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Posts Tagged ‘Tax’

The 2% Economy

Posted by Ram Kumar Shrestha on June 5, 2011

By RANA FOROOHAR

John Kenneth Galbraith, one of the most famous practitioners of the high-minded guessing game known as economics,

Illustration by Harry Campbell for TIME

once noted that in the dismal science, “the majority is always wrong.” How else to explain the fact that so many economists upgraded their growth forecasts for the American economy at the end of last year, often to well above 3%, when the numbers so far this year have come in below 2%? The plunge is due to many things, from higher food and oil prices to supply-chain disruptions in the wake of the Japanese nuclear disaster to a terrible housing market. (The latest Case-Shiller data show that home prices have fallen further than they did during the Great Depression.)

But the bottom line is that the 2% economy is reshuffling the deck on everything from the debt debate to job growth to the likely outcome of the 2012 elections. Here in the U.S., there won’t be many winners.(See if Wall Street is aiding the recovery or strangling it.)

To understand why, a little math is in order. When the economy grows faster, tax receipts go up too. That can make a big difference in the debt picture. For example, if the economy grew steadily at, say, 3.9% — which the Fed, in its own moment of irrational exuberance back in February, predicted it might for the year — our national debt (including Social Security and other entitlements) would decline over the next decade from roughly 100% of GDP to a relatively svelte 83%. No more excruciating conversations about cutting Grandma’s health benefits or squeezing another five kids into already overcrowded classrooms. If, on the other hand, we grow at 1.8% over the next 10 years, debt rises to 144% of GDP. That makes us Greece. Read the rest of this entry »

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