[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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