House Hearing on 'Why Debt Matters'
The House Financial Services Committee held a hearing this morning on "Why Debt Matters," which included testimony by Honeywell CEO Dave Cote, former CBO and OMB director Alice Rivlin, former CBO director and American Action Forum president Douglas Holtz-Eakin, and former economic adviser to Vice President Biden and current Center on Budget and Policy Priorities fellow Jared Bernstein. They discussed the major drivers of the national debt, policy options to address it, and the implications of failing to act.
The witnesses spelled out several reasons why high and growing levels of national debt matter, including:
- Crowding out of other areas of the budget due to rising interest payments
- Leaving the U.S. vulnerable to shifts in investor preferences and hindering foreign policy flexibility when large amounts of debt are held by foreign governments
- Decreased policy flexibility to respond to unforeseen domestic and foreign events
- Reduced hiring and investment from firms today anticipating a high-debt, low-growth economy
- Public sector borrowing crowding out private investment
During the hearing, Rivlin said that while there is very little chance of the United States facing a debt crisis in the near term, responsible measures to address the long term debt often take time to phase in, so action should be taken soon. Cote stressed that rising government debt can have an effect on business decisions today, as employers who expect a low-growth economy will cut back on hiring. There was also a consensus among all four witnesses that failure to address the debt would disproportionally hurt low- and middle-income earners more than high-income groups.
A "grand bargain" could be the answer to the long term challenge of growing public debt levels. Rivlin praised plans like Simpson-Bowles and Domenici-Rivlin that reduced deficits in a bipartisan manner. These plans slowed the growth of health care spending, shored up Social Security's finances, reformed the tax system by broadening the tax base and lowering rates, and capped the growth of discretionary spending. Crucially, they back-loaded the changes, limiting immediate deficit reduction to avoid derailing the fragile economic recovery while slowly phasing in reforms in entitlements and taxes to put debt on a downward path as a percent of GDP.
Cote's testimony included a similar call for long term entitlement and tax reform while stressing the importance of making public investments in education and infrastructure.
We need to increase our investments and decrease our entitlements if we’re going to compete. Changes made now can have a big effect in the second decade and allow people and systems time to adjust so it’s much less onerous.
Unfortunately, actual policy since 2010 has been the opposite. While discretionary spending is expected to fall to record low levels, policymakers have yet to make the necessary changes to taxes and entitlement programs that would put the debt on a sustainable path.