Three Ideas To Boost Economic Growth And Reduce Government Deficits

Forbes

3 days ago

NEW YORK - NEW YORK - JUNE 1: A man walks near the National Debt Clock in Midtown Manhattan on June ... More 1, 2023 in New York City. (Photo by Eduardo Munoz Alvarez/VIEWpress)
The federal budget is a mess, with federal debt held by the public at $29 trillion and counting. States cannot print money and borrow the way the federal government can, but some of them still have deficit problems. Maine, California, Colorado, and New York are just a few of the states facing large deficits over the next few years. Fortunately, there are policy reforms both the federal government and state governments can implement to boost economic growth and reduce deficits.
In a recent National Bureau of Economic Research (NBER) paper, economists Douglas Elmendorf, Zachary Liscow, and R. Glenn Hubbard examine several policies with the potential to increase economic growth and reduce deficits. The general idea is that increasing total factor productivity (TFP)—the primary driver of economic growth—increases incomes and thus tax revenue. If this can be done in a way that does not involve too much government spending (or revenue losses) then the higher tax revenue would lower the deficit. Using estimates from the Congressional Budget Office (CBO), the authors calculate that increasing TFP by 0.5 percentage points each year for the next decade would reduce the federal budget deficit by 1.2% of GDP and make debt held by the public around 12% of GDP lower than it otherwise would be.
The authors discuss seven policies in their paper, but I am going to focus on the three that seem to have the most potential. And while the paper focuses on the policies' impacts on federal deficits, the same growth effects would also impact state budgets.
The first policy idea is making it easier to build housing. Economists know land-use regulations that restrict the supply of housing—including minimum lot sizes, parking requirements, and prohibitions on apartments, duplexes, and other forms of multi-family housing—make housing more expensive. As the authors explain, reducing the cost of housing construction would lead to more housing being built, which has downstream impacts on the demand for appliances, furniture, carpet, decks, and all the other things that make a house a home. The increase in housing construction and the production of complementary products would directly increase GDP all else equal.
In addition to this direct effect, more housing in the most productive cities would make it easier for workers to move to take higher paying jobs. A few studies estimate that this mobility effect would increase U.S. GDP by roughly 8%. New residents also have a significant impact on state budgets. A recent report from the National Taxpayers Union Foundation shows that adding new residents can increase a state's revenue by billions of dollars.
For all these reasons, it is a good idea for policymakers to reform regulations so we can build more housing in the places people want to live. State and local governments control most of the regulations that restrict the supply of housing. Over the last several years, many states have implemented reforms to make it easier to build, including Montana, Florida, California, and Arizona. This year, Texas passed several laws that will make housing more affordable in the Lone Star state. Other states should adopt and build on these reforms.
A second and related idea discussed by Elmendorf, Liscow, and Hubbard is permitting reform for construction projects. In recent years, long permitting times have gotten more attention, and for good reason. Federal laws like the National Environmental Policy Act (NEPA) can delay projects for years. A recent report from the Council on Environmental Quality, which oversees agency implementation of NEPA, found that 61% of environmental impact statements still take more than two years to review despite a law specifying a two-year deadline. Clearly, we need more changes at the federal level.
States have permitting problems, too. Earlier this year, wildfires destroyed thousands of homes in Los Angeles County. California governor Gavin Newsome promised to fast-track permitting so families could rebuild and get on with their lives. Five months later, only 33 building permits have been issued and not one house has been rebuilt. This is unacceptable for a country as wealthy as the United States.
Long permitting times increase project costs since money is tied up in resources—land, equipment, and buildings—that are not generating returns. As the authors note, shortening permitting times would accelerate projects already underway as well as increase the number and size of future projects by increasing the return on investment. And since reforming regulations and processes typically does not require a lot of government spending, the growth we create by shortening permitting times is likely to help bring down government deficits.
A third idea to boost economic growth and help reduce government deficits is immigration reform. Allowing more foreign workers with advanced degrees in science, engineering, and math to live and work in America would increase U.S. innovation and productivity. The NBER study calculates that a one-time increase of 200,000 additional high-skill immigrants would reduce debt held by the public as a percent of GDP by 2% after thirty years. Adding more high-skilled immigrants every year instead of just a one-time increase would have a larger effect.
In addition to increasing innovation and productivity, immigrants have a direct effect on government deficits. High-skill immigrants, like high-skill natives, have a positive effect on government budgets on average since they pay more in taxes than they consume in government services such as welfare benefits or Social Security. One study estimates that over a decade we could reduce federal deficits by $25 billion per 100,000 additional people who come to America to work.
Another recent report from the Committee to Unleash Prosperity (CTUP) also makes the case for more immigration to increase growth. The basic formula for economic growth is to add workers and make workers more productive. The U.S. fertility rate is falling, and without a sudden rebound the best way to add workers will be through immigration. From 2013 to 2023 about half of the growth in the U.S. civilian labor force was due to immigrants, as shown in the figure below (red bar). Without immigration, U.S. labor force growth would slow and eventually turn negative.
Labor force growth
Immigrants also tend to be incredibly entrepreneurial. According to the CTUP report, nearly half of all Fortune 500 companies were founded by foreign-born or second-generation Americans. These immigrants and their children create jobs for native-born workers in addition to the valuable new goods and services their companies create for consumers. Federal policymakers should reform our immigration system so more high-skill immigrants can create and grow their companies in America.
Government budgets throughout the United States are a mess. From cities such as Chicago to the Halls of Congress, policymakers struggle to keep spending in line with revenue. Economic growth cannot solve all these budget problems, but it can help. Policy changes that make it easier to build housing, reduce permitting times, and increase immigration would boost output, incomes, and tax revenue. If we could get government spending under control, too, we would have a real shot at fixing our debt problem.