Today the House Budget Committee convened a hearing on the burden of mounting national debt on the country and how to address it. The committee heard from a panel of four witnesses, including CRFB President Maya MacGuineas.
Committee Chair Paul Ryan (R-WI) opened the proceedings by stating that “I don’t think there is any serious debate over the urgency of these challenges. I doubt anyone here would dispute the fact that, if we fail to act, we are inviting a debt crisis with potentially catastrophic consequences.” Ryan also mentioned that the debt is the most predictable crisis the United States has ever faced, and noted we still have the time to act. Yet he questioned whether we have the resolve and called on the parties to work together. He closed by saying,
The stakes in this challenge are no less than the unique American legacy of bequeathing to our children a more prosperous nation than the one we inherited.
In his opening statement Ranking Committee Member Chris Van Hollen (D-MD) said,
We all agree that our current long term debt trajectory in unsustainable and unacceptable. And I believe we all agree that it is important to come together now to develop and enact a sensible plan to reduce that debt in a steady and predictable manner. We should have a healthy discussion on what such a plan would look like.
Van Hollen went on to say that debt reduction actions should not harm the fragile economic recovery. He also noted that the Bowles-Simpson Fiscal Commission recommended revenue increases in addition to discretionary and mandatory spending cuts.
In her testimony, CRFB’s Maya MacGuineas noted that U.S. debt is higher as a percentage of the economy than it ever has been in the post-World War II era and that it is rising with no end currently in sight. She said that debt at the levels we are heading for will destroy economic growth and slash vital investments and standard of living. The solution is a multi-year, comprehensive fiscal plan that deals with each area of the budget. And the sooner it is enacted the better.
MacGuineas laid out two paths we could take:
Under one, fiscal consolidation is used as part of an economic strategy that also includes preserving—and in many cases, increasing—productive public investments and a sound safety net and fundamentally reforming our tax code to enhance competitiveness. The economy and U.S. standard of living would benefit from having taken thoughtful preemptive actions. Under the other, we delay due to the difficult policy choices and political stalemate, which causes the debt to continue to grow, pushing up interest rates and payments, squeezing out more important priorities, choking off economic growth and affecting working families, and ultimately leading to a vicious debt spiral, which damages the entire economy and country. And under that scenario we still have to make the same difficult spending and tax choices we face now—but they would have to be larger and more painful.
She then discussed five areas where debt causes substantial problems.
- Economic: increased borrowing and debt will crowd out private investment as interest rates rise—adversely affecting economic growth and living standards.
- Budget: increased interest payments on the debt will squeeze out room for productive public investments and tax cuts.
- Fiscal: as interest payments take up a larger share of the federal budget, our ability to respond to unforeseen events is compromised.
- Psychological: uncertainty surrounding our fiscal course erodes confidence among businesses and consumers, impairing their ability to make long-term investments.
- Intergenerational: higher debt levels threaten the well-being of future generations, pushing the costs to our children and grandchildren.
Without changes, there will be a crisis of some sort. We need to devise a fiscal plan now with a goal along the lines of stabilizing the debt at 60% of GDP within a decade and then lowering it further thereafter. All areas of the budget must be on the table.
MacGuineas went on to say that the debt threat provides us with an opportunity to restructure our budget to promote investment in areas such as infrastructure, research and education over consumption. She also mentioned the need for entitlement and tax code reform. She specifically mentioned the need to tackle tax expenditures (see some ideas here).
Carmen Reinhart of the Peterson Institute for International Economics discussed the historical research she has conducted on the links between public debt and economic growth. The research she performed with Harvard’s Ken Rogoff strongly suggests that economic growth is significantly impacted when a nation’s government debt reaches 90 percent of GDP. She stated in her testimony that more recent research suggests that the threshold may in fact be lower, perhaps in the 70-80 percent range. She closed her remarks by saying:
The sooner our political leadership reconciles itself to accepting adjustment, the lower the risks of truly paralyzing debt problems down the road. Although most governments still enjoy strong access to financial markets at very low interest rates, market discipline can come without warning. Countries that have not laid the groundwork for adjustment will regret it. This time is not different.
Former CBO Director Douglas Holtz-Eakin of the American Action Forum stated that “[t]he outlook for deficits and debt threatens the nation’s prosperity and freedom. Changing the fiscal course should be our top national priority.” Additionally, he argued that cutting spending now would help, not harm the economy. He also called for corporate tax and entitlement reform and said that time is running short for action.
John Podesta of the Center for American Progress took issue with Holtz-Eakin’s contention that the debt is caused purely by too much spending and that substantial cuts now would not harm the delicate recovery. He did agree with all the panelists that we are on an unsustainable fiscal course. He commended the bipartisan group of senators working on a comprehensive fiscal plan and noted that difficult choices on both sides of the budget ledger will be required. He also targeted tax expenditures and mandatory spending for reform. And he said that budget process reform will help instill fiscal discipline. (The Peterson-Pew Commission on Budget Reform has ideas for budget process reform here.)
Under questioning from members of the committee, the panelists were in general agreement that time is running out to act. Reinhart said that we have less than five years. Chairman Ryan and Doug Holtz-Eakin agreed that just showing leadership now would send the right message and buy us some more time. This is along the lines of the “Announcement Effect” – which posits that adopting a credible plan now will show creditors that we are serious about addressing our debt. MacGuineas warned that the markets are watching us and are concerned about the ability of our political process to respond properly. Reinhart described a possible “debt by a thousand cuts scenario” where the economy is slowly choked by debt, like in the case of Japan.
All the panelists agreed on the need to reform tax expenditures and there was general agreement on the need for a fiscal plan. MacGuineas said that better public understanding, leadership and bipartisanship are required to develop a needed fiscal plan.