BEYOND THE NUMBERS
Chad Stone on the Fallacy of “Spend Less, Owe Less, Grow the Economy”
Like the Fed and CBO, we believe that policymakers should meet [our] fiscal stabilization goal in a reasonable period of time, but it is important to avoid a sudden negative impact on a still-fragile recovery by implementing it too precipitously.
[O]ne of the purposes of this hearing is to highlight a different point of view from what I regard as this mainstream economic consensus. This alternative point of view appears to be based on three premises: that the United States faces an immediate debt crisis due to an unwarranted explosion of government spending; that immediate sharp reductions in government spending are necessary and could even make the economy grow faster in the short run; and that deficit reduction is more likely to be successful if it is composed largely of spending cuts rather than tax increases.
. . . I find all three of these arguments unpersuasive, with the empirical support for them being weak and largely irrelevant to current U.S. economic conditions. In addition, I am concerned that insistence on large immediate budget cuts, and opposition to any kind of revenue-raising measures — including raising revenues by narrowing unproductive economically inefficient tax expenditures — constitutes a barrier to enacting the kind of credible, practical, and enforceable deficit reduction plan that we should be striving to implement. . . .
[M]y testimony . . . will make the following key points:
- Policies enacted since the 2008 election are not the main drivers of deficits and debt. The U.S. fiscal imbalance problem is a long-term problem that has little to do with the short term imbalances that have emerged as a result of the financial crisis and Great Recession. The main driver over the long term is unsustainable growth in health care costs throughout the U.S. health care system, in the public and private sectors alike. Increases in the deficit due to policies enacted over the past few years are temporary and only their relatively modest associated interest costs add to longer term deficits.
- Large immediate cuts in government spending will hurt the still-fragile economic recovery. Economic and budget conditions in the United States are very different from those in countries deemed to have had successful fiscal adjustments. Looking at the empirical literature on “expansionary austerity,” the International Monetary Fund found little empirical support for the idea that immediate sharp reductions in government spending strengthen an economic recovery. The Congressional Research Service found that fiscal adjustments beginning in a slack economy such as the United States is now experiencing have a low probability of success.
- International evidence has little to say about how much of U.S. deficit reduction should be spending cuts and how much should be revenue increases. The United States needs a long-term deficit-reduction plan and most of the empirical literature is about short-sharp fiscal consolidations under very different economic and budget circumstances from those we face. The literature on short, sharp adjustments has nothing to say about the composition of a long-term deficit reduction package or the proper size of government. It also does not come to grips with the fact that the United States is unique in the extent to which it relies on the tax code to do what other countries do directly through government spending – the so-called tax expenditures. Finally, it ignores lessons from successful longer-term deficit reduction efforts such as the United States pursued in the 1990s, when revenue measures were a significant component of the 1990 budget agreement and the deficit reduction act of 1993, which were followed by the longest economic expansion in our history and a balanced budget by the end of the decade.