The recent government shutdown and debt ceiling brinksmanship just postpones the time when the nation’s budget issues will have to be addressed. Unfortunately the “Washington consensus” on the budget, based on neoclassical economic thinking, leads to the wrong solutions. With its focus on cutting debt, rather than the debt-to-GDP ratio, and its overriding mantra that “everything should be on the table,” this mantra, being promoted by groups such as Simpson-Bowles, Domenci-Rivlin, The Concord Coalition, and the Committee for a Responsible Federal Budget, is generating budget solutions that will lead to less, not more U.S. growth.
It is time for a budget debate that is based on a new approach to economics – innovation economics – that focuses on maximizing innovation and long-term growth. This report argues that any budget solution must set a goal of improving the debt-to-GDP ratio as opposed to simply cutting the debt. It also needs to actually increase public investment and cut corporate taxes to drive growth, even though in the short run these steps will increase the budget deficit. These policies will be much more effective at spurring growth and U.S. competitiveness, which is what the ultimate goal of any economic policy, including budget policy, should be. Moreover, by spurring growth, these policies will help cut the debt-to-GDP ratio, a more accurate measure of the government’s fiscal condition.