The Wonk Room

To Balance McCain’s Budget, U.S. Economy Would Have To Grow At An Unrealistic 8% Per Year»

Yesterday, McCain spokeswoman Nancy Pfotenhauer responded to our analysis showing that McCain could eliminate 10 government agencies and still not balance his budget by 2013. Watch it:

But some quick calculations show that to balance his budget the economy would have to grow by a blazing 8% a year between now and 2013.

That annual growth rate is faster than any the U.S. economy has experienced since 1950, and faster than any economy in the G7 (which includes Germany and Japan) has grown since 1970. And to balance his budget, McCain needs it to happen five years in a row.

The last time the Unites States experienced 5 years of growth that fast was between 1939 and 1944 when growth averaged 12.8% per year.

Put simply, the only way McCain could achieve that kind of growth is to start World War III.

UPDATE: An alert Wonk Room reader noted that we were comparing McCain’s needed growth rates to inflation adjusted growth rates instead of nominal growth rates (which is the proper historical comparison to make). The point remains, however, that a growth rate of 8% for five years in a row is wildly unrealistic. Nominal growth rates have never achieved such a stretch since the late seventies when inflation accounted for most of the growth. This post’s title and the accompanying chart have been removed to reflect this change.

Read methodology and calculations after the jump.

Continuing Bush’s tax cuts, as McCain plans to do, would leave a deficit of over $400 billion in 2013. McCain plans on adding an additional $300 billion in tax cuts for corporations and the wealthy. Even assuming McCain is able save $50 billion a year with a discretionary spending freeze and earmark reductions (a very generous assumption), McCain would still face a deficit in 2013 of at least $650 billion.

In 2006, McCain adviser Douglas Holtz-Eakin said that “the federal government collects roughly 18 cents on the national dollar in taxes—close to the postwar average.” (This is about right: tax policy center predicts that McCain will collect about 17.8% of GDP in taxes in 2013.)

At this rate, according to our back-of-the-envelope calculations, McCain would need a GDP of $21.7 trillion to have revenues high enough in 2013 to fill his $650 billion hole. That means that between now and 2013, the United States economy would have to grow at 8% every year.

Calculations: CBO predicts a GDP of $18.1 trillion in 2013. To calculate how much more GDP is required for $650 billion in revenue, we find $650/.18=$3,611 or $3.6 trillion. This means McCain needs a GDP of $21.7 trillion in 2013. The last recorded GDP level is 2007’s $13.7 trillion. To find needed the annual growth rate, we solve (($21.7/$13.7)^(1/6))-1=.08=8%.