Can the increase in economic growth be enough to solve the Baker-Krugman problem? I think not in the long run but I am not so sure about short-run dynamics, even a small increase in growth rates can increase prices significantly. I turn this one over to better macro-economists than I.
Bearing in mind that there are definitely much better macro-economists than I as well, I have comments of my own.
A short run improvement in economic growth that levels off to normal growth levels is still pretty important because growth, and economic product, isn’t something that starts from zero every year. Like a bank account compounds interest the economy compounds the short run increase in growth this year as normal growth happens next year. So this leads to two important points. One, the earlier the extra growth starts the sooner it starts compounding and the more compounded growth you get out of it. (Just the way that someone who saves for retirement in their 20s can save much less and still have more at retirement than someone who waits until age 45.)
Second, every incremental increase in growth is important. There’s lots of talk about separating tax reform from Social Security reform, often without even mentioning other pro-growth policies like streamlining regulatory processes, reforming the tort system, adopting a sound energy policy and lowering trade barriers. That’s a mistake. The most growth is going to come from stacking and compounding the extra growth from a total package of pro-growth policies and from getting all those policies moving as quickly as possible. If we’re going to have personal accounts, pro-growth tax reform will make those accounts more successful.