The One Thing We Haven't Talked About
“Economic progress is the work of the savers, of the inventors, and of the entrepreneurs.”
— Ludwig von Mises, Human Action
For the past six weeks, we’ve walked through the forces creating America’s K-shaped economy, housing, healthcare, education, wages, incentives, and the political consequences when enough people decide the system is not working for them. This week let’s look at the situation from a more optimistic angle.
First, we must start with a problem, perhaps the biggest problem of all: federal debt and deficits. Now, this is not going to be a letter telling you Washington spends too much. You already know that.
Instead, let’s ask a more interesting question…
To help set it up, the federal government spent about $7 trillion last year and collected about $5.2 trillion. The difference, roughly $1.8 trillion, was 5.8% of GDP. The Congressional Budget Office projects the deficit will reach 6.7% of GDP by 2036, with debt rising from 99.4% of GDP to 120%.[1]
For context, federal deficits have averaged 3.8% of GDP over the past 50 years. We are running well above that now, and CBO projects we will stay there. The trajectory is clear: federal deficits, and therefore the debt, are growing faster than the economy’s ability to carry it.
There are ways to fix the problem. Washington can spend less. We all know how that goes. Everyone likes cutting spending until you start naming what gets cut.
The government can collect more tax revenue. But from whom? There are not many volunteers (I for one think income tax rates are plenty high and I’m not eager to pay more. I’m sure I’m not alone in this thinking. I’d prefer they close loopholes, but let’s not get sidetracked...).
There’s a third scenario - one that every politician will love (and take credit for). We could grow our way out of the debt problem.
This is the argument Treasury Secretary Scott Bessent has been making: grow the economy faster. As he recently said about the US debt, “There’s nothing magic about the $40 trillion number, and we can grow our way out of that.”
What would it take to grow our way out of debt? Have we done it before? And is anything happening today that gives us reason to believe, realistically, we could do it again?
What Would It Actually Take?
First, let’s define what “grow our way out” means.
It does not mean paying off $40 trillion in its entirety. It means getting the debt burden to stop growing relative to the size of the economy carrying it. Think about a family whose income grows faster than its mortgage payment. The mortgage does not disappear; it just becomes easier to carry each year.
We’ll use the CBO’s numbers for this exercise. In its higher-growth scenario, the CBO estimates real GDP growth averaging 2.6% over the next decade (note, “real GDP growth” is GDP adjusted for inflation). That seemingly modest improvement to the CBO’s baseline projection lowers their projected 2036 debt from 120% of GDP to 109%, and the deficit drops from 6.7% of GDP to 5.5%.[2]
Faster growth materially changes the math.
Let’s take the exercise a step further. What if the US were to boost real GDP by four percent annually? To be clear, four percent is not an official CBO forecast. It is simply a useful thought exercise and not impossible. Ambitious by recent standards, for sure, but not outside America’s historical experience.
The chart below illustrates the size of the economic impact: if real GDP grew at 4% annually from the same 2026 starting point, the economy would produce roughly $6.4 trillion more annual output by 2036 than under CBO’s baseline.
That does not make the $40 trillion debt disappear, but it leaves the economy far better able to support it. With fiscal restraint, it could put the debt burden on the other side of the curve, falling as a percentage of GDP instead of rising.
Four percent sounds like it would be ambitious by recent standards. but we’ve done it before…
Is That Crazy?
Historically, no.
For roughly a century and a half, from the 1820s through the 1970s, U.S. real GDP growth generally ran in the 3% to 4% range.
America went from an agrarian economy to the world’s largest industrial power. We built railroads across a continent, electrified the country, created entirely new industries, fought a Civil War and two world wars, survived the Depression, and built the postwar middle class.
Growth in that era was not 4% every year. But growth of 3% to 4% was much closer to the norm than the exception.
Since then, growth has slowed. It averaged about 3.1% in the 1980s and 3.2% in the 1990s. Since 2000, it has been closer to 2.1%.[3]
So asking whether America can get back toward 4% is not asking whether it can do something unprecedented.
Critics will rightly point out that today’s workforce is older, labor-force growth is slower, and the debt burden is larger. These are strong headwinds.
The Key is Productivity
If America is going to get back toward 4% real GDP growth, it will not come primarily from adding workers. It will come from helping each worker produce more.
Economic growth comes from two places: more people working, and/or each worker producing more. Demographics are not likely to provide much help with the first. CBO expects labor-force growth of only about 0.5% per year.[4] That means productivity has to do the heavy lifting.
And this is where my friend Dr. Pippa Malmgren believes it gets interesting. She describes the period we’re living through as the "controlled demolition of an old system," with rapid advances in AI, computing, energy, and science potentially changing the economic assumptions built around the recent past.
One reason is speed. Pippa points to AI and supercomputing dramatically shortening the time required for scientific discovery. She believes breakthroughs in areas like energy, materials, and manufacturing can now more quickly move from impossible, to possible, to commercially useful.
Scale that concept across the economy, and workers will produce more with the same time, capital, and resources. Getting anywhere near 4% growth with a slowly growing workforce requires exactly the kind of productivity regime Pippa is describing.
Is she right? There are signs…
From 2007 through 2019, U.S. labor productivity grew at an annualized rate of about 1.5%. From the second quarter of 2023 through the third quarter of 2024, it averaged 2.6%. Full-year productivity growth was 2.3% in 2024, and productivity rose 2.8% over the four quarters ending in late 2025.[5]
Three years is not enough to declare a new productivity boom. But it is not nothing. More importantly, we can see where some of it may be coming from.
Capital Is Being Deployed
So, if productivity is going to keep accelerating, what would we expect to see? Investment.
New technologies do not raise economy-wide productivity simply because they exist. Businesses have to put them to work: building factories, buying better equipment, installing new technology, and expanding the infrastructure required to support it. That is how an idea becomes output, and how output per worker rises.
The capital is being deployed.
Manufacturing construction spending rose from roughly $75 billion at an annual rate in 2020 to a peak near $249 billion in 2024. It has cooled, but was still running at about $173 billion in June 2026, more than twice its 2020 level.[6]
Data-center construction has surged to roughly a $50 billion annualized rate.[7]
These are not assets changing hands. They are factories, semiconductor fabs, data centers, power facilities, and physical productive capacity being built in America.
Policy is increasingly encouraging more of it.
Last year’s tax bill permanently restored full expensing for domestic R&D and 100% bonus depreciation for qualifying capital investment.[8][9] In plain English, Washington made it cheaper and more predictable for companies to invest in research, equipment, factories, and other productive capacity.
Energy policy is moving, too. The ADVANCE Act reduced licensing-review fees for advanced nuclear-reactor applicants and established more defined Nuclear Regulatory Commission review timelines.[10]
These policies do not guarantee higher productivity. Some of these investments will fail. But this economic behavior is what you expect to see when a new productivity cycle is beginning: more incentive to invest, more physical capacity being built, and fewer barriers around the energy required to run it.
Where This Leaves Us
A sustained return toward 4% real growth would dramatically change the fiscal arithmetic. If DC can show enough restraint to not spend away the gains (a big “if”), it would put the debt burden on a declining path relative to the economy.
That is a high bar, but perhaps not out of reach. Productivity has accelerated from pre-pandemic levels. Manufacturing and data-center construction have surged. Policy has become more favorable to R&D, capital investment, and energy development.
Four percent growth would feel extraordinary today. For long stretches of American history, it was not. None of that guarantees we get there. Washington will probably have to do some combination of all three options: spend less, tax more, and help the economy grow faster. But the Treasury Secretary is right about growth being the force that makes every other choice easier.
We are making a massive investment in AI. What if it works? So far, the feared job losses are not showing up in the data. The Federal Reserve Bank of New York reports that over 50% of manufacturing and service firms have now adopted AI, leading to retraining instead of layoffs.[11]
America, with all its frustrations, is still a place to build. Today’s young builders are impressive. I recently spent a couple days in LA, where I toured Valar Atomics’s small modular reactor facility.
Hearing directly from the founder about where the US is heading for energy development, hearing his unwavering dedication to success, and hearing from other entrepreneurs building new technologies that sound like science fiction... this is why I’m a Rational Optimist at heart. I like to joke that I’m really a prudent pessimist, but I think Pippa is on to something. Let’s grow our way out of this!
Let me know what you think — reply to this note or drop a comment.
Thanks for reading.
Ed D’Agostino
Partner & COO
[1] https://www.cbo.gov/publication/61882
[2] https://www.cbo.gov/publication/62184
[3] https://www.crestmontresearch.com/docs/Economy-GDP-R-By-Decade.pdf
[4] https://www.cbo.gov/system/files/2026-02/61882-Outlook-2026.pdf
[5] https://www.bls.gov/news.release/archives/prod2_03052026.htm
[6] https://fred.stlouisfed.org/series/TLMFGCONS
[7] https://www.datacenterknowledge.com/build-design/data-centers-become-largest-segment-of-us-office-construction
[8] https://www.grantthornton.com/insights/alerts/tax/2025/insights/full-expensing-of-domestic-research
[9] https://www.bdo.com/insights/tax/one-big-beautiful-bill-act-expands-100-depreciation-expensing-opportunities
[10] https://www.nrc.gov/about-nrc/governing-laws/advance-act/about-advance-act
[11] https://libertystreeteconomics.newyorkfed.org/2026/09/businesses-are-using-ai-to-transform-work-not-cut-jobs/
Ed D’Agostino
Publisher & COO
If you prefer to listen to Global Macro Update, you can do so here:
Permanlink:
Recent Articles
The Optics of Low-Hire, Low-Fire
September 25, 2026
The Optics of Inflation
September 18, 2026
The State of Being Ready
September 11, 2026
The One Thing We Haven't Talked About
September 3, 2026
A Little Now, or a Lot Later
August 28, 2026
Healthcare Pt. 2: Show Me The Incentive
August 21, 2026
Get Ahead of Big Market Trends—with Global Macro Update
Today’s most successful investors share one thing in common: They spot major trends early and move quickly to take advantage of them.
Twice a week, Ed D’Agostino—our publisher and COO—shares macro insights and analysis, along with exclusive interviews with leading economic, geopolitical, and investment experts to help you get ahead of major trends and market shifts.
By opting in you are also consenting to receive Mauldin Economics' marketing emails.
You can opt-out from these at any time. Privacy Policy
I won't get political with an overt mention, but there is one political party that is entirely capable of sabotaging any growth prospects since they are generally opposed, preferring regulation and containment of new technology.
"If America is going to get back toward 4% real GDP growth, it will not come primarily from adding workers. It will come from helping each worker produce more."
The productivity argument is reasonable from the standpoint that companies are always looking to improve productivity, and productivity does tend to increase over time. Where it falls flat though, is that this argument assumes that while productivity increases, the number of workers remains constant, with all the added productivity going straight to growth.
We have over a century of history that suggests this is not the case.
When companies develop ways to make workers more productive, the immediate next step is to fire their excess worker capacity. This increases corporate profits- but not growth throughout the country. The profits are hoarded at the top, and sit in bank accounts, were the capital does not flow throughout the economy. They are not directed towards future investment.
The stronger argument is demographics. The growth cited from much of the 20th century was in a growing country- growing by birthrates, growing by immigrants, and growing by education. All of those trends are now in decline. Some of those are the nature of mature economies, and some are self-inflicted.
Future 4% growth for the US is a fantasy. Time to bite the bullet, and focus on cutting spending and raising taxes. The longer we wait, the worse it will be.
The premise is completely flawed. There is a temporary increase in jobs while construction takes place and while businesses look to create AGI. Once construction slows and AGI is achieved, mass firings will begin.
Productivity will soar but unemployment will explode higher. Those without income and assets don't spend. Either the government provides aid or the economy slowly and then rapidly collapses. Exploding Productivity while a depression unfolds. Or government spending ramps higher to prevent the depression.
The tax code will need to be reconfigured as wages will become rare and profits will be extreme if the government saves the consumer.
If AGI is never achieved productivity stable employment could possibly happen but it is difficult to imagine a recession doesn't creap in for 1 reason or another. Every recession seems to trigger even more extreme government debt.
Buy gold but be prepared for another leg down as it is absolutely possible.
There are rational optimists and there are rational realists! Im a dyed in the wool capitalist but I have to acknowledge that the returns to the owners of capital are not sustainable- the working class will accept this until they won't. We don't want to or need to test this hypothesis, the owners of capital need to pay their fair share. Pay or see capitalism destroyed!
The “Grow our way out of it.” argument, with all due respect, is exhaustingly flawed, on at least 2 fronts:
1) it dismisses the absolute waste of taxpayer dollars to (indefinitely) “carry the load”. It is a boat anchor that endlessly impedes the boat, stressing every system to overcome the drag and move appreciably forward.
2) it never happens, because the “growth” is quickly consumed by, wait for it…overspending. In other, most stark words of all, we simply are a pathetically-weak, undisciplined, species. Which is to say, we will “spend” ourselves into oblivion — overeating, over-imbibing, and lazy to an unhealthy sloth, until nothing can reverse it, not even the burdensome over-taxation of the ever-decreasing percentage of those that are actually productive among us.
Put simply, the entire problem is one of collective will, which sadly over the last 60+ years is a rapid disintegration of culture, values, community, and country. THAT is the real problem, and it is going to take, as M. Scott Peck warned over 3 decades ago, an order of magnitude more strength to overcome than that which it took to create. You don’t “grow” out of that technologically, financially, hell not even magically.
Why, oh why, does no one ever talk about the $2.3 TRILLION spent ANNUALLY on tax expenditures? You want a budget surplus? There is your answer.
Our disengenuous politicians, who are paid by special interests to create and protect tax expenditures, always claim the only cuts that can be made are "discretionary spending" on defense or welfare. Guns and butter.
But tax expenditures are 100 percent discretionary!
We have an insane system where people earning identical incomes are paying radically different income tax each year. And the same is true for businesses with identical earnings.
Tax expenditures are the biggest government social engineering project in the history of the world. $2.3 trillion every year.
No capitalist in their right mind should support this wall-to-wall government interference in the free market. These are a huge transfer of wealth UP the food chain. These tilt the playing field to the advantage of the wealthy.
For example, the mortgage interest deduction results in the price of homes being up to 27 percent higher. And who benefits from a working schlub having to borrow more for his house? The lenders, the mortage brokers, the real estate agents with their commissions, and the home builders. And all of these vultures spend hundreds of millions of dollars on lobbyists every year, and countless millions more on campaign donations.
Every dollar of revenues lost through deductions, exemptions, and credits has to be taken from someone else through higher tax rates, or borrowed.
And boy oh boy, do we borrow!
We need to ban tax expenditures. Not only will this restore sanity to our tax structure, it will have the serendipitous effect of campaign finance reform since it will remove the incentives for special interests to bribe our politicians to create and protect this colossal spending.
Then we can not only pay down the debt, we can lower tax rates for EVERYONE.
I believe that AI has been over optimistically named. This misnomer has elevated expectations beyond what is in reality possible. In fact, the label "machine knowledge" far better suits the product because while it can provide almost any known answer, a five-year-old is better at finding new knowledge. Yes, it can provide a basis for research, but no, it can't recognize a good idea when it is offered.
Real growth comes from providing human beings with something that they want; no machine can have or understand human desire.
Great concept, and hopefully AI and robotics will goose our GDP/capita. But as you said, GDP growth is population growth * productivity growth. We have no population growth, so that leaves just productivity growth; what have we achieved historically? You have to subtract the population growth from your historical chart, and the 1800's saw mostly 3%/yr population growth, and the 1900's mostly 2%/yr. That leaves an average of 1-2% productivity growth throughout our history. Isn't that where we are now?
America is addicted to excessive spending financed by massive increases in debt. Our central bank has enabled the habit with monetary expansion with extremeluy low interest rates.
This will have a happy ending for a very small group of Americans. Howerver, the vast majority of us will pay a very high price as piper will be paid.
B
Ken123 is right about growing our workforce. My concern - data center buildout will finish at some point. 2 years from now? I still remember all of the fiber from 1999-2000. I think there is too much hope on AI solving our problems. PCs made us more productive. Internet (even with the dot-com bust) improved productivity. But look at your chart. Hard to see it there. Then there is energy costs. This administration spent $2B to cancel new energy projects. (Offshore wind - not the best source, but still). It is pushing coal generation, forcing end of life coal plants to stay open. It canceled grid upgrades because they were part of Biden's green energy. But the grid does not care where the energy came from. We need more and cheaper electricity. Energy makes an economy run. Trump is doing well with nuclear. But that is at least 5 years out from being useful for us.