Tags: debt | GDP | Rivlin | interest

House Committee Asks Why Debt Matters

By    |   Monday, 31 March 2014 01:42 PM

House Financial Services Committee Chairman Jeb Hensarling, R-Texas, began a series of hearings on March 25 titled "Why Debt Matters." In his opening statement, Hensarling observed that the debt-to-GDP ratio of the United States is unsustainable and this fact affects nearly every issue within the committee's jurisdiction.

Rep. Maxine Waters, D-Calif., the ranking Democrat responded by repeating the view expressed by the administration and the Federal Reserve that the best fiscal policy would be to maintain a stimulative policy for the short term and put in place measures that would reduce the deficit during a longer period. She accused the Republicans of conducting hearings based more on politics than policy because they don't want to give the administration credit for the progress they have made by proposing a budget that would reduce the deficit.

The hearing had the appearance of a sermon Hensarling and his colleagues are preaching to themselves. However, it also had the virtue of bringing the legislators face to face with a mix of budget experts. Alice Rivlin, senior fellow at the Brookings Institution, and Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities, are Democrats who are well regarded by conservatives, and Douglas Holtz-Eakin, president of the American Action Forum, was especially blunt in telling members how difficult it is going to be to make policy changes that will hold up in the long run. Hensarling, Rivlin and Honeywell CEO David Cote, the other witness, all served on the ill-fated Simpson-Bowles Commission.

Many years ago I worked for a member of the House Budget Committee, although not on budget matters, and tried to warn the boss how futile it would be to promote the various reform ideas, such as balanced budget legislation and even the creation of the budget committee itself, and during the intervening decades this has proved to be the case. The reason was stated very clearly by former Rep. Bill Gradison, R-Ohio, when he reminded an audience at the American Enterprise Institute that no congressman had ever been defeated because of the deficit, but many had been defeated for failing to obtain funding for programs important to constituents.

Cote's message is that the world is going to become much more competitive and therefore the United States needs to adopt a "competitiveness agenda" that coincidentally resembles the agenda of multinational corporations like Honeywell and other members of the Business Roundtable.

The most salient point is that a heavy debt burden leads to inflation and higher interest rates that, once they are reflected in the cost of Treasury borrowing, will be reflected in the cost of credit for mortgages and car loans, and these higher rates will slow economic growth.

The other items on the agenda, accompanied by helpful charts, are: 2) Infrastructure, where the United States is outspent by competing countries; 3) Education, where U.S. standing has slipped; 4) Immigration, to attract people who are bright and productive; 5) Tort reform, to tilt the balance more toward the industrial sector; 6) Patents, to encourage and protect innovation; 7) Energy, where use of Honeywell products could reduce costs by 20 to 25 percent; and 8) Free and fair trade, to balance competing interests in a way that promotes global trade.

Among the economists, Rivlin is optimistic that a meltdown is not imminent and can be avoided if the political parties can work together to address a fiscal circumstance she sees as "less scary, but still not sustainable."

Bernstein blames the Bush tax cuts for a spike in debt that from his point of view has been addressed by the administration through the largest decline in the deficit-to-GDP ratio since 1950.

(Archived video, the staff memorandum and witness statements can be found here.)

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House Financial Services Committee Chairman Jeb Hensarling, R-Texas, began a series of hearings on March 25 titled "Why Debt Matters."
Monday, 31 March 2014 01:42 PM
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