1-2-4

Balancing the Federal budget is about bringing the revenue line up and the spending line down when measured against the GDP. When measured against absolute dollars amounts, it is about flatting the spending line and getting the revenue line going up a bit faster.

If the economy is growing at 2 to 4% but spending is growing at 5 to 7%, the deficits will continue and debt will pile up which has been occurring for the last decade under both Republican Bush and Democrat Obama administrations.

So fixing the deficit and thus getting the debt under control is as "easy" as 1-2-4.

Cap growth of government to 1% per year. Assume GDP growth at 2% per year. Raise revenue by 4% per year. Do this and the budget balances by 2027.

However you slice up the numbers, the growth rate of government MUST be lower than the growth rate of the economy or else we will be forever chasing our own tail. The reality is that the US economy has been growing at about 2% per year on average over the last couple of decades. Clinton era boom times hit around 4% for a few years. Assume inevitable booms and busts average out to 2% growth per year. Thus, growth in government spending must be LOWER than growth rate in the economy. We also should aim for 4% growth in the taxation side per year to speed up reaching balance.

1% growth in spending, 2% growth in the economy and 4% growth in taxation, you get to balance by 2027.

The math is easy. It is just plugging in numbers and you get to balance. You can tweak the exact combination of numbers but the spending growth rate has to be LESS than economic growth rate and the rise in taxation should be a gentle one since sudden increases cause panics. If the economy grows faster than 2% you get to balance sooner. If the economy grows slower than 2% but above 1% growth in spending you eventually get to balance, it just takes a few more years.

The problem is the political will to cap spending growth to 1% per year given that we have routinely been spending 5-7% more per year.

All the angst and sackcloth over the fiscal cliff is political gamesmanship. The mathematical road map to balance is actually rather straightforward.

The graphs that illustrate the 1-2-4 plan are below. First, in absolute dollars.

Second, in percent GDP.

P.S. Another way to look at it is to look at THREE key numbers:
(1) what % GDP we want government spending to be
(2) the year we want to reach that target
(3) assumption about economic growth.

In the above graphs, the target is 21% GDP by 2027 assuming 2% economic growth.

There are of course other possible scenarios, for example 20% GDP by 2030. The slope of the lines in that scenario would be a little different. One could aim for 19% GDP by 2020 and the slopes in those lines would be also a bit different.

The $16,000,000,000,000 question: if the White House had to pick a GDP number and a year, what would they pick? What numbers would the House Republican's pick? Of course, they would probably pick very different numbers! Would they split the difference?

The thing they probably would agree upon is overly optimistic economic growth assumptions which makes the effort pointless. Sigh.

P.P.S. I do like to read Dan Mitchell's stuff. I posted the above item before I saw this item over at Cato he wrote recently. In sum, Mitchell declares, Simply stated, even huge tax hikes won't stem the flow of red ink in the long run if government keeps growing faster than the private economy. This is the fiscal problem that demands attention. Alas, unfortunately, it would appear that the wisdom of a non-economist blogger in pajamas and a seasoned pro like Mitchell will get ignored just the same by the powers that be in the White House and the Hill.