The United States is pinning its fiscal hopes on growth. The argument is straightforward enough: faster productivity growth driven by artificial intelligence, renewed capital spending, deregulation, and reshoring should allow the economy to expand at a faster rate than growth in the federal debt. This would allow the country to grow its way out of its fiscal challenges. It is also the most appealing solution, because unlike higher taxes or lower spending, faster growth promises to make everyone better off. The problem is that growth today faces a headwind that previous periods of fiscal improvement did not—i.e., demographics. Fertility rates remain below replacement, net immigration has slowed, and the Congressional Budget Office expects deaths to exceed births by the end of the decade. An aging population raises spending obligations through entitlement programs while slowing the growth of the labor force and the tax base that funds them. In this Economics Weekly, Richard de Chazal examines whether growth alone can stabilize the nation’s finances, how much of that growth the tax system stands to capture, and what happens if it falls short.
