Can the U.S. grow its way out of debt?
Douglas W. Elmendorf, Glenn Hubbard, and Zachary D. Liscow analyzed whether policy changes can meaningfully reduce federal budget deficits in the U.S. through enhanced economic growth by examining seven policy areas: high-skilled immigration, housing regulation, safety net programs, electricity transmission, R&D support, business investment tax policy, and infrastructure permitting.
Their methodology frames the debt-to-GDP ratio as a race between debt growth and GDP growth, utilizing CBO modeling to assess scenarios where total factor productivity growth increases by 0.5 percentage points annually – the threshold needed for debt stabilization.
Three primary conclusions
- Growth policies cannot stabilize debt alone. No evidence exists that plausible policy changes could generate the sustained 0.5 percentage point annual productivity increase needed for debt stabilization without explicit spending cuts or tax increases.
- Growth policies can reduce required fiscal adjustments. While insufficient alone, growth-enhancing measures could substantially boost output at low enough budgetary costs to reduce the magnitude of needed tax increases and spending cuts.
- Significant research gaps limit policy quantification. There exists a substantial shortage of research on growth-enhancing policy impacts, hampering informed policymaking.
Quantitative impact estimates
- High-skilled immigration: Adding 200,000 STEM workers would boost annual productivity growth by 0.003-0.053 percentage points after 25 years, resulting in 1% higher GNP and 2% of GDP smaller debt after 30 years.
- Housing regulation reform: Relaxing restrictions in seven major metropolitan areas could have increased 2010 GDP by nearly 8 percent, though specific federal policy impacts remain unquantified.
- Safety net programs: Children’s healthcare programs show strong returns, for example, $1 spent on major Medicaid expansions generated $1.78 in improved budget balance through higher subsequent earnings.
- Productivity growth scenario: A 0.5 percentage point annual productivity increase would raise GDP by 7%, reduce budget deficit by $400 billion, and make debt $2 trillion smaller over a decade.
Policy implementation insights
Regulatory changes offer greater promise than tax cuts or spending increases since fiscal changes directly widen deficits and require very potent growth impacts to offset their budgetary costs. 
Policies to Reduce Federal Budget Deficits by Increasing Economic Growth
Authors: Douglas W. Elmendorf, Glenn Hubbard, Zachary D. Liscow
From: Harvard Kennedy School, Columbia University, Yale University
When Congress stopped caring about deficits
Alan J. Auerbach and Danny Yagan examine how much deficit reduction is needed to maintain fiscal sustainability in the U.S by analyzing Congressional Budget Office data on legislated fiscal changes from 1984-2024. They compare two distinct periods: 1984-2003 versus 2004-2024, then develop a stochastic simulation model incorporating large transitory deficit shocks (like COVID-19) and persistent interest rate shocks to project debt trajectories under different fiscal feedback scenarios.
Empirical findings
- Disappearance of fiscal responsibility: During 1984-2003, Congress systematically reduced deficits by 0.15% of GDP for every 1% of GDP increase in projected deficits (statistically significant with t-statistic of 5). However, from 2004-2024, this fiscal feedback completely disappeared—Congress showed no statistically significant response to projected deficits, with the 95% confidence interval rejecting the earlier period’s estimates.
- Debt trajectory implications: The authors’ simulations reveal that without fiscal feedback, the debt-to-GDP ratio explodes beyond sustainable levels. However, with historical levels of fiscal responsiveness, debt remains manageable at 155-167% of GDP after 100 years.
Policy requirements for sustainability
To keep the debt-to-GDP ratio below 250% with 95% probability over 100 years requires:
- Gradual deficit feedback half as strong as observed in 1984-2003
- Immediate policy translation: 0.5-1.1% of GDP deficit reduction over the next decade ($1.8-3.9 trillion in fiscal consolidations)
- Wait-and-see approach risks: Would require two large deficit reductions (1.5% of GDP each) within 13 years during adverse scenarios
Historical context and future implications
Had the 1984-2003 fiscal feedback continued through 2024, current debt-to-GDP ratios would be significantly lower. The research demonstrates that relatively modest but consistent fiscal adjustments could restore sustainability, while delaying action through “wait-and-see” approaches substantially increases both required adjustment magnitudes and fiscal crisis risks.
Robust Fiscal Stabilization
Authors: Alan J. Auerbach, Danny Yagan
From: University of California, Berkeley
