[Congressional Record Volume 156, Number 28 (Tuesday, March 2, 2010)]
[Senate]
[Pages S936-S937]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
WHEN DEFICITS BECOME DANGEROUS
Mr. KYL. Madam President, I recommend to my colleagues a February 11
Wall Street Journal column by Stanford economist Michael Boskin,
entitled, ``When Deficits Become Dangerous.''
Boskin's premise is that the new taxes and ``enormous deficits and
endless accumulation of debt'' in President Obama's budget will create
a ripple effect of problems through our economy.
He explains that the debt will eventually force additional growth-
smothering taxes: ``Such vast debt implies immense future tax
increases. . . . It's hard to imagine a worse detriment to economic
growth.''
Boskin also notes that ``so worrisome is this debt outlook that
Moody's warns of a downgrade on U.S. Treasury bonds, and major global
finance powers talk of ending the dollar's reign as the global reserve
currency.'' He describes President Obama's budget as ``the most risky
fiscal strategy in history.''
I ask unanimous consent that this article be printed in the Record,
and urge my colleagues to consider the facts and arguments it contains.
There being no objection, the material was ordered to be printed in
the Record, as follows:
When Deficits Become Dangerous--Debt-to-GDP Ratios Over 90 Percent Have
Significant Impact on the Pace of Economic Growth
(By Michael J. Boskin, Feb. 11, 2010)
President Barack Obama's 2011 budget lays out a stunningly
expensive big-government spending agenda, mostly to be paid
for years down the road. He proposes to increase capital
gains, dividend, payroll, income and energy taxes. But the
enormous deficits and endless accumulation of debt will
eventually force growth-inhibiting income tax hikes, a
national value-added tax similar to those in Europe, or
severe inflation.
On average, in the first three years of the 10-year budget
plan, federal spending rises by 4.4 percent of GDP. That's
more than during President Lyndon Johnson's Great Society and
Vietnam War buildup and President Ronald Reagan's defense
buildup combined. In those same three years, spending on
average hits the highest level in American history (25.1
percent of GDP), save the peak of World War II. The average
deficit of $1.4 trillion (9.6 percent of GDP) is over three
times the previous 2008 record.
Remarkably, President Obama will add more red ink in his
first two years than President George W. Bush--berated by
conservatives for his failure to control domestic spending
and by liberals for the explosion of military spending in
Iraq and Afghanistan--did in eight. In his first 15 months,
Mr. Obama will raise the debt burden--the ratio of the
national debt to GDP--by more than Reagan did in eight years.
Some specific proposals are laudable: permanently indexing
the Alternative Minimum Tax for inflation, part of the
increased R&D funding, reform of agriculture subsidies, a
future freeze on one-sixth of the budget (only after it
balloons for two years). But these are swamped by the huge
expansion and centralization of government.
True, as he often reminds us, President Obama inherited a
recession and fiscal mess. Much of the deficit is the natural
and desirable result of the deep recession.
[[Page S937]]
As tax revenues fall much more rapidly than income, these
so-called automatic stabilizers cushioned the decline in
after-tax income and helped natural business-cycle dynamics
and monetary policy stabilize the economy. But Mr. Obama and
Congress added hundreds of billions of dollars a year of
ineffective ``stimulus'' spending--more accurately
characterized as social engineering and pork--when far more
effective, less expensive options were available.
The Obama 10-year budget--unprecedented in its spending,
taxes, deficits and accumulation of debt--is by a large
margin the most risky fiscal strategy in American history. In
his Feb. 1 budget message, Mr. Obama said, ``We cannot
continue to borrow against our children's future.'' But that
is exactly what he proposes to do.
He projects a cumulative deficit of $11.5 trillion by 2020.
That brings the publicly held debt (excluding debt held
inside the government, e.g., Social Security) to 77 percent
of GDP, and the gross debt to over 100 percent. Presidents
Reagan and George W. Bush each ended their terms at about 40
percent.
The deficits are so large relative to GDP that the debt/GDP
ratio keeps growing and then explodes as entitlement costs
accelerate in subsequent decades. So worrisome is this debt
outlook that Moody's warns of a downgrade on U.S. Treasury
bonds, and major global finance powers talk of ending the
dollar's reign as the global reserve currency.
Ken Rogoff of Harvard and Carmen Reinhart of Maryland have
studied the impact of high levels of national debt on
economic growth in the U.S. and around the world in the last
two centuries. In a study presented last month at the annual
meeting of the American Economic Association in Atlanta, they
conclude that, so long as the gross debt-GDP ratio is
relatively modest, 30 percent-90 percent of GDP, the negative
growth impact of higher debt is likely to be modest as well.
But as it gets to 90 percent of GDP, there is a dramatic
slowing of economic growth by at least one percentage point a
year. The likely causes are expectations of much higher
taxes, uncertainty over resolution of the unsustainable
deficits, and higher interest rates curtailing capital
investment.
The Obama budget takes the publicly held debt to 73 percent
and the gross debt to 103 percent of GDP by 2015, over this
precipice. The president's economists peg long-run growth
potential at 2.5 percent per year, implying per capita growth
of 1.7 percent. A decline of one percentage point would cut
this annual growth rate by over half. That's eventually the
difference between a strong economy that can project global
power and a stagnant, ossified society.
Such vast debt implies immense future tax increases.
Balancing the 2015 budget would require a 43 percent increase
in everyone's income taxes that year. It's hard to imagine a
worse detriment to economic growth.
Presidents and political parties used to propose paths to a
balanced budget. After almost doubling it, Mr. Obama proposes
to substitute stabilizing the debt/GDP ratio, a much weaker
goal.
That goal requires balancing the budget excluding interest
payments, the so-called primary budget. But he never achieves
this, even after five and a half years of economic growth,
withdrawal from Iraq and Afghanistan, and repaid financial
bailouts. The 2015 budget still calls for a primary deficit
of $181 billion.
For perspective, returning 2015 spending to population
growth plus inflation produces a primary surplus of $645
billion (3.3 percent of GDP). Mr. Obama's spending turns a
short-run crisis into a medium-term debacle.
Two factors greatly compound the risk from Mr. Obama's
budget plan. He is running up this debt and current and
future taxes just as the baby boomers are retiring and the
entitlement cost problems are growing, which will necessitate
major reform. (Mr. Obama didn't get any help from his
predecessors: George W. Bush's growing Medicare prescription
drug benefit was not funded, and Mr. Clinton's Social
Security reform was a casualty of the Monica Lewinsky
scandal.) And Mr. Obama's programs increase the fraction of
people getting more money back from the government than the
taxes they pay almost to 50 percent, just as the demographics
on an aging population will drive it up further. That's an
unhealthy political dynamic.
Former Senate Majority Leader Howard Baker famously called
Reaganomics--with its defense buildup, tax cuts and budget
deficits--a ``riverboat gamble.'' (Which, by the way, worked
out well.) Mr. Obama's fiscal strategy is more akin to the
voyage of the Titanic. Let's hope he changes course soon
enough to prevent disaster.
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