Can The US Grow Its Way Out Of Debt? The Answer Is Yes!

The federal budget goes up every single year, no matter who is in the White House and regardless which party controls Congress. The national debt recently topped a record $22 trillion, and annual budget deficits are projected to top $1 trillion a year starting as early as next year and continue over a trillion a year as far as the eye can see. If so, there is a major debt crisis looming!

If there’s no way politicians are going to reduce federal spending (until we hit the next debt crisis), then maybe we should look at whether we could grow our way out of debt. Mainstream economists assure us that this is simply not possible, but let’s look at what it would take anyway. You may be surprised.

Most economists and even the Congressional Budget Office (CBO) believe that the US economy will only grow by an average of 2% or less going forward. Averaging sustained growth of 2.5%-3.0% is simply not possible, they tell us. But at least the CBO makes annual forecasts on our debt levels as if we could achieve those levels of growth.

Keep in mind that the US economy grew at the rate of 3.1% last year based on this morning’s first estimate of 4Q GDP, the best showing since 2005. Yet economists will tell us that such a rate is not sustainable. Maybe they’re right, but what if they’re not.

Let’s start with a chart based on the Congressional Budget Office’s own projections about what would happen to our national debt at various growth rates in the economy going forward, illustrated below as the Debt-to-GDP Ratio.

Before we get to the chart, keep in mind that it only considers “debt held by the public” which is nearly $16 trillion, whereas the total national debt is over $22 trillion, but for illustration purposes, we’ll go with it.

 

The CBO estimates that if GDP growth continues to average only 1.9% (blue line) as it did during the Bush/Obama administrations, the debt-to-GDP ratio on debt held by the public will explode from 80% of GDP today to nearly 160% over the next 30 years.

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