[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
REEXAMINING THE ECONOMIC COSTS OF DEBT
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HEARING
BEFORE THE
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, D.C., NOVEMBER 20, 2019
__________
Serial No. 116-18
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Printed for the use of the Committee on the Budget
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available on the Internet:
www.govinfo.gov
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U.S. GOVERNMENT PUBLISHING OFFICE
40-261 WASHINGTON : 2020
COMMITTEE ON THE BUDGET
JOHN A. YARMUTH, Kentucky, Chairman
SETH MOULTON, Massachusetts, STEVE WOMACK, Arkansas,
Vice Chairman Ranking Member
HAKEEM S. JEFFRIES, New York ROB WOODALL, Georgia
BRIAN HIGGINS, New York BILL JOHNSON, Ohio,
BRENDAN F. BOYLE, Pennsylvania Vice Ranking Member
RO KHANNA, California JASON SMITH, Missouri
ROSA L. DELAURO, Connecticut BILL FLORES, Texas
LLOYD DOGGETT, Texas GEORGE HOLDING, North Carolina
DAVID E. PRICE, North Carolina CHRIS STEWART, Utah
JANICE D. SCHAKOWSKY, Illinois RALPH NORMAN, South Carolina
DANIEL T. KILDEE, Michigan KEVIN HERN, Oklahoma
JIMMY PANETTA, California CHIP ROY, Texas
JOSEPH D. MORELLE, New York DANIEL MEUSER, Pennsylvania
STEVEN HORSFORD, Nevada DAN CRENSHAW, Texas
ROBERT C. ``BOBBY'' SCOTT, Virginia TIM BURCHETT, Tennessee
SHEILA JACKSON LEE, Texas
BARBARA LEE, California
PRAMILA JAYAPAL, Washington
ILHAN OMAR, Minnesota
ALBIO SIRES, New Jersey
SCOTT H. PETERS, California
JIM COOPER, Tennessee
Professional Staff
Ellen Balis, Staff Director
Dan Keniry, Minority Staff Director
CONTENTS
Page
Hearing held in Washington D.C., November 20, 2019............... 1
Hon. John A. Yarmuth, Chairman, Committee on the Budget...... 1
Prepared statement of.................................... 4
Hon. Steve Womack, Ranking Member, Committee on the Budget... 6
Prepared statement of.................................... 8
Olivier Blanchard, Ph.D., Senior Fellow, Peterson Institute
For International Economics, and Professor of Economics
Emeritus, Mit.............................................. 10
Prepared statement of.................................... 12
L. Randall Wray, Ph.D., Professor of Economics, Bard College,
and Senior Scholar, Levy Economics Institute............... 16
Prepared statement of.................................... 21
Jared Bernstein, Ph.D., Senior Fellow, Center on Budget and
Policy Priorities.......................................... 43
Prepared statement of.................................... 45
John Taylor, Ph.D., Professor of Economics, Stanford
University, and Senior Fellow, Hoover Institution.......... 59
Prepared statement of.................................... 61
Hon. Sheila Jackson Lee, Member, Committee on the Budget,
statement submitted for the record......................... 112
Hon. Seth Moulton, Member, Committee on the Budget, questions
submitted for the record................................... 118
Hon. Ilhan Omar, Member, Committee on the Budget, questions
submitted for the record................................... 119
Answers to questions submitted for the record................ 120
REEXAMINING THE
ECONOMIC COSTS OF DEBT
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WEDNESDAY, NOVEMBER 20, 2019
House of Representatives,
Committee on the Budget,
Washington, D.C.
The Committee met, pursuant to notice, at 10:05 a.m., in
Room 210, Cannon House Office Building, Hon. John A. Yarmuth
[Chairman of the Committee] presiding.
Present: Representatives Yarmuth, Moulton, Higgins, Khanna,
Schakowsky, Panetta, Morelle, Horsford, Scott, Peters, Cooper;
Womack, Woodall, Johnson, Smith, Norman, Roy, Meuser, Crenshaw,
Hern, and Burchett.
Chairman Yarmuth. This hearing will come to order. Good
morning, and welcome to the Budget Committee's hearing on
Reexamining the Economic Costs of Debt. I want to welcome our
witnesses here with us today.
This morning, we will be hearing from Dr. Olivier
Blanchard, a senior fellow at the Peterson Institute for
International Economics, and professor of economics emeritus at
MIT; Dr. L. Randall Wray, professor of economics at Bard
College, and senior scholar at Levy Economics Institute; Dr.
Jared Bernstein, senior fellow at the Center on Budget and
Policy Priorities; and Dr. John Taylor, professor of economics
at Stanford University, and senior fellow at the Hoover
Institution.
Welcome to all of you. We look forward to your testimony. I
will now yield myself five minutes for an opening statement.
Once again, I would like to welcome our witnesses. We
appreciate you coming here to help us discuss the changing
economics of debt and its implications for fiscal policymaking.
There is a wide array of views on this subject at the witness
table, across the aisle, and even within our caucus, and within
the Republican conference. So it is my hope that we can use
this hearing as an opportunity to learn more about the
different perspectives driving this important debate and hear
from the experts on what Congress must evaluate when
considering the real costs of debt in this new economic era.
I say, ``new economic era,'' because today's economy defies
many of the core principles of traditional economic theory. We
have been operating under the long-held assumption that
persistent budget deficits and rising government debt would
increase interest rates and inflation, harming our economy over
the long run.
However, contrary to these predictions, we have seen
interest rates and inflation fall to record lows, while debt
has soared to its highest level since just after World War II.
We are truly in a new era that has economists reassessing
entire economic theories in light of these unexpected outcomes.
If the Budget Committee is to promote effective and
responsible fiscal policy, it is important that we learn more
and participate in this growing debate.
In our hearing last week, Federal Reserve Chair Powell made
it clear that the fiscal challenge we face is a long-term one,
not an immediate crisis. Our aging population and growing
health care costs have put our debt on an unsustainable path.
We will need to take steps to address this issue over the next
several decades.
But, in the meantime, persistently low interest rates have
made reducing deficits in the near term less urgent, even
counterproductive, given the risk to economic growth. It has
also increased Congress's fiscal space, empowering lawmakers to
make responsible investments now that will improve our future
economic outlook.
But that doesn't mean we should be spending like a drunken
sailor, without thought or discretion. I apologize to any
current or former sailors in the room. Deficits, and what they
are used for, matter. Failing to tackle severe and persistent
infrastructure, education, and health gaps is, arguably, more
damaging to our economic and fiscal outlooks than the risk
posed today by higher debt.
Policies that support working Americans in an economic
downturn, provide much-needed investments in our families,
communities, and environment, and have a positive impact on our
long-term fiscal health, are responsible uses of deficits.
Every dollar invested in infrastructure increases near-term
economic output by $1.50 and boosts our economy's productivity
over time. A dollar for pre-disaster mitigation efforts saves
$6 in future disaster costs. Investments in children's health
care and preschool and college attainment pay for themselves
over the long run. Housing programs that move children out of
poverty can increase lifetime earnings by $300,000.
Moreover, low interest rates will supercharge these
investments. They will be cheaper to make today, and likely
provide a bigger boost to the economy later.
On the other hand, deficit-financed tax cuts for the
wealthy and big corporations are clearly an irresponsible use
of deficits. The Republicans' 2017 tax law is the poster child
for wasteful deficit-financed policy. It has failed to provide
any meaningful boost to the economy but increased our debt by
at least 1.9 trillion and counting, worsening our already
serious revenue problem. Skyrocketing the deficit for this
purpose, while uninsured rates increase, air pollution worsens,
and our children's reading scores decline is appalling.
At the end of the day, carrying debt still carries risks.
But by investing strategically in responsible policies that
reflect our nation's values, and by having a more sober and
evidenced-based understanding of the costs of debt, we can lay
the groundwork for a productive and dynamic 21st century
economy.
I know we will hear different points of view as we examine
this, which is the point of this hearing. But despite critical
differences, both mainstream and alternative schools of thought
increasingly agree that government debt appears to be less
risky, less costly, and less urgent than traditional economic
thought suggests. Today's hearing will provide a platform for
experts and policymakers to share their ideas, whether
practical, or aspirational, conventional, or controversial.
Once again, I look forward to hearing from our witnesses
about what they believe Congress can and should be doing in
this new economic era, how we can invest responsibly in our
future, and what fiscal policies best support American
families.
[The prepared statement of Chairman Yarmuth follows:]
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Chairman Yarmuth. With that I yield five minutes to the
Ranking Member, Mr. Womack.
Mr. Womack. I thank the Chairman for holding this hearing.
I think it is an appropriate continuation of the conversation
we began last week with the Federal Reserve Chairman.
Last week I likened Chairman Powell's assessment of the
economy to a checkup with your doctor. We received an
encouraging bill of health. Our economy is strong. Forward
momentum continues, thanks to the pro-growth policies enacted
last Congress and under this Administration. Americans are
confident, and rightly so.
We should certainly celebrate this historic economic
prosperity but cannot ignore the fact that we continue to face
serious long-term fiscal challenges, particularly the ever-
increasing federal debt. Simply put, the debt is on a
completely unsustainable trajectory. The national debt is $23-
plus trillion and is projected to grow more--to more than $34
trillion within a decade. Soon thereafter, on our current path,
the federal debt will reach the highest level in American
history as a percentage of our economy.
CBO also projects that by 2049 the federal debt will equal
$248,000 per American, almost $1 million for each family of
four. After that, it continues to grow. Interest payments will
increasingly crowd out the other federal spending that is
directed toward programs many Americans rely on. CBO projects
interest payments on the debt will amount to $390 billion in
fiscal 2020, an 11 percent amount of our federal tax revenue.
Mr. Chairman, your hearing title provocatively asks us to
reexamine the debt. And I suspect we will hear from some voices
today that suggest we should not worry too much about it, or we
will hear it is wrong--the wrong time to deal with it. Allow me
to underscore just how irresponsible that thought process is.
The way our government is operating is the same as an
American family trying to make difficult financial decisions
about mortgages, health insurance, and bills when they must
first direct a significant portion of their family budget just
toward paying the interest on a growing credit card balance. We
call that the minimum payment due.
Not only is this, the way we are doing business, fiscally
irresponsible and unsustainable, CBO also found that a growing
federal debt has a negative impact on business investment,
productivity, and economic growth. It simply does not make
sense to champion our present economic successes while ignoring
the long-term challenge that is the debt.
I hope we can have a realistic discussion today about the
scenarios that are in front of us in the future. We could do
nothing. We could try not to make things worse. We could spend
even more and add new mandatory spending programs like we did
yesterday on the CR, as many in this institution are proposing.
Or we could work together and address the debt.
What happens to the economy and the financial future of our
children and grandchildren under each of these scenarios? I
certainly don't want to--want my grandkids to see the crisis
scenario, in which the interest rate on the debt will skyrocket
abruptly because investors will no longer have confidence in
our government's ability to pay its bills.
That is why I am seriously concerned that it seems today as
though many lawmakers have shifted from a willingness to
address the debt with real bipartisan solutions, and instead
are buying into this modern monetary theory, which tells us
that the debt doesn't matter because we can, essentially, just
print more money.
This notion is absurd. We cannot simply wish our problems
away. Last week, before this very Committee, Chairman Powell
made the point himself that--when he said the idea that the
debt doesn't matter is simply wrong. Yet our colleagues serving
in the House used this theory to justify the costs of programs
like the Green New Deal.
So at this point I cannot help but wonder how many neutral
outside experts Congress needs to hear from before we wake up
and act. Congress must come together in a bipartisan, bicameral
fashion to reduce the debt, deliver on our Article I
responsibilities and make good on our responsibility to the
American people who have to balance their own budgets each
month.
Finally, I would like to congratulate my friend, Mr.
Burchett from Tennessee, the former mayor of Knox County,
Tennessee, and Mr. Case from Hawaii, for working together to
introduce a new bipartisan idea to address the national debt.
I am often asked at home: when are you guys going to get
together and do something, instead of fighting with each other?
H.R. 5178 suggest creative approaches for how Congress could
look at the debt in a bipartisan way, involving the House and
the Senate. I am proud to support the bill authored by my
friend, the mayor from Knox County, and his Democrat cosponsor,
Mr. Case.
Thank you, Mr. Chairman. I yield back the balance of my
time, and I look forward to the Q&A.
[The prepared statement of Steve Womack follows:]
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Chairman Yarmuth. I thank the Ranking Member for his
opening statement.
In the interest of time, if any other Member has an opening
statement, you may submit those statements in writing for the
record.
Once again, I want to thank our witnesses for being here
this morning. The Committee has received your written
statements, and they will be made part of the formal hearing
record.
You each will have five minutes to give your oral remarks.
Dr. Blanchard, you may begin when you are ready.
You know that in Arkansas and Kentucky you would be
Blanchard. And I don't know how many people on the Committee
will butcher your name, so I apologize in advance for that.
You are recognized for five minutes.
STATEMENT OF OLIVIER BLANCHARD, PH.D., SENIOR FELLOW, PETERSON
INSTITUTE FOR INTERNATIONAL ECONOMICS, AND PROFESSOR OF
ECONOMICS EMERITUS, MIT; L. RANDALL WRAY, PH.D., PROFESSOR OF
ECONOMICS, BARD COLLEGE, AND SENIOR SCHOLAR, LEVY ECONOMICS
INSTITUTE; JARED BERNSTEIN, PH.D., SENIOR FELLOW, CENTER ON
BUDGET AND POLICY PRIORITIES; AND JOHN TAYLOR, PH.D., PROFESSOR
OF ECONOMICS, STANFORD UNIVERSITY, AND SENIOR FELLOW, HOOVER
INSTITUTION
STATEMENT OF OLIVIER BLANCHARD, PH.D.
Dr. Blanchard. Thank you. I have accepted the fact that I
am called Blanchard. The--Mr. Chairman, Members of the
Committee, thank you very much for giving me the opportunity to
testify on what I think is, really, indeed, a crucial topic.
In my testimony today I would like to make five points. The
first, nominal and real interest rates are likely to remain low
for a long time to come. Indeed, nominal interest rates are
forecast to be lower than the growth rate of nominal GDP for
the next 20 years. Now, this being said, it is not an absolute
certainty, and one should indeed be ready to act if the
circumstances changed. That was the first point.
The second point is that, as a matter of logic, low real
rates have three implications for fiscal policy.
Fiscal costs are lower. The cost of debt, inflation
adjusted, is currently negative, slightly negative, more or
less zero.
Primary deficits, which are the deficits not including
interest payments on the debt, must be offset by primary
surpluses in the future, but smaller primary surpluses--in
other words, lower taxes today require smaller increases in
taxes in the future, just again, as a matter of arithmetic.
Fiscal risks are also smaller. The probability that there
is a market-induced debt crisis in the U.S. reflecting the
inability of a government to pay its bills is smaller or, more
or less non-existent, for the moment.
So this is implications of lower rates for fiscal policy.
My third point is about implications of low rates for
monetary policy, and we are all familiar with what these
implications are. The low nominal rates put sharp limits on the
use of monetary policy, and the most that the Federal Reserve
can do is--to stimulate the economy is to decrease nominal
interest rates to zero, or very close to zero. Once at the
lower bound, monetary policy cannot help. But fiscal policy
can. That is, I think, a very central point.
Fourth, as a result of my first three points, the
implication is lower--on the one hand, lower fiscal cost and a
higher potential benefits imply a larger role for fiscal policy
as a macro stabilization tool. Put another way, the tradeoff
between debt stabilization and output stabilization has shifted
as a result of low rates in the direction of output
stabilization, which would be relatively more concerned about
output stabilization than debt stabilization.
My fifth point is to try to translate these general
principles into concrete conclusions about U.S. fiscal policy.
And here I see two main implications.
First, the deficits are running at a bit above 5 percent of
GDP at this point, and they are very large. So, unless they are
used to finance an ambitious and credible public investment
plan, ambitious capital spending, they should be decreased.
Decreasing them too fast, however, would be risky, because they
might well reduce demand, and there is little room for the Fed
to have set this decrease in demand for low interest rates.
Therefore, the reduction in the deficit, which is highly
desirable, should be contingent on the strength of private
demand. This strategy might lead to further increases in the
ratio of debt to GDP from the already fairly higher levels, but
I believe that it is an acceptable risk, that maintaining
output is very, very important.
The second and final conclusion is that, if a recession
materialized, monetary policy would be likely constrained.
There is very little room for maneuver, making it essential to
use fiscal policy. Automatic stabilizers, which is a fiscal
instrument which has been used in the past, are too weak in the
U.S. to do the job. Better ones focusing, for example, on
larger payments to low income households should be designed
soon. This is an urgent matter. Thank you.
[The prepared statement of Olivier Blanchard follows:]
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Chairman Yarmuth. Thank you very much for your testimony.
And now, Dr. Randall Wray, you have five minutes.
STATEMENT OF L. RANDALL WRAY, PH.D.
Dr. Wray. Okay, thank you for the opportunity to speak
here.
In my statement I argue that federal deficits and debt are
not so scary. Neither is on an unsustainable path. Rather,
persistent deficits and rising debt are normal. They are not
due to out-of-control spending now or in the future. They serve
a useful public purpose. They are largely outside the control
of Congress. And it is hard to imagine a scenario in which they
create a financial crisis, lead to insolvency or high
inflation, or trigger an attack by bond vigilantes.
I want to focus on two graphs to back up these claims, and
I don't know if these can be shown.
Dr. Wray. Okay, there we go.
Figure 7 shows sectoral balances. In the aggregate,
spending equals income. One sector can run a surplus only if at
least one other runs a deficit.
[Slide].
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The government sector is in red in this graph. And, except
for the Clinton years, it is always in deficit below the line.
The private sector is blue, including firms and households.
It is almost always in surplus, except for the decade after
1996, when the private sector spent more than its income.
The foreign sector is green, and in surplus since the
Reagan years. That is because we run a current account deficit
reflected in our trade deficit. So the usual case is the
government's deficit equals the sum of the private-sector
surplus and the foreign surplus against us.
This is an identity. You can't change one without changing
at least one other balance. Those wanting to eliminate deficits
have to tell us which of the other two balances will change to
allow that to happen.
Will they put the private sector in deficit? That is what
happened in the dot.com and housing bubbles, leading to the
global financial crisis.
Or we will get foreigners to run trade deficits. How? We
have had a current account deficit for 40 years.
Understanding sectoral balances shows why the federal
balance is not under the control of Congress, as it depends on
the other two sectors.
Finally, let's address the bond vigilantes and projections
of exploding interest payments on the debt.
Dr. Wray. Figure 11 shows debt service is driven by
interest rates, not by the debt ratio, and interest rates are
determined by monetary policy, not by the debt ratio, nor by
bond vigilantes.
[Slide].
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
So what do I recommend, going forward? I actually agree
with a lot of the comments made.
We don't need tax hikes or spending constraint now, when
growth seems to be moderating, and there is no inflationary
pressure. Indeed, doing that now might depress growth so that
the deficit would actually increase, as it always does in
recession. The time to rein in the deficit will be when growth
booms and inflation threatens.
I am not saying all deficits are good and created equal. I
prefer well-targeted taxes and spending. The recent tax cuts
were inefficient, because the main beneficiaries were high-
income earners. This raised the deficit without boosting
growth. It makes sense to shift taxes away from low to moderate
incomes, and onto high income and wealth. That raises
consumption and encourages investment. Spending should be
targeted to job creation and productivity increases.
I don't take long-term projections very seriously. I
remember when President Clinton projected budget surpluses for
15 years, retiring all the debt. The dot.com crash wiped out
the surplus, and we have had deficits ever since. We at the
Levy Institute warned in 1997 that that would happen.
Current CBO projections have the debt ratio rising
continuously. This is based on the twin erroneous assumptions
that debt raises interest rates and lowers investment and
growth through crowding out. That ignores positive impacts of
deficits on the private-sector surpluses. This doesn't crowd
out spending, but it increases net wealth and encourages
growth.
Instead of worrying about long-term projections that will
be wrong, we should focus on formulating good policy today. So
I suggest three recommendations.
First, strengthen the automatic stabilizers. Spending
should be more counter-cyclical, while taxes should be pro-
cyclical. Policy changes weakened them over the past decades.
Second, if discretionary policy is possible, raise taxes or
cut spending only when the economy is overheating. There is no
point adopting austerity today only because the deficit might
be bigger in the distant future.
And finally, increase efficiency of both spending and
taxing. The goal should be sustainable growth, rising living
standards, reduction of inequality, and not to achieve some
arbitrary deficit or debt number. Thank you.
[The prepared statement of L. Randall Wray follows:]
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Chairman Yarmuth. Thank you very much for your testimony. I
now recognize Dr. Bernstein for five minutes.
STATEMENT OF JARED BERNSTEIN, PH.D.
Dr. Bernstein. Chairman Yarmuth, Ranking Member Womack, I
thank you for the chance to speak to this evolving area, where
economics intersects public finance.
My testimony starts by noting that current deficits are
unusually high for this stage of the economic recovery. And yet
these deficits are not pushing up interest rates or inflation.
If the increased flow of deficits and the resulting higher
stock of debt are not having obvious negative economic
consequences, does that mean deficits don't matter, and
policymakers should blithely put all of their preferences on
the national credit card?
My answer is no. The evidence does not relieve policymakers
of budget constraints. It does not negate the revenue-robbing
impact of the 2017 tax cuts that, in my framing, are exhibit A
in wasteful, inequitable debt accumulation.
But the evidence provides a more nuanced, far less cramped
understanding of the economic costs of budget deficits and the
potential benefits from investing in people and places who have
long needed the help.
The coexistence of high deficits and debt amid low interest
rates belies the traditional crowd-out arguments where public
and private borrowing compete over a fixed lump of capital. In
fact, our economy is large and open with deep liquid global
credit markets, and our debt is considered among the world's
safest to invest excess savings.
The central bank is also in the mix. The Fed has kept its
benchmark interest rate below 1 percent for most of the past
decade, and convinced investors that inflation would remain low
and stable.
Other evidence suggests that deficits are not leading to
faster inflation and higher rates because the U.S. economy has
not been operating at full capacity. For either public or
private spending to generate overheating conditions, aggregate
demand must exceed supply such that any extra demand, save for
more deficit spending, would generate not more jobs and higher
real incomes, but just more inflation.
Priors in this area of economics also require updating,
most notably regarding the lowest unemployment rate thought to
be consistent with stable prices. Thus, it is a serious mistake
to assume that deficits will pressure interest rates,
especially when there is economic slack, strong capital flows,
excess savings over investment, and well-anchored inflation.
Moreover, with the economy's growth rate outpacing the
relevant interest rate, the fiscal cost of debt stabilization
is diminished. These facts should push strongly against knee-
jerk, austere fiscal policy, but they should not obviate
concerns about our persistent fiscal imbalances.
First, interest rates could eventually rise that would be
served--such that we would be servicing a much larger stock of
debt, thus devoting a larger share of national income to debt
payments. Prudent risk management does not assign a zero
probability to higher future rates.
Second, financing more of our public debt with foreign
capital has led to an increasing share of our GDP leaking out
through debt payments abroad. Back in 1970, public debt held by
foreigners amounted to less than 2 percent of GDP. Most
recently, that share was 30 percent.
Third--and this is the concern that I find most worrisome--
is the lack of perceived versus actual fiscal space. When the
next recession hits, the Federal Reserve will reduce the cost
of credit. But because interest rates have been so low, the Fed
is likely to have reduced monetary space, less room to lower
their benchmark interest rate. Counter-cyclical fiscal policy
does not face an analogous limit. However, were Congress to
take insufficient action to offset a downturn, it would be a
fateful mistake, one that would disproportionately harm those
who are already economically vulnerable and who are, at least--
and who are least insulated from recessions.
In closing, our evolving understanding of the role of
fiscal debt provides us with both opportunities and risks. The
former implies more leeway to use deficit spending to make
necessary productive investments. The latter means avoiding
adding to our already historically elevated debt for non-
productive or wasteful spending and/or tax cuts.
It is, thus, essential to define good debt from bad debt.
Good debt invests in people and places that need the help. Bad
debt does not. Considering the set of unmet needs we observe in
communities across the country, along with the threat from
climate change, there exists a deep, rich set of good debt
investment opportunities. Tens of millions remain under-
insured, in terms of health coverage. The impact of climate
change is already being felt in volatile and costly weather
patterns. The cost of colleges is a constraint to many families
of moderate means. Much of our public infrastructure needs
upgrading. Long-term wage stagnation has constrained the living
standards of many working households, and there are significant
swaths of people and places that have been left out of the
current expansion.
I am happy to elaborate on what I believe are good debt
opportunities in those spaces during our future discussion.
Thank you very much.
[The prepared statement of Jared Bernstein follows:]
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Chairman Yarmuth. Thank you very much for your testimony.
And now, finally, Dr. John Taylor, you have five minutes.
STATEMENT OF JOHN TAYLOR, PH.D.
Dr. Taylor. Chairman Yarmuth, Ranking Member Womack,
Members of the Committee, thank you for inviting me to testify
on this important topic, reexamining the economic costs of
debt. At previous hearings of this Committee at which I
testified, including the 19--including a 2015 meeting that was
titled ``Why Congress Must Balance the Budget,'' in that
hearing I showed that basic economic theory grounded in real-
world data implies that high federal government debt has a
cost. It reduces real GDP and real income per household
compared to what these would be with lower debt levels.
A reexamination of the economic costs conducted for this
hearing yields the same results. In work with John Cogan,
Volker Wieland, and myself, we used modern economic models to
estimate the effect of a decline in federal expenditures as a
share of GDP. This fiscal consolidation plan led to an
immediate and permanent increase in real GDP, according to the
model calculations. Similar fiscal consolidation strategies
were simulated in later years.
Recently the Congressional Budget Office reported similar
results. They compared their extended baseline in which--that
goes to 144 percent of GDP--with an extended alternative fiscal
scenario in which the federal debt goes up to 219 percent of
GDP. This alternative scenario has the total deficit rising to
15.5 percent, compared with 8.7 percent in their extended
baseline.
The CBO also finds that real GDP is 3.6 percent lower when
the debt is higher. So clearly, according to these analyses,
the higher debt has real economic costs.
CBO also analyzed scenarios in which the debt is lower as a
share of GDP, 42 percent and 78 percent. In the 42 percent
scenario, real GDP would be 5.8 percent higher; in the 78
percent scenario real GDP would be 3.7 percent higher.
With the Congressional Budget Office's currently projected
increase in the deficit and the federal debt in the United
States, this reexamination implies the need for a credible
fiscal consolidation strategy. Under such a strategy, spending
still grows, but at a slower rate than GDP, at least for a
while, thereby reducing both spending as a share of GDP and the
debt as a share of GDP, compared with current projections.
Such a fiscal strategy would greatly benefit the American
economy. It would also reduce the risk of the debt spiraling up
much faster than is currently projected by the CBO. I believe
these conclusions are robust to different ways of thinking
about the world.
Professor Blanchard has emphasized that if the growth rate
of the economy is greater than the relevant interest rate and
the public debt, then there will be a tendency for the debt-to-
GDP ratio to decline over time. In many of the simulations
reported by Professor Blanchard, the primary deficit is held to
zero. However, any projection at this point has a primary
deficit far, far above zero. And according to Congressional
Budget Office, it is growing over time.
Moreover, the economic costs reported here do not
distinguish between the primary and the total deficit. It is
the increase in the debt via the total deficit that creates
economic costs. Of course, different views of the relative size
of the growth rate and the interest rate are important, but
they do not diminish the estimated costs of high debt.
Another view of the economic costs of debt is related to
what is sometimes called modern monetary theory. It is
difficult to determine how this approach would work in the
future, and it is frequently associated with large spending
programs, and even wage and price controls. Model simulations
would be useful, to be sure, but history can also be a valuable
guide.
In the 1970s the United States imposed wage and price
controls, and the Federal Reserve helped finance the deficit by
creating money. The result was a terrible economy, with
unemployment and inflation both rising. This ended when money
growth was reduced in the late 1970s and early 1980s. As
explained in a new book by George Shultz and myself, it is an
example where poor economic reasoning led to poor economic
policy, which led to poor economic performance. It was only
reversed when good economics again prevailed and policy
changed. Thank you.
[The prepared statement of John Taylor follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman Yarmuth. Thank you for your testimony and, once
again, thanks to all the witnesses. We will now begin our
question-and-answer session.
As a reminder, Members can submit written questions to be
answered later in writing. Those questions, and the answers
from our witnesses, will be made part of the formal hearing
record. Any Members who wish to submit questions for the record
may do so within seven days.
The Ranking Member and I will defer our questions until the
end. So I now yield five minutes to the gentleman from New
York, Mr. Morelle.
Mr. Morelle. Thank you very much, Mr. Chairman, for holding
such an important hearing. I feel a little bit like being at a
panel where I have just listened to the four leading
cosmologists in the world talk about string theory,
multiverses, blackholes, the origin of universe, and my first
question is, like, how does gravity work? So I apologize,
because this was a lot to process.
But I did want to--just to go back to--and I think perhaps,
Dr. Bernstein, you touched on this, as maybe--you all did, to
some degree, but textbook economic theory, as I understand it,
predicts that persistent budget deficits and rising government
debt essentially raises interest rates, fuels inflation, crowds
out, as you talked about, or depresses private investment, and
triggers financial and fiscal difficulties.
We are, obviously, not seeing that. The publicly held debt,
I think, in the United States is roughly 80 percent of GDP. It
has actually grown, which I think is unusual to grow as a
percentage of GDP during an economic expansion, which we have
seen over the last 10 or 11 years. The 10-year note is at lower
interest rates than it was 20 years ago.
So, since that was the sort of expectations, and it hasn't
played out, is it that the assumptions that we made are
incorrect? Or are we in sort of a unique period, or the
circumstances have changed, where no longer those expected
results are present? And what is the lesson that we, as
policymakers, should take from that?
Dr. Bernstein. I think it is more accurate to say that the
assumptions were right at one point in time and they no longer
are.
So in my testimony I show a scatterplot between budget
deficits and interest rates. And actually, if you go back a few
decades, that lines up pretty negatively, much like the theory
would predict.
And, by the way, you comprehended everything that we were
talking about perfectly well. So just being clear that you--we
are on the same page here.
But, as I stressed in my testimony, dynamics, global
credit, the role of the Federal Reserve, anchored inflationary
expectations, excess savings over global investment, all of
those have contributed to fundamentally change the relationship
such that the crowd-out hypothesis simply doesn't bind in the
data.
Now, I try to be very clear in my testimony that that
doesn't mean that interest rates won't go up and create a
serious problem for us. I think the way I put it was that, you
know, it is not good risk management to assume, you know, a
zero threat from that possibility. But it is really that the
old assumptions no longer hold.
Mr. Morelle. I would like to just shift. Last week we had
the Fed Chair--Chairman Powell was here, talked about debt
level sustainability. And I just want to read what he said. ``I
would define sustainable as the debt is not growing faster than
the economy. Our debt is growing faster than our economy now by
a margin. And so, by definition, it makes it unsustainable. You
have to have an economy that is growing faster than your debt,
and you have to do that for 10 to 20 years. That is how you
successfully handle this. If you don't do it, over time you
will be crowding out private investment.''
I am just curious, Dr. Bernstein, as a follow-up, would you
agree with that, or do you think--would you dissent from that
view?
Dr. Bernstein. I would broadly dissent in the spirit that I
just showed you. I think it is really an empirical question.
However, John Taylor makes a fair point when he says that,
you know, yes, it is true that growth rates surpass interest
rates, but because the primary deficit, or the deficit net of
interest payments has been large and growing, that is putting
upward pressure on the debt. I don't think that means that
crowd-out is around the corner, or at least in any perspective
that I can see.
I think what it does mean is that, to the extent that we do
engage in deficit spending, it should be on the kinds of
productive--I put it under the rubric of good debt.
Mr. Morelle. Yes, and I did--I wanted to ask a question on
the--something else, but--the automatic stabilizers, and
perhaps someone else will ask about that.
But while you are on the subject, could you just define
perhaps a couple of examples of bad debt? You have mentioned
some of good.
Dr. Bernstein. I think the most--I think exhibit A is
really in a debt that comes from tax cuts, and particularly tax
cuts that are regressive. That is, that return far more
benefits to those at the top of the wealth scale. To me, that
is a classic example of both inequitable, revenue-robbing, bad
debt.
Mr. Morelle. Very good. Thank you, Mr. Chairman, I will
yield back.
Chairman Yarmuth. The gentleman yields back. I now
recognize the gentleman from Missouri, Mr. Smith, for five
minutes.
Mr. Smith. Thank you, Mr. Chairman. As of today it has been
219 days since the deadline has passed for us to propose a
budget in this Committee.
While this Committee might not realize it, there is several
reasons why we go through the budget process. One, it gives
guidelines to the appropriators; two, in a budget resolution,
we also set the 302(a) number allocations, which establishes
the overall spending numbers. Yesterday on the floor we saw a
continuing resolution passed again, yet we still don't have the
302(a) numbers.
I am glad that this Committee hearing at least is moving
more towards a hearing that a Budget Committee would have when
you are talking about the national debt. So I think that at
least that is a step in the right direction, even though we are
219 days behind.
Earlier this--I just want to make a comment in regards to
what some of the witnesses had said earlier about good debt
investing in people. Mr. Bernstein made that statement. I think
a lot of times folks up here in the swamp get confused, and
they think of government-funded, government spending, but it is
not government-funded, it is not government spending, it is not
government debt. It is taxpayer-spending, taxpayer funded, and
taxpayer debt.
So when we talk about debt, it is not government debt, it
is taxpayer debt. It is every one of the 320-plus million
Americans that have the debt. And let's not get blinded by a
different entity, by saying ``government,'' because it all has
to be paid for someday. And it is all the citizens of this
country. It is the taxpayers. So remember the difference
between government debt and taxpayer debt. It is taxpayer debt.
I know the Tax Cut and Jobs Act was brought up a couple of
times. I represent a congressional district that is one of the
poorest in the nation. And I can tell you, under the Tax Cut
and Jobs Act, where our median household income of a family of
four is just right at $40,000 a year, the people of my district
benefited greatly from the Tax Cut and Jobs Act. And a family
of four with a median income household of 40,000 is not a lot.
It is in the lowest bracket of median household incomes in the
nation of 435 congressional districts.
And I can tell you, by traveling the 30 counties of
southeast and south central Missouri, how people have benefited
from the Tax Cut and Jobs Act by the doubling of the standard
deduction, by the doubling of the child tax credit. These were
real numbers that helped drive the economy in a very rural,
impoverished economy.
So I do know that there was huge benefits, and there wasn't
any robbing of the poor people in southeast Missouri. In fact,
they benefited from the Tax Cut and Jobs Act, at least the
people that I represent and the 30 counties that call 20,000
square miles home in southeast Missouri.
You know, the bootheel of Missouri used to be a swamp, by
the way. And we drained it. And now it is some of the most
fertile land in the country. And I think that is what President
Trump is trying to do up here in Washington, D.C. And let's
hope that it is working.
Mr. Taylor, I have a question for you. CBO reports that an
increasing public debt harms per-capita gross national product,
whereas reducing the debt improves per-capita gross national
product. Given the negative consequences of our nation's
current fiscal path, if we were to actually legislate and put
the federal budget on a sustainable course, what would be the
positive economic effects?
Dr. Taylor. I believe if the plan, if you like, the
credible consolidation plan, budget deficit reduction plan, was
somehow passed or agreed to--as multi-year would be best, to be
sure, so it is credible--I think it would have a beneficial
effect on the economy.
So often the models that people use emphasize any reduction
in government spending of any kind as contraction, and I don't
believe that is the case. If it is credible, if it is
understood, if it is planned, it has been beneficial. And that
is what our models show. That is what our simulations show.
I think it would be a benefit--and people have talked about
this in the past--a strategy to reduce the debt-to-GDP over
time. And it would be beneficial, according to models that I
use, and I think other people have used. So I would very much
hope that that would be the direction. I know it is not what
you are focused on right now, but I wish there was more focus
on that multi-year discussion, and what is going to happen.
If you look at the expenditure growth, it is astounding,
what is being projected. So I think that needs to be fixed.
Mr. Smith. I see my time expired, Mr. Chairman.
Chairman Yarmuth. Yes. Thank--the gentleman's time has
expired. I now recognize the gentleman from Nevada, Mr.
Horsford, for five minutes.
Mr. Horsford. Thank you very much, Chairman Yarmuth, and to
the Ranking Member.
I know we are here today to reexamine how we view debt and
deficits with respect to our economy. And my good friend, Mr.
Smith from Missouri, he and I serve on the Ways and Means
Committee, as well, we have had some good, lively debate in
both this Committee and our other Committee.
But what I find interesting sometimes is that the other
side will view tax cuts for the very wealthy as investments.
But when we talk about investing in resources and programs that
we know will benefit our children and their future, somehow
that is not something that is worth investing in.
So I want to go directly to the numbers that impact my
constituents. Mr. Smith talked about his.
During the 2017-2018 school year, Nevada, which has 355
Title I schools, over 200 thousand children in those schools--
Clark County is the fifth largest school district in the
country, nearly half of the students are Latino students,
limited English proficient students. Had we received the full
allocation of funding, we would have been budgeted $379 million
in Title I funding from the federal government.
However, our schools received only $130 million. That is
$250 million funding deficit for our students that need it the
most. And I have been to these schools. I have seen what these
teachers are dealing with, with overcrowded classrooms, with
inadequate textbooks, with not having the after-school
resources, early childhood investments that we know will
improve the educational outcomes of young people and improve
their quality of life.
Mr. Horsford. Let me give you another example to turn to
the chart. We have seen cuts to various skills training
programs such as the Workforce Innovation Opportunity Act and
the Perkins Career and Technical Education Act, as well as
adult education. As you can see from this chart, WIOA was
funded at $4.6 billion in fiscal year 2001. These are programs
to train people for the 21st--skills of the future, but it only
received $2.8 billion in funding for fiscal year 2019.
[Chart].
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
So Mr. Bernstein and Dr. Blanchard, do you think the long-
term economic and fiscal consequences of neglecting investments
in critical areas such as education and skills training could
be more damaging than the consequences of increasing our debt?
Dr. Bernstein. I will start. I do worry about precisely
that, and this is a good example of what I am talking about
when I say good investment, in terms of deficit spending versus
wasteful inequitable spending.
And it is important to just broaden out your comments
slightly, and I will get out of the way so Olivier can jump in.
One force that is clearly not driving the debt ratio forecast
that we have all been talking about is precisely this kind of
spending. So this is non-defense, discretionary spending. It is
expected to fall to historical lows as a share of GDP. It is--
precisely the area where we should be investing is where we are
doing the least.
Mr. Horsford. Dr. Blanchard?
Dr. Blanchard. I very much agree. I think the deficits, as
they are now, are not used for the right purposes. There is a
number of programs, measures which could increase growth,
decrease inequality. It would be a much better use of these
deficits than is currently the case.
Mr. Horsford. Thank you. So I just want to note, Mr.
Chairman, that the President and my Republican colleagues again
passed a $1.9 trillion tax cut, and they did so in 51 days
without one hearing. They rammed through that job tax cut bill.
That $1.9 trillion my Republican colleagues in the Trump
Administration passed, that benefited only the top 1 percent.
That could have been used to fully fund Title I in my state. It
could have been to invest in some of these programs that we
know people need in order to compete for American jobs.
We are talking about getting ready to work on USMCA. Trade
is important, but guess what? We also have to invest in our
workers in order to have the skills to compete.
So when we talk about competition in a global economy, it
is trade, it is skills in our workforce, and it is having a
competitive tax rate. My colleagues focused on only one of
those areas. They did it in 51 days, and they did it without
regard to the majority of the American people who would benefit
the most. I yield back.
Chairman Yarmuth. The gentleman's time has expired. And I,
unfortunately, neglected to, while Mr. Smith was still in the
room, to correct one thing he said for the record--and he may
have misspoken.
But there--we do have 302(a) numbers for next year. We
don't have 302(b) yet. We are working on that. But anyway, I
just wanted to correct that for the record.
I now recognize the gentleman from South Carolina, Mr.
Norman, for five minutes.
Mr. Norman. Thank you so much. Thanks to each of you for
being here.
Let me just re-emphasize what Mr.--Congressman Smith said.
You know, when you say government debt, that is taxpayers'
debt. This thing we call government is made up of taxpayers.
They are the ones who put the money in the coffers to make
government work. So that is not some term that is--I think it
is misunderstood or misused by the left.
Secondly, I have heard several talk about tax cuts for the
rich, tax cut for those at the top. Where did the bonuses come
that President Trump--that we passed that President Trump has
put into practice, where did the bonuses go? They went to
people, people that make up the corporations.
So it is interesting that, you know, we talk about this, we
think of government in terms--as if it is not people. We talk
about corporations, the rich. I think the people who have
benefited the most are those that have a job now. I think the
growth rates under the President Trump are real, as opposed to
the obvious low growth rates under the previous Administration,
which hovered over 1.2, 1.5 percent. There is a reason people
have jobs. There is a reason the growth has occurred in this
economy like never before.
Mr. Wray, let me ask you, have you ever run a private
business?
Dr. Wray. No.
Mr. Norman. Okay. So you have never had to hire--make a
payroll, balance up--I guess, other than your household budget,
you never had to balance, make a product, or use--make sure
things--you are making a profit so that you can pay the police,
you can pay our schools, you can pay our first responders. You
have never done that.
Dr. Wray. That is correct.
Mr. Norman. Okay. Let me ask you about the modern monetary
theory, which I think you buy into. And I think the basis of
that--tell me if I am wrong--budget deficits can be financed by
nations who control the currency.
Dr. Wray. Yes.
Mr. Norman. Okay. Are you familiar with the monetary policy
of some Latin American economies, Chile?
Dr. Wray. Some Latin American countries, yes.
Mr. Norman. Okay. What about Peru?
Dr. Wray. Not Peru, no.
Mr. Norman. Okay. Are you familiar with some of the
inflation rates? And I mentioned Chile. You--do you remember
what that is, the inflation rate in Chile?
Dr. Wray. No, I don't----
Mr. Norman. It is 500 percent. Do you remember the
inflation rate in Peru by just printing money? Seven thousand
percent.
What about Venezuela? How has that worked out? That was
10,398 percent.
So hyperinflation hurts the little man that you are talking
about you protect.
You know, in Venezuela today we are witnessing the effects
of Socialism, a socialistic economy that doesn't work for the
people that you say you protect. Those are the consequences of
the very monetary policy that you say you promote.
And I guess--let me ask each one of you. I have got a
minute, 31. As you look at priorities in this country that we
spend on, is--does the Green New Deal add up as the top
priority?
And I would start with--well, Mr. Wray, let me start with
you.
Dr. Wray. I do think that we face a very serious challenge
that will require federal government involvement and federal
government spending.
Mr. Norman. What would it cost?
Dr. Wray. It depends on what you include in the Green New
Deal. Say----
Mr. Norman. Pick a number.
Dr. Wray. Well, say the complete package of greening
programs could be as much as 5 percent of GDP for the next 10
years.
Mr. Norman. Which is? Give me a number. Just pick a number,
because I have heard----
Dr. Wray. Okay.
Mr. Norman.----73 trillion, I have heard----
Dr. Wray. No.
Mr. Norman. Not that?
Dr. Wray. No.
Mr. Norman. But it is top of the list over national
defense, over education----
Dr. Wray. I don't think that we have to make a choice like
that.
Mr. Norman. Okay.
Dr. Wray. If we are talking about adding 5 percent of GDP
to total spending, we don't have to eliminate defense. That
would bring government spending up to about 25 percent of GDP.
Mr. Norman. Okay. Mr. Taylor?
Dr. Taylor. I think the highest priority is to have a
faster-growing economy which benefits large parts of this
economy. And--as you have emphasized.
Mr. Norman. Which is what the tax cuts have done. That is--
--
Dr. Taylor. They have been effective.
Mr. Norman. Right. That is--I am out of time. Thank you,
Mr. Chairman.
Chairman Yarmuth. Do either of the other two witnesses want
to respond to the question? Dr. Blanchard?
Dr. Blanchard. The Green New Deal is, indeed, a priority.
Is it the top priority? There are many other things which need
to be repaired in this country, from bridges to other
infrastructure. Should it be financed by debt or by taxes? I
think the answer is by a mix of the two.
Dr. Bernstein. The only thing I will add is when you are
contemplating the cost of the Green New Deal, or any other
action against climate change, it is very important to factor
in the costs of not doing anything about climate change. Those
costs are becoming increasingly significant, and they must be
netted out of whatever numbers we are throwing around.
Chairman Yarmuth. Thank you. The gentleman's time has
expired. I now recognize the gentleman from Tennessee, Mr.
Cooper, for five minutes.
Mr. Cooper. Thank you, Mr. Chairman. And I welcome such a
distinguished panel of economists. I appreciate your patience,
because you must know when you come there will be a lot of
partisan sparring.
I must admit, I actually watched the YouTube video of Mr.
Blanchard's address, because when I saw the headline that he
apparently said, according to the press, that deficits don't
matter, I had to see for myself what, in fact, you had said.
And I regret the distortions that were made of your, what, AEA
speech that prompted some journalists to mischaracterize it.
I worry, in general, that the nuance that is in all of your
testimony largely escapes Members, so I worry that you end up
looking like pinatas, hit by whatever is the opposing side.
Because, as we well know, when the other side is in the
majority, there will be three John Taylors on the panel,
instead of the only one we have today. I am not suggesting you
be cloned.
But the real issue is whether we can get at the truth. And
perhaps no hearing this year is going to be more important in
helping us ferret out the truth, because, as we deal with
short-term, medium-term, long-term tradeoffs, I worry that
there is a certain learned behavior here, when we refuse to
acknowledge nuance, when we refuse to try to get things right
and look beyond the horizon, that we could be committing grave
errors today.
And literally, none of us really has skin in the game,
because the average congressional tenure is six to eight years.
We will be gone. Some of you have tenure. Even with that, you
will be gone.
So our real obligation is to our children and
grandchildren, great-grandchildren. And it really matters, even
though some of these issues are measured in small percentage
points, whether we get it right. Because the difference between
1 percent growth, 3 percent growth, 5 percent growth is
monumental.
I worry that, on behalf of your profession, there is not
sufficient humility, because my guess is that none of you
correctly predicted the 2008 recession, because hardly anyone
did, and those who claim they did sometimes exaggerate their
foresight.
But I think John Maynard Keynes said that all economists
should be humble, like dentists. And I am not saying, you know,
from the profession, a dentist type humility or ability--
because at least dentists have to talk to their patients and
try to make sure the patient understands brush your teeth every
day, otherwise you will have cavities.
So, if you could help me understand, because, to me, there
is more commonality in the testimony than would appear on the
surface, and yet you are being separated three to one, as if,
you know, one side is good, one side is bad. Dr. Bernstein even
characterizes good debt, bad debt. That is a pretty Manichean
view of the world.
You know, it all depends on what your favorite programs
are. And both parties end up having similar sins. We both love
spending if it is our sort of spending. We both decry debt if
it is not our sort of debt. So I am worried we are really
talking past each other here.
So would any of you admit that there is really more
commonality than first appears?
Dr. Bernstein. I mean, I--first of all, let me just say
that embedded in my testimony is more humility than perhaps I
showed. And I totally agree with your point on that. And the
idea is that we should be humble about our ability to predict
the future, say the correlation between deficits, debt, and
interest rates. And so I really emphasize the empirical
relationship. And I think that is the important one.
In terms of good debt and bad debt, I was just--that is
sort of trying to be somewhat of a cute framing to suggest the
debt that is incurred in the interest of productive investment
is very different than debt that is incurred for what I would
consider wasteful tax cuts.
Now, we can have a good argument about that, but I just
wanted to be clear about that point.
Mr. Cooper. Dr. Blanchard?
Dr. Blanchard. Thank you. I thought, listening to the three
others, that there was, indeed, a lot of commonality, in the
sense that I think we would all say that debt, per se, is not
good in the long run, that it has--we can disagree about how
bad it is, but nobody argued that it was good.
There was some difference about the short run. I think a
few of us believe that, if there was a sharp fiscal
consolidation, this would lead to a decrease in demand and
potentially a recession.
John, I think, was more optimistic about the fact that
animal spirits triggered by fiscal consolidation could undo the
direct effects. I am very skeptical of this. But beyond this, I
think there was agreement.
The last point is I think there was agreement that if that
is used for good stuff, public investment, R&D, growth-
enhancing measures, then there is some justification for using
debt in that case, the same as would be true for a private
firm.
Mr. Cooper. I see that my time has expired, Mr. Chairman.
Chairman Yarmuth. The gentleman yields back. I now
recognize the other gentleman from Tennessee, Mr. Burchett, for
five minutes.
Mr. Burchett. Thank you, Mr. Chairman and Ranking Member. I
want to thank you for your kind words. I think about my folks
when somebody says something nice about me, and I hope, where
they are, they can see that. I think they would be very
pleased. And I thank you, brother, for that.
My question today is for the entire panel. And I am always
concerned about China. I guess it is almost genetic. My father,
actually, after the Second World War, was in the Marine Corps
actually went to China and fought the Communists for a short
while, and was, I think, amazed at their abilities that they
had, and just their view of totalitarianism, and very little
regard for human lives. And I think that scared him.
And with that, I would like to know--China, of course,
holds the most of our debt, with $1.1 trillion. What are the
economic impacts if these foreign countries decide to collect
on that debt?
I hear that a lot. Put it down on my level. I took first
quarter economics for a good reason. I was asked to. So I--the
second time around I was told to. So if you all could--I would
appreciate every one of you all giving your response.
Dr. Blanchard. I think we have to worry about China. As I
mentioned, that particular one worries me less than some of the
others, in the sense that, if they were to want to sell the
large amount of treasury bills and bonds that they have, they
would make a very large capital loss on their holdings. I think
that is sufficient reason not to want to do it, from their own
point of view. So I would not worry very much about the fact
that China holds quite a large quantity of government, U.S.
Government, bonds.
Dr. Wray. Can I add? If you look at who are the holders of
U.S. Government bonds abroad--and that is almost half of the
debt we have been talking about--they are the exporters to the
United States, plus offshore banking centers. The way that they
get the bonds is by selling output to us. We use dollars to buy
it. They accumulate dollar reserves at the Fed, and then they
convert those into U.S. treasuries.
So, as long as China and other exporting nations want to
sell their goods to us, they are going to accumulate dollars,
and they are going to very rationally convert those to U.S.
treasuries. I think that any transition out of U.S. Government
bonds is going to be very slow. China will eventually run a
trade deficit. It is going to become too wealthy; its incomes
are going to become too high to be the low-cost exporter in the
world. Their population will buy more imports, and so that will
reverse. But it is going to be very, very gradual.
So I agree with Professor Blanchard, this is really not a
worry.
Dr. Bernstein. Since I agree with Blanchard, let me just
briefly say that if you owe the bank $100, they own you. If you
owe the bank $1 million, you own them. That is kind of what
Olivier was saying, and I share that view.
Dr. Taylor. Yes, I think we should be concerned because our
debt is growing very rapidly. And many people are buying it.
They won't always buy it. There is a risk. And that is not
built into the usual forecast, but you can't ignore that. It
could be a spiral up, and some people would say no, that is
enough. So I think it is a risk.
I think that China is much more than that. I think there--
they seem to be going back, away from some of the market
principles that made debt economies so successful with Deng
Xiaoping, originally.
I think the U.S. needs to be concerned about its own
economy, its growth, its tax system, et cetera, and continue to
stress that philosophy that we have had for many years and has
worked. China seems to be going in the wrong direction. That is
bad for them, bad for the world, as well.
Mr. Burchett. Thank you, Mr. Chairman. Thank you all very
much for being here.
Chairman Yarmuth. The gentleman yields back. I now
recognize the gentleman from New York, Mr. Higgins, for five
minutes.
Mr. Higgins. And thank you, Mr. Chairman, and thank you,
panelists, for being here. Let's just be clear about a couple
of things.
First of all, the job creators in the strongest economy in
the history of the world, a $21 trillion economy which is 70
percent consumption, are the American people. And with higher
wages, you have higher demand. With higher demand you have
higher growth. So fiscal policy and tax policy has a major,
major impact.
Some talk about bad debt, and, you know, debt does matter.
What is absurd is the hypocrisy of Republican actions that
created lots of bad debt that served the interests only of the
hyper-rich, and not the general good.
Two questions: Did the $1.5 trillion over 10 years
corporate tax cut produce economic growth beyond that which was
projected before the tax cut? It did not. And I would defy
anybody to argue the contrary.
Did every American household receive $4 to $9,000 increase
in household income that the White House Council of Economic
Advisors explicitly said would occur, and on a recurring basis,
because of the tax cut? Absolutely, it did not.
Here is who it benefitted, and this is why it is bad debt.
In fiscal year 2017, FedEx owed more than $1.5 billion in
taxes. The next year, after the full year that the tax cut went
into effect, it owed nothing. FedEx's effective tax rate went
from 34 percent in 2017 to less than zero, meaning that the
federal government owes FedEx a rebate. FedEx spent $2 billion
on stock buybacks and dividend increases in 2019, more than
double the amount that FedEx paid for buy-backs and dividends
in 2017, before the tax cut. The FedEx chief executive officer
received $16 million in compensation in 2019, and the five top
executives below him received compensation averaging $6.2
million in compensation.
So it seems to me that it is very, very clear after a very
short period of time that this tax cut was bad debt. We spent
$1.5 trillion and didn't get any measurable return accruing to
the public good.
Under President Trump, he has accumulated almost $4
trillion in new debt. That will be by the end of the fiscal
year 2020, the final year of his first term. The U.S. budget
deficit grew to almost $1 trillion this year, and we project $1
trillion deficits for the next several years, moving forward.
Now, it would seem to me a company like FedEx would be
promoting good debt for the general purpose. I mean that is a
company, as I understand it, that is a logistics company. They
move product by ship, by plane, but a lot by trucks. And my
sense is that the better use of debt would have been $1.5
trillion in infrastructure bill that would have produced
economic growth and helped this economy, our $21 trillion
economy, function much more efficiently.
Dr. Bernstein, your thoughts?
Dr. Bernstein. Yes, if you look from the first quarter of
2018, which is when the tax law took effect--this is broadening
out from the FedEx point, just to the broader business
community--companies have spent almost three times as much on
dividends and stock buy-backs than they have on increased
investment. If you actually look at the investment record, it
is exhibit A against the argument that the tax cut was going to
have these trickle-down effects that would generate faster
investment, faster productivity, and then faster income growth.
In fact, in the prior two quarters business investment has
been a negative on GDP, and it is widely agreed-upon that this
is one of the most conspicuous failures.
And that is what I mean when I talk about debt that I view
as both wasteful, inequitable, and robbing the treasury of
revenues it needs to make the kinds of investments that we have
been talking about earlier.
Mr. Higgins. Dr. Blanchard?
Dr. Blanchard. Whatever the case for corporate tax rate
reduction as boosting investment, I think the evidence so far
is that it has not. And therefore, indeed, I think the money
could have been spent much better, along the lines that you
suggested.
Chairman Yarmuth. The gentleman's time has expired. I now
recognize the gentleman from Georgia, Mr. Woodall, for five
minutes.
Mr. Woodall. Thank you, Mr. Chairman, and thank you for
holding the hearing. If I have learned anything with you over
these 11 months now, it is that we should stop passing bills
that are only supported by one party or the other.
When Mr. Womack was chairman, we spent much of our time
debating the merits of the Affordable Care Act and the unmet
promises that were there, and now we are debating the merits of
the Tax Cut and Jobs Act. We are not debating the 1983 Social
Security amendments that raised taxes and cut benefits and
solved the system for a generation. We are not debating the
1996 welfare bill, we are not debating the 1997 Medicare
amendments, we are not debating the 2005 Medicare Part D, all
of those things that we did in partnership.
And against that backdrop I ask, here we are, with a three-
to-one ratio--and yes, if Mr. Womack was chairman, we would
have a three-to-one ratio going the other way--I want to find
what those things are we agree on, because the three of us had
an opportunity to serve on a bipartisan, bicameral budget
process reform committee last cycle, and I think we have heard
that broad agreement, that we can't keep doing things the way
we are doing them, that we can do better. Even if we can keep
doing things the way we are doing them, we can do better.
In your testimony, Dr. Bernstein, you point out that non-
defense discretionary spending isn't the problem. It
absolutely, positively is not the problem. Now, we will spend
more time in Congress this year debating those issues than we
will any of the problem issues. But it is not the problem.
Dr. Blanchard, you said unless they are used to finance
ambitious, incredible public investment plans, deficits should
be decreased. I serve on the Transportation and Infrastructure
Committee. I promise you we were supposed to debate ambitious,
incredible infrastructure development plans this year, and we
haven't. We have been focused on other, smaller issues.
So what is the big picture item that, across this panel, we
can agree on?
And the plug I would put in would be a debt-to-GDP target
that had enforceable mechanisms. It has to be revenue; it has
to be dealing with mandatory spending growth. But that--to
bring people together, I have got to have a common set of rules
and goals. If we all agree we can do better, tell me what that
proposal is you would make. Dr. Bernstein?
Dr. Bernstein. Well, I think you said it. I am not going to
give you a number or a debt rule. What I am going to say is
that I think both sides agree that our infrastructure, our
public infrastructure, is really in trouble. And I must say I
don't understand, especially given how low interest rates are,
why we are not doing more investment in that. Maybe you can
help me understand that. But that would seem to be an area of
bipartisan agreement.
Mr. Woodall. Now, given that everyone testified that they
thought interest rates would remain low for some time to come,
I thought we had a sense of urgency to get to work on taking
advantage of low interest rates. I feel less of that sense of
urgency, listening to you all. I sometimes think we need that
sense of urgency. If interest rates were 5, 6, 7 percent on
federal debt, I promise you we wouldn't be having the debt
conversation we are having now. We have made it too easy.
Dr. Wray, you have been the target of a lot of conservative
attention. But that also makes you someone who could help me
bring my colleagues with me to the center. What is your
counsel?
Dr. Wray. Well, we have to remember that the debt ratio is
a compound term. And if we increase GDP, and if we get growth
going, the debt ratio will come down in two ways. High growth
increases tax revenue tremendously. It reduces some kinds of
transfer payments. So total spending goes down. And second--so
the debt is smaller. And second, we are increasing the
denominator. GDP is higher. And that is the best way to reduce
the debt ratio.
And that is typically what has happened in the past. Our
debt ratio was 100 percent in World War II. And then it
declined over the whole post-war period until relatively
recently, when it started going back up again to 80 percent.
Mr. Woodall. I was looking through each of your written
testimonies, looking for that dramatic change in productivity,
women entering the workforce, all of those dramatic factors
that led to economic growth over the past 50 years. I didn't
see any of those transformative things, which had me worried
about repeating that.
Even at these high consumption--our debt is not fueling the
investment we have talked about. It is fueling consumption. It
is fueling transfer payments. Even at these levels that--you
believe that we can only deal with one side of the equation,
which is growing GDP? I love to grow GDP; I just don't think it
is--I don't think--I am a growth guy. I can't do it by growth
alone, I have got to have revenue, I have got to have
reductions in spending.
Do you disagree with that, fundamentally?
Dr. Wray. I don't think we need reductions of spending, no.
Mr. Woodall. Thank you, Mr. Chairman.
Chairman Yarmuth. The gentleman's time has expired. I now
recognize the gentleman from Virginia, Mr. Scott, for five
minutes.
Mr. Scott. Thank you, Mr. Chairman.
Dr. Bernstein, you mentioned the offsetting costs of
climate change. What did you mean by that?
Dr. Bernstein. I could cite various studies that project
the costs of climate change, in terms of destruction of
property, destruction of businesses, destruction of homes. But
I don't have to cite studies. You can just open the newspaper.
We see much more volatile weather that scientists tell you is
related to climate change; droughts; fires. That is what I was
referring to.
If we are going to contemplate the cost of doing something
about that on the budget side, we must net out the cost of not
doing something about it, which are in the hundreds of
billions, according to estimates I have seen.
Mr. Scott. Thank you. In terms of fiscal responsibility,
they say we should run the budget--run the federal budget like
families run their budgets. Isn't it true that a fiscally
responsible family will routinely go into debt buying a house,
buying a car, and sending children to college? What are
comparable good debt on the government's behalf?
Dr. Bernstein. I think the analogy that the government is
like a family is extremely misguided in this regard. In fact,
it goes the other way. When families are tightening their
belts, say in a downturn, the federal government, which has the
ability to borrow--and, again, at particularly low rates--
should be loosening their belts.
So the idea that the federal government would contract when
the private sector is contracting is a recipe for austerity,
more specifically, for--more pain for the people least
insulated from the pain, the most economically vulnerable
families.
Mr. Scott. But families do go into debt for houses. That is
not considered fiscally irresponsible.
Dr. Bernstein. No. I mean I think that is a good example of
the kinds of debt distinctions that I am making.
I mean people will go into debt for a college education,
for a housing--it--you know, it really gets back to this idea
that growth rate versus the interest rate--and that applies to
families, too.
Why does a college education often make sense to people?
Because--a college loan often make sense to people? Because you
are becoming indebted in the interest of improving your earning
power. And so that is the kind of calculation that I think
families make, and governments ought to, as well.
Mr. Scott. Now, it has been pointed out that there is no
noticeable difference in trajectory in unemployment rate and
jobs created after the $1.5 trillion tax cut, an economic plan
about twice as expensive as the Obama stimulus package, which
had a profound change in trajectory in terms of jobs and
unemployment rate.
Why did the Trump--why was the Trump initiative so
ineffective?
Dr. Bernstein. Well, first of all, I have noticed many
Members citing $1.5 trillion cost of the--the CBO says $1.9,
and that, I think, is more accurate.
Mr. Scott. I think it is a question of whether you add the
interest in, I think, is the question.
Dr. Bernstein. The answer--my answer to your question
actually comes to predictions that not just myself, but were
widely made before the Trump tax cuts, that it would not have
anything like the investment effects that were projected. And
the reason why many of us thought that was because the cost of
capital was already so low, and that firms were sitting on
large piles of retained earnings.
So there was no reason to think that, as an economist would
say, there was a large elasticity to tap there. That is, firms
had access to all the investment capital they needed, we made
it a bunch cheaper by cutting taxes, and, guess what, they
didn't respond on the investment side. Once again, supply side,
trickle-down fairy dust didn't work.
Mr. Scott. You mentioned debt held--foreign-held debt went
from 2 percent to 30 percent of GDP. What is the problem with
that?
Dr. Bernstein. Well, the problem with that is that more of
our national income leaks out to lenders from abroad. So if you
are concerned about one of the costs of increasing debt,
meaning that income that we produce in this country ends up in
the pockets of lenders from other countries, you know, that is
a germane concern at 30 percent, not so much at 2 percent.
Mr. Scott. And interest rates are set on--we talk about
crowd-out, and we used to be concerned about the federal
deficit. Is our interest rate set on a domestic basis or an
international basis?
Dr. Bernstein. I would say very much on an international
basis. But I would also stress that the Federal Reserve, or the
central bank--and not just our Central Bank--are very much in
the mix. And, as I point out in my testimony, if you average
out over the last decade, the central bank's interest rate has
been .6 percent, on average. So they are in the mix, as well.
Mr. Scott. And if the international rate went up, an
international rate over which we have very little control, what
would happen?
Dr. Bernstein. Well, that is one of the reasons why I argue
deficits matter, because we are exposed with a larger stock of
debt to that kind of problem.
Chairman Yarmuth. The gentleman's time has expired. I now
recognize the gentleman from Oklahoma, Mr. Hern, for five
minutes.
Mr. Hern. Thank you, Mr. Chairman. I am thankful today in
the House Budget Committee that we are actually talking about
taxpayer debt for the first time. I have been here a little--
one year, and it is the first time we have talked about it. It
is encouraging.
But I am also discouraged to hear that, you know, that we
don't think deficits and debts matter when we talk about the
monetary theory, and that countries that can print their own
money can just take care of their issues, and we don't really
have a responsibility.
Last week we had the opportunity to talk to the Fed
Chairman, Jerome Powell, sitting in your seat. And I asked him
specifically about the modern monetary theory. And his--he
stated, ``The idea that countries that borrow in their own
currency can't get into trouble is just wrong. And the idea
that debt does not matter is also wrong.''
Additionally, we have--more than 40 leading economists were
asked whether they agree with the underlying tenets of modern
monetary theory by the University of Chicago's Booth School of
Business. One hundred percent of the respondents disagreed or
strongly disagreed with the economic principle.
I don't believe that Members of Congress are naive enough
to believe in MMT as a way of servicing our debt. I believe
that this is just a way to justify their multi-trillion-dollar
wish list. They simply cannot face up to the reality that their
free proposals like the Green New Deal, Medicare for All, the
Green Housing Deal are not at all free.
When asked about how to pay for these programs, they can't
get a straight answer. Some just argue that ``We will.'' Some
settle on the convenient MMT. This is not realistic. The Green
New Deal, Medicare for All, and the Green Housing Deal are not
realistic, and our kids and grandkids will pay the price tag.
By pretending that we can afford these outrageous proposals, we
are indebting our future generations to pay for them all.
We have all talked about the 2017 Tax Cut and Jobs Act of
being just so destroying of our economy. Would you all agree
that we are--this year we will have the highest revenues in the
history of this country?
Dr. Bernstein. Not nearly as a share of GDP, which, in my
view, is the right way to----
Mr. Hern. But we will--from a pure dollar standpoint, we
will have the highest revenues ever in the history of this
country. Is that correct?
It is yes or no. I mean it is not hard. You guys are
economists, all doctorates, the last time I checked.
Dr. Bernstein. That statement is probably true every
quarter in our history, except when we are in recession.
The relevant measure is as a share of GDP. I mean this is
a--this is not a partisan statement. This is a CBO view. And as
a share of GDP, we are collecting 16.3 percent of revenues in
fiscal year 2019. That is a historical low point.
Mr. Hern. So, you know what? I have been here one year. I
will tell you that, no matter what the revenue is, that we will
figure out how to spend it. I mean would you agree with that,
as well?
Dr. Bernstein. Yes.
Mr. Hern. Okay, good. We got a yes-or-no on that one, for
sure. Yes, we will figure out how to spend it. There is no
sense of fiscal accountability in this House.
And so, to say that it is wrong to put a little bit of
money back in the people's pocket--because I will tell you,
back in the hinterland, when you get out of the beltway, they
don't believe we can control any kind of spending. And to put
money back in their pocket is not wrong, because they don't
just go bury it in their backyard, contrary to what you would
like to make everybody believe. They go spend it in their
economies, their local economies, which pay taxes to fund their
schools, to fund their roads, to fund everything else in their
area not dependent upon the federal government.
Those are just facts. You can agree or disagree, but those
are facts.
You know, as we go forward here, I like what you said, Mr.
Bernstein, about we have good debt and bad debt. In fact, I
introduced a pro-growth budgeting act two weeks ago. It will
never see the light of day, because, contrary to popular
belief, most people here don't believe that you actually invest
using debt.
And when we talk to the ordinary people in the world, the
people that are not in this room--except for our guests, I
appreciate our guests being here--but those of us that are here
talking at each other, when you talk about debt you have some
reasonable expectation of paying it back. That does not occur
in Congress. You borrow money and you never pay it back. It has
only been paid back four times in--four years in a row, 1997,
1998, 1999, and 2000--and 2001, a little bit. But since then we
have been running deficits every year, which means we are not
paying down any debt.
So we have a different definition of debt in this world up
here. So I would encourage you to look at that and give me your
thoughts because it says if we spend $1 or borrow $1, it is
being borrowed and spent to actually grow the economy. I would
encourage you to look at it. It has got a lot of reviews, a lot
of people signed onto it. Not Members of Congress, but a lot of
people signed onto it. So, anyway, I would like you to take a
look at that.
You know, as we go forward here, I would like to talk about
the Green New Deal, Mr. Wray. If it is not $93 trillion or $83
trillion, what is the number that we are talking about? Because
it is getting used a lot around here. I know you guys, you see
this, and you hear about it, and it is in the press. But in our
hearings, every hearing, every committee, 22 committees, has
some component of a conversation of Green New Deal. Can you
give me just your best guesstimate of what that is going to
cost?
Net, net. I get it, you know, you are going to save money
and all that stuff, Mr. Taylor and others. But what is that
number?
Dr. Wray. As I said, it depends on what you include in the
Green New Deal, and it could be about 5 percent of GDP.
Mr. Hern. So only $100 billion a year? Is that what you are
saying? Is that roughly--wow. Trillion? Trillion dollars a
year. So a trillion versus $9 trillion?
Dr. Wray. Yes.
Mr. Hern. That is a big difference, I mean----
Dr. Wray. Sure.
Mr. Hern.--because up until now I have not really heard
many people argue the $9.3 trillion a year number that----
Dr. Wray. Yes.
Mr. Hern. So----
Dr. Wray. I have looked at the $93 trillion number, which
is an outlier. And they don't count reduction of spending on,
say, the destructive activities.
Mr. Hern. So you are saying the $8.3 trillion is what we
would save, versus spending on net trillion. That is--man, I
don't know. That is a pretty good return.
Dr. Wray. Well, as I said, that was an outlier.
Mr. Hern. Yes.
Dr. Wray. Other estimates are nowhere near that number.
Mr. Hern. Obviously, we don't have 20 minutes to ask
questions. But Chairman, I thank you for your indulgence.
Chairman Yarmuth. I always enjoy giving you more time.
Mr. Hern. No, thank you, Mr. Chairman. I really appreciate
it. I thank the witnesses for being here.
Chairman Yarmuth. The gentleman's time has expired. I now
recognize the gentleman from California, Mr. Khanna, for five
minutes.
Mr. Khanna. Thank you, Mr. Chairman. Thank you to the
distinguished panel. I want to welcome Professor Taylor, who is
from the Bay Area. I taught as a lecturer in economics at
Stanford for four years. And while I am more with Professor
Krugman than I am with you, Professor Taylor, I will say that I
had students in my class who wore a tee shirt with your face on
it, and the Taylor Rule. So you certainly were a popular
professor.
I want to ask the panel about our strategy that allowed us
to win the Cold War. I think we forget that, post-Sputnik, our
government did great things. We created satellites. We remain
the only country that has ever sent someone to the moon. We
invented the Internet. We invented navigation systems.
And I would argue that there were two comparative
advantages to American policy: one, we had a policy of talent
acquisition from around the world. If you were creative, smart,
entrepreneurial, we wanted you here; and two, we had almost 3
percent of our GDP in fundamental science and technology
investment.
And so I would like to ask the panel, putting aside
partisanship, if we want to lead the 21st century against
China, would you recommend, as a growth strategy, that we
invest in smart infrastructure, smart broadband, smart new
technologies, quantum computing, artificial intelligence, new
fields of biology? And would you recommend that we have a
policy of talent acquisition? Dr. Bernstein or Dr. Taylor,
either.
Dr. Taylor. So, thank you, fellow professor.
Mr. Khanna. Lecturer. I never would be tenured at Stanford.
Dr. Taylor. So I think you are correct, that what we did
is--in technology is amazing. The Apollo 11 movie, it is a
fantastic thing to watch. I encourage everybody to do that. It
is the private-sector, public sector working together, and I
think that is admirable.
I think we need to find out more ways to do that. I think
it is partly working with the private sector. It has encouraged
them. You know the private sector very well, and it is not
bashing them, it is encouraging them, because it is very much
part of our society and why we are successful.
I do think the question of crowding out of discretionary
spending, what you are talking about, is other kinds of
spending. I could see these projections of spending as a shared
GDP, they are just going through the roof. And that means that
other things, which haven't even come up yet in this hearing,
are growing very rapidly, because we know that funding for the
things you are talking about are not going.
So I think the focus should be what are you going to do to
control the growth of those items, because they are crowding
out the things that you want and we want. That is what is
happening. And it is not really benefitting people very much.
So that is where I would look. What is--why is that
spending path exploding? It is exploding. What can you do about
that, and what can this Budget Committee do about it?
It is probably the targets that Mr. Woodall suggested. What
should the--maybe 42 percent of GDP, like we had averaged over
50 years is okay. What is wrong with that? And have a
deliberative process of how do you get to that.
So I would suggest having an overall view would be very
important.
Mr. Khanna. Dr. Bernstein, do you want to----
Dr. Bernstein. Very quickly, I would say that I wouldn't
characterize our spending in the areas that John did as
exploding. I would characterize them as completely predictable,
given pressures from demographics and health care costs. And I
do think there are savings to be had there in health care
reform.
To answer your--let me just give you one granular answer to
your question. And I know, Congressman, this is--I think this
will appeal to you, because I know that you think about this in
a granular way.
So green technology wasn't on your list, but I am sure it
was implicit. And think about battery storage. Now, I happen to
know that--I pay attention to this--countries are now trying to
figure out--kind of competing, fighting for who is going to
dominate the global market when it comes to storing energy in
battery technology. And that is a fight that we are not even
in, and I think it is extremely consistent with your view.
Mr. Khanna. If I could ask one more quick question to the
panel, putting aside your view on the wealth tax, I ran
around--across a statistic that 87 percent of American wealth
is in the United States, 87 percent. Only 2 percent is in the
Cayman Islands, 1.5 percent in Britain, 13 percent overseas.
And so people who say, okay, if you have a tax on wealth
people are going to leave, remind me of my friends who said if
Donald Trump was going to win the presidency, they would leave
America. They didn't, because this is the best place to live in
the world. And don't you think this is the best place, still,
to invest in the world?
Dr. Bernstein. That is a rhetorical question. Yes.
[Laughter.]
Yes, I do, and I think you make an interesting point that
hasn't really been brought to bear on the wealth--I mean I
think it is true that, given the mobility of wealth, and
proclivities for avoidance and evasion, we do need a structure
that holds hands with other countries to monitor that. But your
point is well taken.
Chairman Yarmuth. The gentleman yields back. I now
recognize the gentleman from Pennsylvania, Mr. Meuser, for five
minutes.
Mr. Meuser. Thank you, Mr. Chairman. Thank you all for
being here with us.
So the federal government does have a serious spending
problem, as do state governments, truly trying to be all things
to all people. Even just hearing today, it sounds like he wants
the government to get into the battery business.
We don't so much have a revenue problem. According to CBO
projections, the federal government's revenue will total $46
trillion over the next 10 years. Revenues will grow by 63
percent, about a 6 percent range. Very healthy. That is--and
last year our revenues grew about 7 percent, and that is after
the Tax Act, which had extraordinary results.
So--but, however, mandatory spending over the next 10 years
is projected to increase by $3.1 trillion to $5.3 trillion, a
total of $36.5 trillion over a 10-year period, almost as much
as it will be--total as much as revenues. So without even
discretionary, which will grow by $14 trillion, we have already
used up, just in mandatory spending, all the revenue growth.
So clearly, we have a spending problem. And that would put
us in the neighborhood of a $10 trillion--you know, 36 plus
14--deficit, or debt, in addition to where we currently are.
So--and this would lead to 79 percent of GDP today to 144
percent in--within a 10-year period.
So the way I look at it is we have two budgets, we have
discretionary and we have mandatory budgets. Discretionary
spending is up $70 billion in 2018. Revenues, however, are also
up $70 billion. So just looking at that one budget, we have a
balanced budget. Our problem is, as stated, with mandatory
spending.
So what we have, though, is many proposals to add to our
mandatory spending, such as Medicare for All, which has a $32
trillion estimate cost over the next 10 years.
So, Dr. Taylor, I will ask you, I will start with you. In
your opinion, how do you think the government would have to
finance this program? And how high would taxes have to be
raised to meet such a large level of additional mandatory
spending?
Dr. Taylor. I think, if it is just in addition, it is not
going to work. You have to go the other direction.
The simulations, the calculations, as you say, there is--
mandatory spending is going very rapidly. It has got to be
controlled. You don't have to reduce it, you have to slow the
growth, compared to growth of GDP. There is proposals out to do
that.
I think there would be--more discussion of those proposals
would be very worthwhile. Much of the discussion is going to
the opposite direction, the Green New Deal, et cetera, Medicare
for All. I haven't seen those where they are really saving
money. I know there are some people that argue that it would
be.
But there really has to be some attention given to this--I
would--because the projections, at least, are explosions of
spending, and it is largely because of the so-called
entitlement problem.
Mr. Meuser. All right. Has there ever been a country that
you can think of in history that has spent its way into
prosperity, and increased taxes in order to pay for more
government-run programs?
Dr. Taylor. I think the history is quite clear, that a
solid fiscal policy, where you are balancing the budget as
close as possible over the cycle, you have deficits and
recessions and slumps, you have even surpluses sometimes and
sometimes it works pretty well. It has worked well for the
United States. When we got off of that, it has not worked very
well.
So that should be the goal. We are a long way from that
now. But some of the reforms that would go in that direction--I
would actually encourage you to use CBO. Why doesn't CBO have a
model that answers the questions about the short run and the
long run?
Much of the debates and the focus is, oh, you can't even
reduce the growth of spending, because it is going to be a hit
to the economy. I don't believe that is the case. I think you
can. And reasonable calculations, the models show that it is a
benefit.
So I would encourage that part. Maybe it deals with some of
the partisanship that we are seeing already.
Mr. Meuser. Yes, agreed. I want to ask you this, then. The
tax cuts that took place, they are being debated, they are
saying they were not helpful. And clearly, we have an
unbelievably booming economy. And they are being compared to
the shovel-ready stimulus program from 10 years ago, which
was--the data shows was relatively useless, and waste.
Can you just comment on the historical results that come
from tax cuts, putting money in people's pockets, and gaining
the multiplier effect, versus the federal government thinks it
knows best what people's money--and on projects that are so-
called shovel-ready and are presented based upon, very often,
who knows who, and--which is also a symptom of a Socialist
government?
Dr. Taylor. Thank you very much. I have written a lot on
the stimulus packages, both in 2008 and later, the stimulus
packages of President Obama. I don't think they had the impact
that some people do. I think it actually was negative, in many
respects. The states didn't spend the money as they thought
they would, they pocketed the money. A lot of it was transfers.
It really didn't work very well, and I have lots of studies
that show that is the case.
I also am on the record for showing and arguing that the
2017 tax reduction reform was beneficial, and is not just the
35 to 21 percent, it is a lower rate on small businesses, it is
expensing of investment. It is the kind of things that we know,
at least in our theories--and I think it is true in reality--
that more investment, more tools, better tools, better things
that workers have to work with, they are going to be more
productive, and their wages will go--that is the idea, and that
is what is built into the CBO long-term calculations that I
referred to before.
So I don't think economics has changed. I think it is
basically working quite well. We can see anomalies, like the
low interest rates that we have seen. But--negative interest
rates around the world. But basic economic forces are still
working very well, and I think we need to emphasize those more.
Mr. Meuser. I apologize for going over my time, Mr.
Chairman. I yield.
Chairman Yarmuth. The gentleman's time has expired. I now
recognize the gentleman from California, Mr. Peters, for five
minutes.
Mr. Peters. Thank you very much, Mr. Chairman, and thank
you to the witnesses for being here.
I want to--I keep hearing about the Green New Deal. It is a
straw man. Fewer than half the Democrats have sponsored it. It
has already been killed in the Senate. So I don't think we
should spend a lot of time talking about it. I mean there are
component parts of it that have to deal with climate that I
certainly think would be worth talking about, but it has become
just this straw man, and it seems to end the discussion and not
lead to much nuance.
The--with respect to nuance, I get the sense that there is
kind of a consensus that it might be appropriate to debt-
finance the kinds of things that would generate a return. So
that might be infrastructure, a training investment in
education for people who could add to their earning potential,
basic research.
Of course, we did not develop GPS through the government,
we did not develop the Internet, but we led the research that
allowed the private sector to invest in those things, and I
think, you know, it certainly was good for the country and good
for the United States to be the locus of that, I think, as
well, as I think your other statement implied.
But I do want to talk a little bit about bad debt. And I
suspect that bad debt--and maybe, Mr. Bernstein, you could
answer this--might be financing or borrowing money to pay your
ongoing expenses, whether it is--particularly the ones that are
non-cyclical.
So, if you think about the social benefit programs, I mean,
is this something that we should be concerned about? Is it
appropriate? Is that what you mean by bad debt?
Dr. Bernstein. You know, it isn't. And the reason----
Mr. Peters. What is an example of bad debt, then?
Dr. Bernstein. Well, I think that--so I keep raising the
tax cuts from my perspective. We don't have to rehearse that.
There is another one, though, that I haven't had a chance
to talk about, and it gets to something you were just raising,
which is, you know, the fact that other countries ensure their
full populations for about 10 or 12 percent of their GDP, and
we do so for 18 percent of our GDP. So call that 6 to 8 percent
of GDP that is, you know, basically waste in the delivery
system of the way we provide health care. So I think we could
slow the cost of health care growth.
Getting back to your first question, though, I would want
to do so in a way that protects vulnerable people.
Mr. Peters. Okay, but--so you really--so would you think it
is appropriate for us to debt-finance the cost of health care?
Dr. Bernstein. Oh, well, we very much do so, of course, and
yes, I think these are--I mean, whether it is health care or
retirement security through Social Security, I mean, these are
clearly essential public goods. And we are not raising enough
revenue to pay for them. So yes, I consider that to be
reasonable debt in this climate.
Mr. Peters. Okay. I haven't found an answer yet, I don't
think, but I will ask Mr. Taylor.
You advocate for the 2017 tax cut. Should we be cutting
taxes more?
Dr. Taylor. I think we should be looking for tax reform
that promotes more economic growth.
Mr. Peters. So the----
Dr. Taylor. It also deals with other problems, but I think
it is still an important issue for the United States.
Mr. Peters. The knock on that bill was that--not that it
didn't help some people, but that it helped a lot of people who
didn't need help, and that by--if you give money back to people
who already have swollen bank accounts and have a lot of
savings, that is not going to generate the kind of economic
activity.
And, in fact, all the economists surveyed by the University
of Chicago--I think 38 of them--agreed that it wouldn't pay for
itself. And I think even Mr. McConnell said--admitted we had to
generate 4 percent growth in the economy to pay for those tax
cuts.
So my question--and I guess it is rhetorical--is where does
this end? And if our revenues are at a low point compared to
GDP, isn't it really time to think about how to get more
revenue in? And maybe should wealthy people pay more, the ones
who have plenty of earnings to part with?
Dr. Taylor. I think it is time to--if there is something--
--
Mr. Peters. More directly, what would you do, as--for
American tax policy? What would be your next step to make
sure----
Dr. Taylor. I would consider more ways to reform. There was
very little done on the personal side. There could be done more
on that [sic]. There is--the tax cuts are not permanent,
anyway. They are going to disappear.
They--again, based on the basic economic theory, you want
to have more encouragement of investment, because that is where
more productivity comes from.
Mr. Peters. Right.
Dr. Taylor. More productivity leads to higher wages and
higher incomes. It is just sort of the most basic thing in
economics. You don't want to discourage businesses from
investing. You don't--you want to encourage them, because that
will make their workers more productive in the system, as it
has for many, many years. Another----
Mr. Peters. We should tax people at some level. How would
I----
Dr. Taylor. Yes, of course.
Mr. Peters.----as a policymaker, determine what that level
should be?
Dr. Taylor. I think the first thing is what do you want
your spending level to be. And there is not a discussion about
that. And then you have a way to finance that. I think there is
reasons that sometimes you have a deficit----
Mr. Peters. Assume I wanted my spending level to be what it
is today, which is $1 trillion more than we are taking in. What
would I do to raise that----
Dr. Taylor. I think the projections of spending are that it
is--I don't know, 28 percent of GDP is the projections.
Mr. Peters. Well, I----
Dr. Taylor. So that is not going to work. So you have to--
--
Mr. Peters. Assume it is 20 percent, and right now I am
taking in 16 percent. What should I do to tax policy to raise
that money?
Dr. Taylor. I think the tax cut that is in place will raise
more. This notion that it is not paying for itself is not
really true, if you look over the long term. It is true over
maybe a couple years, or three years, but it is not true over
the longer term. Growth increases. You don't have to be----
Mr. Peters. I am out of time. But maybe I would ask you in
writing.
Like, if I say 20 percent is a historical level at which we
spend, invest, and we are taxing at 16 percent----
Dr. Taylor. Well, you--I think the Budget Committee of the
Congress has to decide what is the right level. There is----
Mr. Peters. I am not a professor at Stanford. That is why I
ask you a question about how I would answer that question.
I mean we all would--we are all people of good faith who
want to figure out what the right answer is. But, you know,
all--I never hear from people, you know, what the appropriate
way to set that number is. And it strikes me that some people
are being under-taxed, and they are not the people who are
paying payroll taxes.
So I guess we will have to continue this discussion later.
But I would really like to know the answer to that question.
Dr. Bernstein. Can I submit a memo on that to you?
Chairman Yarmuth. Absolutely, you may.
The gentleman's time has expired. I now recognize the
gentleman from Texas, Mr. Crenshaw, for five minutes. Oh,
sorry, no, the gentleman from Ohio, Mr. Johnson, for five
minutes.
Mr. Johnson. Thank you, Mr. Chairman. And I am really
enjoying these--thanks to the witnesses, by the way, for being
here. I am enjoying these conversations today. You know, we are
talking about the un-sustainability of the federal debt. And
yet this Committee, that is responsible for producing a budget
to address our spending, has not done one.
So, Mr. Chairman, I am going to submit to you that we got
to get back on track on this Committee and produce a budget.
That is our primary responsibility.
You know, the federal debt is an unsustainable trajectory.
We all know that. The current debt burden on every American is
$70,000. Within three decades CBO says that it is going to be
around $248,000 per American, or almost $1 million for a family
of four.
So mandatory spending, including interest payments on the
debt, is projected to increase from $3.1 trillion in fiscal
year 2019, to $5.3 trillion in fiscal year 2029. This is a $2.2
trillion--or 71 percent--increase.
So, Mr. Taylor, do you believe we should be focused on
stabilizing current important programs, such as Social Security
and Medicare, which--we know those are part of the mandatory
spending that is driving the debt, right--so that we can make
sure that they are preserved and strengthened? Or should we
focus on expanding these programs and creating a bunch of new
programs on top of them?
Dr. Taylor. I think the most important thing is to
stabilize, in the sense of have them not growing faster than
GDP. And that requires reform. And that requires projections.
And I think they will work better in that case.
I think there could be more focus on this Committee, the
other Committees of Congress, on finding ways to reform those
programs. That is what I would focus on. They are crowding out
other things that have been mentioned already in this room.
And then, once that is determined--that is the job of our
society, our democracy, to determine that--then figure out
about the financing.
And there are reasons why sometimes you have deficits and
sometimes you have surpluses. Economists wrote about that all
the time.
But I think the main thing is what should be the spending
priorities, and I believe, now that it is--the so-called
entitlements are growing too rapidly, many people have thought
that--the same, so figure out a way to reform that. There are
proposals out there. And that is the way I would go about it.
Mr. Johnson. Yes, and you used that ugly word,
``entitlements,'' because I can tell you the people where I
live, where I represent, my 80-something-year-old mother,
before she passed away, they hate that word, ``entitlements,''
because they invested in those programs. They view those
programs as responsibilities of the federal government.
Dr. Taylor. Absolutely.
Mr. Johnson. And we have let them down by not doing
budgets, by not managing the spending so that we protect those
programs.
You know, interest payments on the debt are already high,
and are projected to grow. This year interest on the debt is
projected to be $390 billion. By 2029 it will more than double
to $807 billion. Under CBO's longer-range forecast, interest on
the debt will rise to 29 percent of federal revenue by 2049.
So, again, Mr. Taylor, are you concerned that an ever-
rising federal debt and its associated interest payments will
crowd out other important federal spending priorities such as
defense, research, health care, and meeting our obligations
that American people have paid into?
Dr. Taylor. Absolutely. I am concerned. That is why I
focused in my testimony on the cost of doing that. I think it
is the cost of the economy. It is--CBO agrees it is a long-term
cost. I think it is also a short-term cost and would encourage
CBO to adjust their analysis to capture that, as well.
But it is fundamental. It is really the most important
thing that--I look at the budget. I don't know why it is going
in the direction it is going. We need to change it, need to
make it more--more sense, from an economic perspective.
Mr. Johnson. Okay. In my last 30 seconds, you know, some
would say that modern monetary theory simply says that
Americans shouldn't worry about how much we spend, because the
dollar is the currency of the world, and because America owns
the dollar, we just print it when we want it.
So my question to you is do you worry that implementing
this kind of philosophy, the MMT, could cause a loss of
confidence in U.S. financial markets?
Dr. Taylor. Yes, I have have worried about it for a number
of reasons. It is really going back to policies that we know
hasn't--haven't worked in the U.S. I gave my example of the
1970s, but it is going back to countries which have not been
successful. It is high inflation.
I would like to see, at least, somebody run through
particular proposals that are along these lines with some
models, with the CBO model, so there can be some, at least,
discussion about it. But right now it seems to me it is going
back to policies which we know in history have not worked.
Mr. Johnson. Okay. Thank you, Mr. Chairman. I yield back.
Chairman Yarmuth. The gentleman's time has expired. I now
recognize the gentlewoman from Illinois, Ms. Schakowsky, for
five minutes.
Ms. Schakowsky. Thank you so much. I wanted to go back to
climate for a minute. I think it is, perhaps, the greatest
challenge facing the 21st century.
We have just estimated 11 years to cut emissions by 45
percent. We have to achieve carbon neutrality by 2050 to stop
temperatures from rising above 1.5 degrees centigrade. But
creating a clean--but I see--but creating a clean economy will
require sustained government investment. We have heard you talk
about that.
In a Roosevelt Institute report economists Jay W. Mason and
Mark Parke argue that the government can afford to finance de-
carbonization plans of at least 5 percent of GDP, as you
mentioned, Dr. Wray, without causing substantial economic
disruption.
So Mr. Bernstein and whoever else wants to comment on this,
given our current economic conditions of persistently low
interest rates, as you had mentioned before, and low inflation
rates, would you agree that it is sound fiscal policy for the
government to invest in a clean economy?
And let me also ask would you also agree that the economic
and social cost of not addressing climate change is--climate
change are far greater than any risk to incurring additional
debt?
Dr. Bernstein. I will be brief. I would like to hear my
other panelists comment on this.
Ms. Schakowsky. Sure, thank you.
Dr. Bernstein. Yes. As I have stated throughout the hearing
today, we can't make this a one-sided equation. As you
correctly pointed out, Congresswoman, we have to factor in the
cost of the environmental damage from doing nothing. And if you
simply look at your front page, those costs seem to be growing
by the month.
And I guess my argument would be we can't afford not to do
this. And to talk about this purely as an expense on businesses
or something like that is to miss both the opportunity for
game-changing investments, where, I believe, our country should
play a role, and again, the costs of not doing enough.
Ms. Schakowsky. Yes, Dr. Blanchard?
Dr. Blanchard. There is a marvelous cartoon. It takes place
in 2050. The world has become uninhabitable. But there is an
old man who talks to a young man and he says, ``Yes, it is
uninhabitable, but look, we have reduced the debt.''
I think that is a very deep cartoon. It is clear that we
need to do something about global warming, that the cost will
be high. The question, I think, is not whether it should be
done. It should be done. The question is how much should be
financed with taxation, additional taxation, and how much
should be financed by debt.
I don't think there is a simple answer to that. Some of it
can be financed by debt, but to a large extent what we do to
fight global warming has very large social returns and very low
financial returns to a state. And, therefore, if it is all
financed by debt, it will complicate life later. So I think it
is a mix.
There is no question that we should be doing it, and partly
finance it by tax and partly financing by debt. The part which
would be financed by debt would be called, I think by Jared,
good debt. This is debt to improve the future.
Ms. Schakowsky. Dr. Wray?
Dr. Wray. Yes. Can I add? Look, according to the
scientists--and I am not one of those--we have the technical
know-how, okay?
So the question is can we release the resources from
current uses, plus put unemployed resources to work to tackle
climate change? And I think the answer is, clearly, yes.
If it is 5 percent of GDP and use that as a measure of the
resources we need, this is absolutely doable. Think about what
we did in World War II. We had to move 50 percent of the
nation's production to fight the war. We did it. The debt ratio
went to 100 percent. The deficit reached as high as 25 percent.
We managed to keep inflation below 10 percent at the peak. And
most of the years much below that.
We can, if necessary--I completely agree with Professor
Blanchard--we may find we are going to need a tax increase. Or
we may find that we need to postpone some consumption, to ask
the workers to make a sacrifice for 10 years in order to enact
what we need to do to turn around this trajectory of
annihilation. And we will reward you later.
That is what we did in World War II. We gave benefits,
Social Security, retirement, health care. All those things were
promised at the end of the war. Workers got them. How did we
come out of that experience with 100 debt ratio? The golden age
of U.S. capitalism. That is what we got from that.
Ms. Schakowsky. Thank you. I yield back.
Chairman Yarmuth. The gentlewoman's time is expired. I now
recognize the gentleman from Texas, Mr. Crenshaw, for five
minutes.
Mr. Crenshaw. Thank you, Mr. Chairman. Thank you, everyone,
for being here. I want to clarify some things, because there
has been some creative use of semantics about the debt.
So, over and over again we hear that we aren't taking
enough money from the American people, and the businesses that
they create. If we let them keep their money, it is apparently
classified as bad debt for the government, which is quite the
take.
Dr. Bernstein, as you stated, apparently Americans spending
more of their money because of the tax cuts is not useful
investment, never mind that GDP growth rates have increased
since the tax cuts and, according to the Fed and CBO, it has
been largely due to consumer spending and some business
investment. But I guess that isn't useful, because there is
this belief--and it is a belief--that only the government can
possibly make smart investments.
This is an odd thought, this notion that our debt is a
result of not taking enough of our constituents' money, as
opposed to us spending it on unsustainable entitlement
programs, which, by the way, as a share of GDP, is the only
category that is changing radically.
So federal revenue, in absolute terms, has continued to
increase, increase by 4 percent last year. And as a share of
GDP, it dropped, as Dr. Bernstein has noted, only slightly
recently. But it is on track, as this graph notes.
[Graph].
[GRAPHIC] [TIFF OMITTED] T0261.063
Mr. Crenshaw. It is on track to be back at historical
levels within just a couple of years.
So if we don't cherry-pick the data, we see that we aren't
that far from average federal revenue.
What has happened in the last couple of years? The fastest-
growing wages have been in the bottom quintile of earners. And
it is not even close--child tax credits have doubled, which
matters to low-income earners. Businesses are hiring, which
matters to all people, not just the 1 percent. Eighty percent
of taxpayers are paying less this year, and we all know that it
is the wealthy earners in high-tax states who ended up paying
more. Let's stop pretending otherwise.
And this notion that we are regressive is interesting.
Dr. Bernstein, how does our country compare to others as it
pertains--others in the OECD--as it pertains to progressivity
of the tax code? Where does America stand?
Dr. Bernstein. Pretty low, not only in terms of
progressivity, but also in terms of the amount of tax
collection of the federal government.
Mr. Crenshaw. Yes, well, the OECD data completely
disagrees. In fact, they have us at number one.
Dr. Bernstein. Okay. So that is including state and local.
You can't do anything about----
Mr. Crenshaw. It includes all taxes?
Dr. Bernstein. Yes. You can't do anything about state and
local----
Mr. Crenshaw. So number one. I mean----
Dr. Bernstein. Federal taxes were made far more regressive
by the tax cut. I mean that is not a debatable----
Mr. Crenshaw. But, as a country, we are number one. And it
is not even close. Ireland is second, and it is not even
close----
Dr. Bernstein. Number one in what?
Mr. Crenshaw. Progressivity of the tax code. Okay.
Dr. Taylor, you said the tax cuts have been effective.
And I will give you this data, Dr. Bernstein, if you would
like, to add context to the discussion.
Dr. Taylor, you said the tax cuts have been effective. A
lot of others disagree with you. But how so? How have they been
effective?
Dr. Taylor. Well, first of all, they have had increase in
growth since they were passed. Growth has been higher in 2017
and 2018. Towards the end of 2017 it was passed. It was passed
relatively quickly. Nobody think it would happen [sic]. But I
think it has been a beneficial thing.
I think, long run, you will see more effects. There is a
slow-down now in the economy. It could be due to other things;
it could be due to this growing debt. But I think, ultimately,
it is beneficial, and that is what theories show, the models
show, the data show.
Mr. Crenshaw. Thank you. And look, it doesn't actually seem
like any of you are advocating for unlimited spending. That is
not the--that is not what I am taking here.
And I do believe, Dr. Bernstein, you said in your statement
that we would be better off, actually, decreasing our deficit
somewhat, not zeroing them out--that would be radical,
according to you--but you want to get them on a more
sustainable path. That is what I remember reading from your
statement.
And so, Dr. Bernstein, what--here is what I want to ask
you. What is the main driver of debt, okay? You, obviously--you
do not want to touch discretionary spending, perhaps even
increase it. But even if you had your way and you eliminated
the recent tax cuts, it still wouldn't pay for the vast growth
in entitlement programs.
So I want to know. Can we agree on this? Do we agree that
Social Security and Medicare programs need to be addressed?
And do we have solutions for that that don't involve over-
taxing my generation in order to increase benefits for your
generation?
Dr. Bernstein. Yes, I think we probably get----
Mr. Crenshaw. And, Dr. Taylor, if you could also answer
this after Dr. Bernstein.
Dr. Bernstein. No, I think there is some agreement there.
I think the--where we disagree is on the revenue side. So
you and your colleagues keep citing the--you know, these
highest revenue collections ever, because you are talking
billions and trillions. As I point out in my testimony----
Mr. Crenshaw. Okay, I understand we disagree on that. But I
really----
Dr. Bernstein. Yes.
Mr. Crenshaw. The main driver of debt, we do agree, is
entitlements, right? We do agree on that.
Dr. Bernstein. Yes, yes.
Mr. Crenshaw. So I want to get a solution for that. I
want----
Dr. Bernstein. So the----
Mr. Crenshaw. Drive the discussion towards that.
Dr. Bernstein. So the--I have tried--so there is two
solutions to that. One is we need to collect more revenues and
do some more progressively. And two, we need to slow the growth
of health care spending.
Mr. Crenshaw. Okay. And, Doctor, if the chairman would
allow it, if Dr. Taylor would like to answer that, as well?
Dr. Taylor. No, I think it is clear that the driver is
the--you used the word ``entitlement spending,'' that is okay
with me--is this growth, which is quite rapid, and a reform of
those programs, a reform, I think, which will make them work
better is what we need. And it is going to slow their growth,
and that is what is key.
Mr. Crenshaw. I would love to talk about that for hours,
but only if the chairman would indulge me.
Thank you, Mr. Chairman.
Chairman Yarmuth. We would all love to do that. The
gentleman's time has expired. I now recognize the gentleman
from California, Mr. Panetta, for five minutes.
Mr. Panetta. Thank you, Mr. Chairman.
Gentlemen, thank you very much for being here today, as
well as your expertise on this very, very important crucial
subject I believe that you have testified to. I apologize for
not being here earlier, and so I probably will ask some
questions that have already been asked. So let me just make
that clear. But thank you very much for being here.
You know, we are here, as you know, to reexamine the
economic costs of our debt. And obviously, we won't--before we
do that, though, we want to take the stock level of debt we
have and the trajectory of our deficits and our debt. As you
know, we got $16 trillion in publicly held debt and $6 trillion
in inter-governmental debt, basically close to--we just
passed--the debt surpassed $23 trillion. And it is growing
faster than our GDP.
And Dr. Blanchard, you testified that deficits running at 5
percent of GDP are a cause for concern.
Debt, as a share of GDP, is projected to rise from 79
percent in fiscal year 2019 to 95 percent by fiscal year 2029.
And if we keep on going at this rate, it is going to be 144
percent by 2049.
Now, last week, in the very same--at the very same table
that you gentlemen are sitting at, Federal Reserve Chairman--
the Federal Reserve Chairman said that the level of debt that
we currently are going at is just completely unsustainable. And
I believe he is right.
But regardless of that level, and which level is healthy,
there are clear dangers, I think we understand, of allowing our
debt to continue to grow at this rate. And so, clearly, your
testimony today is very important, not just to examine those
risks, but to also look forward to some sort of solutions to
responsible and smart budgeting.
If I may, Dr. Blanchard--you are closest to me--do you have
an opinion as to what a healthy debt-to-GDP ratio is, and does
100 percent concern you? If not what about that 144 percent
number I threw out there?
Dr. Blanchard. I believe that there is no magic number that
could increase to a much higher level before starting or
triggering a crisis in the markets.
This being said, there is no particular reason to want to
do it because it can be done. And therefore, all things equal,
I think that lower levels of debt than the ones we have are
desirable, and that if we can get there without creating
problems with the economy itself by slowing down public demand,
I think we should try to get there.
Mr. Panetta. Understood. Understood. Now, I wasn't here for
your testimony, but I read your testimony. And you said that
the deficit shouldn't keep us from making smart investments,
clearly. But if we run deficits without considering the debt at
all, we clearly run some risk, correct?
Dr. Blanchard. Yes, when you--you want to issue debt only
for good reasons. One may be to sustain, basically, the demand
and maintain output at full employment. Or for public
investment, which makes sense. If you don't do this, neither of
the two, then you should definitely worry about that. If you do
this, I worry less about that increase in debt if I can justify
it on the basis of your macro considerations or public
investment.
Mr. Panetta. Understood, okay. Thank you. Thank you.
And Dr. Bernstein, you were--in your testimony that I read
you talked about the 2017 tax bill, obviously, and the drain
that it had on revenue. Is there anywhere else that you would
suggest we look to to increase revenue?
Dr. Bernstein. Yes. I think it is an important question.
Because so much of market income and market wealth has
accumulated at the top of the scale, I think that some of the
current debates about taxing wealth are relevant and worth
thinking more about.
Now, whether we are actually talking about a wealth tax is
a different question. So closing the step-up basis loophole
would make a lot of sense to me.
Mr. Panetta. Could you explain that, briefly?
Dr. Bernstein. Sure. So when a wealthy person transfers a
capital gain to an heir, the value or the basis of that capital
is stepped up, meaning it is raised to the current market rate.
And that gain is completely untaxed. So this is a way in which
asset accumulation is--goes untaxed. And the more you put
wealth or income or any sort of accumulation in a tax category
that goes untaxed, the more people are going to figure out that
is precisely the kind of income they have a lot of.
So I am not necessarily endorsing some of the more far-out
ideas about new wealth taxes. I am saying we should tighten up
what we have. We should bring capital gains rate closer to
income rates. We should give the estate tax some bite. And we
should definitely fund the IRS to close some of the tax
avoidance gap that has cost us, literally, hundreds of billions
per year.
Mr. Panetta. Great, thank you. I yield back my time. Thanks
again, gentlemen.
Chairman Yarmuth. The gentleman's time has expired. I now
recognize the Ranking Member for 10 minutes.
Mr. Womack. And we are into the lunch hour, which is never
a good thing for the two of us, who have a few minutes of
questions.
First of all, thanks to the witnesses here today. I am
going to come full circle and just ask each of you--we kind of
started this way. I want to go back, because there has been a
lot said. Does debt matter?
From the perspective of the United States taxpayer who may
be watching this hearing, or hearing about it, to each of my
panelists today, does the federal debt matter? Dr. Blanchard?
Dr. Blanchard. Debt absolutely matters----
Mr. Womack. Dr. Wray?
Dr. Blanchard. That was a ``but,'' but I didn't--you didn't
give me time.
Mr. Womack. We may come back to the ``but,'' but----
Dr. Wray. Yes, but probably not in the way you are
implying.
Mr. Womack. You said ``but'' and kept going, and I wouldn't
let Dr. Blanchard do it.
Dr. Bernstein. Yes.
Dr. Taylor. Yes.
Mr. Womack. Okay. Well, I am glad to hear that. My dad
always said, ``Don't go into debt''--he is a very successful
businessman--``Don't go into debt for things that are not an
appreciating asset.'' Pretty sage advice, don't you think?
Dr. Bernstein. Yes.
Mr. Womack. Do I get any pushback from the----
Dr. Blanchard. No, you said my ``but.''
[Laughter.]
Mr. Womack. Okay. And I think he is right. By the way, he
operates a business today and has no debt, and has an extremely
healthy business.
There have been some discussions here today about whether
the family household budget that most of our constituents have
a context on versus the federal budget, and whether they should
operate similarly when it regards debt.
Now, the household budget does not have to provide for the
national defense. It is not in their constitution; it is in
our--it is in the Constitution that we are responsible for up
here.
But in terms of going into debt for purposes of investment,
growth in the economy, those kinds of things, the principles,
though, between the household and the federal budget are still
similar in nature. Would you not agree?
Dr. Blanchard. I would not agree. The public debt, the
government debt, plays a macro stabilization role that
individual debt does not. So when the government decreases its
debt or has a large surplus, this has an adverse effect on the
economy, which it has to take into account. This is irrelevant
to you or me or any household.
Mr. Womack. Dr. Wray, I saw a negative response from you.
Dr. Wray. Right, because when you are looking at it from
the point of view of the individual in the private sector,
whether household or firm, at some point, yes, they need to
repay their debt. The private sector, taken as a whole, never
repays all of the debt. It grows over time, in the same way
that the federal government's debt grows over time. It has been
growing since 1791. It has been growing as--relative to GDP
since 1791. It will continue to grow. So will the private
sector's total debt.
So you can't look at it from the point of view of the
individual in the private sector. Look at the private sector as
a whole; their debt grows over time, too.
Mr. Womack. All right. Dr. Bernstein?
Dr. Bernstein. Just as I said earlier, I think this idea
that when the household is tightening their belt, the
government actually needs to go in the other direction. So I am
afraid I disagree, as well.
Mr. Womack. Dr. Taylor?
Dr. Taylor. I think the so-called automatic stabilizers are
good when the economy is in a boom, revenues increase and
spending increases. And I think, in a slump, it goes the other
way.
Mr. Womack. Well, I guess here is where I am going with it,
and that is that, unlike the federal government, for the
American household there are consequences for going into too
much debt, to the extent where you do not have the capacity to
repay. And there are many examples of that. Student loan debt,
I think, is a real good poster child for it, because there is a
lot of people that went into student loan debt with a purpose
of improving their earnings potential when, in fact, they
didn't improve their earnings potential.
In fact, a quarter of that student loan debt is not even--
did not even lead to a college degree. So I think it was
purpose-defeating in that regard.
But there are consequences for my constituents for going
into too much debt and not having the capacity to repay, as
opposed to the U.S. Government, which leads me to this
question.
If we agree that debt does matter, and it is just a
discussion about the type of debt--bad debt versus good debt--
and if the premise that the government should have the capacity
to repay--and I am not talking about just minimum payment due,
just the net interest on the debt, but, I mean, start whacking
away at the long-term structural challenges--if that is true,
then this--the lack of the congressional process that this guy
and I worked on, in addition to Mr. Woodall, to develop a
budget of the United States Government, and to be able to put
before the American people what our fiscal condition is, and to
begin to make those prioritized decisions, discretionary versus
non-discretionary, and--or the mandatory side--and remember,
those mandatory programs are on auto-pilot, so unless the
Congress acts, they continue to go completely unchecked, and it
becomes a demographic challenge for the country, that our
moving those costs higher, higher, in addition to health care
spending that, Dr. Bernstein, you talked about.
So do you--would you agree with me that part of the problem
that Congress has is it is not honoring the process that is
designed to be able to put the spotlight on the fiscal
condition of our country in such a way that we can begin to
make those established priorities?
And again, not to--at the risk of using the word ``poster
child'' again, let me remind you yesterday we passed a
continuing resolution. We are seven, almost eight weeks into
the fiscal year, we don't have a budget, and we pushed the
spending of the country again to the 20th of December, to
Christmas, and we will probably do it again, and maybe two or
three more times.
Is the lack of the execution of our process, or a better
process, contributing to the problems that we are facing today,
Dr. Blanchard?
Dr. Blanchard. I would not think of myself as an expert on
these issues. But yes, from where I stand, at the distance, it
looks like the congressional budget process it not ideal and
could be substantially improved.
Mr. Womack. Dr. Wray? Or does the process matter?
Dr. Wray. Look, capacity to repay, I am not sure what that
would mean for a federal government that is an ongoing concern
that has only repaid its debt one time, 1837, followed by our
first depression.
We do not have to repay the debt. What we have to do is
make the interest payments. That is what we need to do.
Mr. Womack. Okay. All right. Well--all right. So let me hit
pause here a minute, and just focus on interest payments for
just a moment.
Today, as evidenced by one of the--a couple of our Members
have indicated that the net interest on the debt this year,
with very low interest rates, is going to be somewhere in the
neighborhood of $400 billion, which is more than half of what
we spend on our constitutional challenge to provide for the
common defense of the country.
And there has been the term ``crowding out'' used many
times here today. We are crowding out the investments that you
gentlemen are suggesting that we continue to make to grow our
economy, help vulnerable Americans, the things that we would
normally spend that money on we are spending on the net
interest on the debt. That is money that could be spent
elsewhere, which I think makes my point that deficits and debt
do matter, because it is crowding out the available money that
we have to be able to effectively fund the discretionary budget
of the U.S. Government.
Dr. Wray. Well, I mean, you put that constraint on
yourselves. And I understand your political dilemma here.
Interest payments, I think all three of us agree, are a very
inefficient kind of spending. The first half of it is going
abroad, and the other half is going into the United States. But
it doesn't tend to go where you want it to go. It doesn't tend
to lead to economic growth.
So I am not advocating trying to ramp up interest payments.
Crowding out theory, there are two approaches, one loanable
funds, the other is IS-LM. The evidence just does not show that
there is crowding out. Now, it may crowd out your spending
because you put constraints on the budgeting process. It
doesn't crowd out in the real world by raising interest rates
and reducing investment. All that government spending goes
somewhere into the economy, and it creates net income for the
private sector, which should encourage investment, rather than
discouraging investment.
Mr. Womack. So the constraints that you suggest that we put
on ourselves, they are only there for one reason, and that is
not to explode this deficit and debt situation, even further
exacerbate the situation as we currently have, which most
people would agree is already beyond any capacity for us to be
able to repay, and it is just going to lead to further
complications in taxes for future generations.
Dr. Bernstein, real quickly, a thought from you, and then--
--
Dr. Bernstein. Well, just on the process point, because I--
what you said resonates with me. I am going to be straight with
you about that, about the broken process.
But the--I immediately went back to--I believe it was 2011,
and the balanced budget agreement that, you know, created this
so-called super-committee, I view that as being, you know, just
a huge process failure. So I----
Mr. Womack. That was 2011.
Dr. Bernstein. Yes, 2011.
Mr. Womack. It was not our Joint Select Committee----
Dr. Bernstein. No, no, no. I am just saying----
[Laughter.]
I said that I think the problems go deeper than process. I
agree with you the process is broken, but I think there are
fundamental differences about the kinds of investments that we
are arguing about today, good versus bad, about the amount of
revenues that we need to collect. And I feel like, before we
can have a reasonable process, we probably have to talk more
about those differences.
Mr. Womack. Dr. Taylor?
Dr. Taylor. So I think going back to regular order would be
a tremendous--budgets come from the President, the Budget
Committees go through it, the appropriations, and you got a
budget by October 1st. It would just be so clear to people,
compared to what is happening now. No one--this is a democracy;
people are supposed to be somewhat informed. It would improve
the process greatly. I would encourage you to try to do that.
Mr. Womack. Okay. And I have just got one final question,
and it is related to our process, because our Committee--which
I think did extraordinary work, we came up a little bit short,
but not because we didn't really work hard at it, because we
spent a year doing it.
But the one thing that I think we kind of rallied behind
was, regarding debt, is some kind of a target. We have talked
about it already today, debt-to-GDP, which I believe--I have
given up hope that we are going to balance the books of the
federal government. It is certainly not in the timeframe I am
going to be here. But at some point in time should this country
not have a reasonable target of debt-to-GDP? Pick the number.
I don't know if it is 42, the historical average, or if it
is 65, or you--whatever that number is. But some kind of a
target, so that we can at least begin to somewhat conduct
ourselves as people who can constrain the absolutely growth of
federal government, which can go out of sight if you don't.
Real quickly, from left to right.
Dr. Blanchard. I think that the issue is that we really do
not have a good sense of what the debt target is. And choosing
a number comes with dangers of trying to do something which may
not be quite the right thing. So I am with you in spirit. I
would have a very hard time deciding what the number should be.
Mr. Womack. Dr. Wray?
Dr. Wray. I absolutely agree. I can't see any--I think you
should focus on the things that are important: employment,
rising income, economic growth, rising productivity, meeting
the challenges that face us in the future.
Mr. Womack. Dr. Bernstein?
Dr. Blanchard. Yes, I would urge you to think about that
much more dynamically. Imagine we had a debt target in World
War II, and we didn't gear up to fight that existential battle.
I am sure you would be opposed to that. So I don't think
targets are a good idea.
Mr. Womack. Okay. Dr. Taylor?
Dr. Taylor. I think targets are a good idea with emergency
clauses to deal with this.
Mr. Womack. Amen. I yield back my time. Thanks for allowing
me to go over.
Chairman Yarmuth. Absolutely.
Mr. Womack. And congratulations on Louisville--number two,
by the way.
Chairman Yarmuth. Thank you. We are loaded. People need to
look out for us.
Well, I yield myself 10 minutes. Thanks again to all the
witnesses for being here, and I think it has been a valuable
discussion. I didn't have much economics education on my way
through school, so I am using my chairmanship to become
educated, and this hearing helped.
When Mr. Cooper earlier talked about nuances in some of
these issues--and I fully agree--most everything we do up here
has significant nuance. And we don't recognize that.
So I am interested--and we talked about the 2017 tax cut.
When people say it is a $1.9 trillion tax cut, it actually
wasn't. It was a $5 trillion tax cut, just that we are
offsetting revenues that made it a $1.9 trillion net tax cut.
So--and one of the biggest factors on the revenue side was
the SALT taxes, eliminating the state and local tax deduction.
There were many others.
And so, in terms of thinking about if we were to review the
tax cut with an aim of keeping the parts that did benefit
people and doing away with the part that had no societal
benefit, I think that is an important thing, distinction, to
make.
When Mr. Smith talks about his residents, yes, if you get a
$100 tax cut and you are making $40,000 a year, or something
less than that, that is a significant amount. When you are my
classmate in college, Stephen Schwarzman, and you talk about
cutting his tax rate by 2.6 percent at the top, that doesn't
seem to serve any great societal benefit. So I think we often
have to think about taxes like that.
And I also think about, when we talk about cutting
mandatory spending, whatever we spend on Social Security,
whatever--every Social Security benefit check that goes out
every month, how much of that do you estimate goes back into
the economy?
Dr. Bernstein. The vast majority.
Chairman Yarmuth. Virtually all of it, right? And whatever
you spend on Medicare and Medicaid goes back into the economy.
So our $4.--whatever it is, $4.5 trillion spending at the
federal level, with the exception of probably some of the
defense budget and the interest on the debt, all of it is part
of GDP.
So when we are talking about cutting federal spending, we
are cutting GDP at the same time. And I think we lose sight of
that sometimes, like all of a sudden, we just cut this, and the
economy keeps roaring on. That is not necessarily the case.
Humana is based in my district. Humana is about a--right
now, about a $60 billion-a-year company. Eighty percent of
their revenue is managing government health care programs. So
you cut health care there, you are cutting a huge part of my
economy in my district. And so, again, these things are all
very nuanced.
Is there any difference, in your opinion--anybody can
answer this--a tax cut that goes to a middle-income individual
versus their Social Security check, in terms of macro-economic
impact? Is there any difference?
Dr. Bernstein. No, I think the likelihood is that they will
both be spent.
Chairman Yarmuth. Right. So in one case you are dropping
federal revenues, the other one you are writing a check. But
they have the same impact on the economy.
And one of the things that I love about your statement, and
it came up when Dr. Taylor talked about looking at models from
CBO, and I saw a little smirk on your face. I may have misread
it. But when you talk about empirical economics--and that is
where I have--since I have been on this Committee, which is
now--this is my 11th year--something that I have always been
very interested in.
I remember several years ago when Tim Geithner was
Secretary of the Treasury and came before the Committee, and at
the time Paul Ryan was Chairman of the Committee. And he put up
these charts showing spending on--mandatory spending, and so
forth, and the debt going out 50 years. So I asked Secretary
Geithner, ``How realistic do you think projections going over
50 years are?''
And he said, ``I don't think going--anything longer than
five years is reliable.'' And that is one of the things that I
have been obsessed with, is that we live in a world that is
changing more rapidly than anyone can possibly have forecast.
And making projections as to what is going to happen in the
economy--I saw this morning there was a release of a story that
some--a company that Bill Gates funded has come up with a
process using artificial intelligence and solar panels that
will increase--allows you to create heat at levels sufficient
to do concrete and so forth, which is responsible for about 7
percent of global carbon emissions.
So it seems to me that the possibilities of technology and
innovation change--radically changing some of our future needs,
and maybe changing either--maybe increasing some of our needs
is something that--it is going to be hard for us to project.
We say Congress's optimum efficiency moves at 10 miles an
hour. This year it is two miles an hour. But the world is
moving at 100, and I don't know how we make policy to
accommodate that.
But one of the things, Dr. Blanchard, that I have been
obsessed with is artificial intelligence. And we know
artificial intelligence is going to have its productive uses,
as it apparently has with this company, but it is also going to
have disruptive uses in the economy. For instance, eliminating
an awful lot of jobs. I heard one estimate that--this came from
one of the top people at IBM, who said that, within the next
three years alone, artificial intelligence would either
eliminate or significantly change 120 million jobs around the
world, and that is going to increase.
So given that, we know--we don't know the extent of
disruption that is going to happen, but we know there is going
to be a lot of disruption happening. What would you say that
means for our priorities of spending in order to try to
accommodate the changes we know will come, but we don't know to
what extent?
Dr. Blanchard. I think, you know, AI has all kinds of
implications. One of them is that the low productivity growth
that we have might increase over time because we are
rediscovering ways of doing things differently, in which case
it would be good news for the economy. It would probably
increase interest rates. But that is fine.
The--I think the other dimension, which is worrying people
very much, is that there might not be enough jobs. And, as you
know, this is an issue which has come with technological
progress for at least two centuries. In the past it has always
worked out okay in the sense that new jobs are being created. I
think this time we are less sure. It may not, in which case we
really have to think about everything we can do to help the
people who may lose their jobs and not find one, which leads to
issues of universal basic income--basically, money given to
people who really cannot find jobs.
It means thinking again about the earned income tax credit
and making it much more generous than it is.
I think we have to be ready for these contingencies. They
may cost money.
Chairman Yarmuth. I am going to not ask any more questions.
But you all have sat here a long time and listened to a lot, so
I would like to give each of you a minute to respond to
anything you heard, if you--if there is something you would
like to comment on that you heard that you would like to either
defend yourself or to make another point.
Dr. Taylor, do you want to start?
Dr. Taylor. So I think three things. Tax reform, if
possible, should be revenue-neutral. So that is the idea of
this SALT changes. You add restrictions on the state and local
tax, and you had a reduction in the rate. So maybe that went
too far for California and some states, but that is the
concept, as useful.
I think it is not correct to say that every reduction in
government purchases reduces GDP. If it is planned, if it is
understood, if it is--the context is there, if there is a
social safety net which is reasonable, I think it can benefit.
And that is what my simulations tried to show. You can actually
have a higher GDP growth.
And finally, the impact of artificial intelligence on jobs,
I think the main lesson is let the private economy work. It is
amazing, what it can do, and that is why the history that
Olivier Blanchard referred to is so promising.
And the worst thing we can do is get in the way of what the
market will do. Of course, you need to have a social safety
net, which is working, but don't really make a mess of what
otherwise could be a tremendous boon to productivity, not only
in the United States, but globally.
Chairman Yarmuth. Thank you. Dr. Bernstein?
Dr. Bernstein. I guess two points. One is--or maybe a point
and a question. One is that we really do have a revenue
problem. And I am--I guess the one thing I would argue is that
it really doesn't make sense to cite revenue collections in the
billions and hundreds of billions and argue that we are in some
uniquely favorable space.
As a percentage of GDP--and I go through this in my
testimony, if you can bear reading through it, I tried to do a
careful job--the 2017 tax cut really broke down connective
tissue between a growing economy and ample revenues. And I
believe that it is essential that we fix that if we are going
to address this problem.
I guess the question I have is, often when I come up here
and talk about these issues, I hear much more reasonable
conversation, much more agreement, much more fundamental
understanding of the importance of key investments in public
goods, and yet, at the other end of the process, we just don't
see it.
And I have been a creature of the swamp here for decades,
and I am still scratching my head as to why well-intentioned
people--not everybody is well-intentioned, but a lot of people
I heard from today on both sides are--can't get together,
especially given the favorable rates that we have all been
stressing, and make some of these investments.
Chairman Yarmuth. Well----
Mr. Womack. I want to respond to that, because if you just
let Yarmuth and me fix all this, give us 30 minutes and a
sandwich----
Dr. Bernstein. Are you announcing that you are running
for----
[Laughter.]
Mr. Womack. No, no, but we have had this conversation a
lot.
Chairman Yarmuth. Right.
Dr. Wray. I just want to say--so there were several
references to MMT, and they all seemed to equate it to printing
money. That is not MMT. We described the way the government
actually spends.
I think what they have in mind is something much closer to
quantitative easing, in which the Fed spent $3 or $4 trillion
buying assets, essentially, by crediting bank accounts with the
reserves. That is nothing like what MMT is recommending.
We are asking you to look at government debt, deficits in a
different way, to take account of sectoral balances. If you are
going to reduce the budget deficit, we need to know which one
of those other two sectoral balances is going to change.
Are we going to be reducing the private sector's surplus?
Are we going to make the private sector run deficits? Are we
going to somehow get the trading partners to decide not to sell
stuff to the United States? Something has to happen. You can't
just raise the tax rate and think that you are going to balance
the budget or reduce government spending and think you are
going to balance the budget, because one of those other two
sectors, or both of them, has to change what they are doing.
Let me just--and cutting health costs is cutting GDP.
Cutting government spending is reducing the injection of
government spending into the economy. Reducing the amount of
debt that is issued is also reducing the net financial assets
that are being accumulated by the private sector. That is going
to have some kind of consequences for the private sector.
So we need to look at both sides of the equation of
government spending, but also of government debt, which is held
as an asset, the safest asset in the world. The world wants
more of it, you know. So why are we so worried about giving the
world what they want.
The last thing on the robots taking away all our jobs, as
Professor Blanchard said. That has been going on for 200 years.
It is usually a good thing. I think it probably will continue
to be a good thing.
But what should the government do about this? We do need
training. We do need education, because robots are pretty good
at taking away the jobs of the lower skilled and lower-educated
workers. They are some way off from taking away our jobs. Maybe
someday that will happen, but we need to worry about the people
at the bottom end that will be replaced probably pretty
quickly. We need to educate them.
I don't like the idea of basic income guarantee, or just
telling people, ``Look, sorry. In the modern economy there is
nothing you can do.'' No, we have to find jobs for these
people, and we need to train them for jobs.
Chairman Yarmuth. I thank you for that. And I--well, I was
going to Dr. Blanchard, first.
Dr. Blanchard. I was looking at my notes. I have two
points.
The first one is a nerdy one, which is that if you look at
the interest rates and debt, it is true that interest rates
have decreased while debt was increasing. To conclude from this
that, therefore, there is no effect of debt on interest rates
would be wrong. This would be mixing correlation and causality.
I think what has happened is many other factors have led to
a decrease in interest rates, which have nothing to do with
debt. It may well be that debt has a positive effect on rates,
it just is hard to see because of all the other things which
have happened.
So I think we have to continue to assume that debt, in the
long run, has some effect on interest rates. I think it would
be dangerous to do something else.
The other is more general and related to a number of
discussions which took place, which is I do not think that
mandatory spending can be decreased substantially. I think
there are some savings to be made, but there are also more
demands, because of aging and dimensions have changed.
I suspect--I very strongly suspect that the way to take
care of deficits and reduce them over time is for increasing
taxes. I have no doubt that this is the case.
Chairman Yarmuth. Thank you. Just one comment. Watson
apparently--IBM's Watson can now apparently do 70 percent of
what lawyers do with greater reliability, and they can read CAT
scans and MRIs more accurately than radiologists.
And when I was talking to my accountant, my Kentucky CPAs,
when they were in town not too long ago, they said that is the
number-one thing they talk about, the existential threat that
artificial intelligence is to CPAs. So it is not just truck
drivers.
Anyway, thank you all very much. Once again, it has been a
stimulating discussion. And we appreciate your contributions
very much.
With no further business, this hearing is adjourned.
[Whereupon, at 12:36 p.m., the Committee was adjourned.]
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