CRFB President Maya MacGuineas and Board Member Douglas Holtz-Eakin Testify on the Economic Effects of the Deficit
In case you missed it last Wednesday, CRFB President Maya MacGuineas and CRFB board member Douglas Holtz-Eakin testified in front of the Senate Committee on Banking, Housing, and Urban Affairs Subcommittee on Economic Policy. Both of them made important points on the benefits of debt reduction and policy certainty for the economy.
Maya testified on the economic effects of our budget deficit. She noted that the economy may already be experiencing some negative economic effects due to the large debt load we currently carry, including diverting capital from private investment to government borrowing, higher interest payments due to higher debt levels, loss of fiscal flexibility, intergenerational inequality and a general lack of economic certainty. However, she said that the greatest problem lies in the potential of a fiscal crisis where interest rates could shoot up dramatically because bond markets and investors would no longer have confidence in the United State's fiscal policy or its ability to pay down its debt. While we are currently not in a fiscal crisis and do not know exactly when one would happen or what specific form it would take, the best course of action, according to MacGuineas, would be the enactment of a fiscal plan that puts our debt on a stable, then downward, path.
Doing so would have a number of positive economic effects. Among them:
- Pro-growth tax reform that broadens the base, reduces tax rates and reduces the deficit would benefit the economy
- Entitlement reform would allow the nation to better make use of its economic resources by spending less on consumption and more on investment
- A fiscal plan would help free up fiscal space needed for short-term economic stimulus
- Add much needed certainty about future tax and spending policies for businesses and individuals
At the same hearing, CRFB Board Member and former CBO Director Douglas Holtz-Eakin testified on the current problems that our nation faces fiscally. He argued that some have overstated the amount of economic negative effects that recent deficit reduction acts have done (Budget Control Act and the 2011 Budget Deal). Holtz-Eakin testified that there is no economic effect on a reduction of budget authority, only actual cash decreases that result in actual less spending, with more effect on consumption decreases. Additionally, on the role of tax policy, he contended that Keynesian economic models would say that increases in taxes have similar effects as decreases in spending, and testified that the United States faces a corporate rate that is too high for American business (he proposed going down to 25 percent) and that the United States should adopt a territorial system. Overall though, Holtz-Eakin noted that the lack of a fiscal plan and the inherent need for one brings in great uncertainty for the economy. Businesses see future deficits, he says, and also see implicit tax increases. A fiscal plan would remove this doubt and add much needed stability to our economy.