[Congressional Record Volume 156, Number 126 (Monday, September 20, 2010)]
[Senate]
[Pages S7187-S7190]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
PRINCIPLES FOR ECONOMIC GROWTH
Mr. KYL. Mr. President, I would like to speak a bit about the two
competing philosophies of economic growth. The first version I will
discuss is the so-called Keynesian economics, which has been the basis
of the Obama administration's economic policy since January 2009 and, I
would add, with little to no success in reviving our economy and
reducing unemployment.
Keynesian economics relies on the theory that in recessionary times,
increased government spending can take the place of private sector
activity, hence the administration's nearly $1 trillion stimulus
package, the Cash for Clunkers Program and a litany of other government
programs, transfer payments, and temporary tax credits. This
administration's insistence on enacting these temporary Keynesian
policies to stimulate consumption is misguided and has ultimately
failed.
As the Wall Street Journal editorialized in a piece called ``The
Obama Economy:''
Never before has government spent so much and intervened so
directly in credit allocation to spur growth, yet the results
have been mediocre at best. In return for adding nearly $3
trillion in Federal debt in 2 years, we still have 14.9
million people unemployed. What happened?
Well, I will mention three problems with Keynesian economics that I
think help to answer that question. First of all, someone without a job
is not going to be fooled into spending more money because of a one-
time payment that he or she received from the Federal Government.
People only change their spending habits when they know they will have
a greater consistent income
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over time, such as when they receive a raise at work. In fact, the
evidence has shown that people either save one-time rebates or shift
future consumption forward but do not permanently increase their work
effort or incentive to invest, which is what is needed to jump-start
economic growth.
Second, Keynesian economics assumes the government has the foresight
to determine in advance which spending programs would best create
economic growth. Well, the obvious problem with this assumption is,
Congress does not spend taxpayers' money wisely. We see time and time
again how straightforward pieces of legislation get loaded up with
special projects which are costly and of questionable value to the
public. This has been one of the problems with the stimulus package.
Third, if the problem is lack of consumption and Americans are too
broke to spend, how can the government spend for us? We are the
government. It is our tax money that is being spent. We have to pay it
back if it is borrowed.
The authors of a textbook entitled ``Economics: Public and Private
Choice,'' write:
There are no free lunches. Regardless how they are
financed, activities undertaken by the government will be
costly. When governments purchase resources and other goods
and services to provide rockets, education, highways, health
care, and other goods, the resources used by the government
will be unavailable to produce goods and services in the
private sector. As a result, private-sector output will be
lower.
In short, there is a major misconception that consumption fueled by
government spending actually creates economic growth. It doesn't. It
just moves money around. Taking it from the private sector to be spent
by the government removes critical capital that is needed to create
jobs.
I noticed, in catching up on reading some of the newspapers over the
weekend, that Treasury Secretary Geithner weighed into this debate a
little bit. Recall that over the last several weeks there has been a
debate about whether we should prevent all taxes from going up or
simply prevent a tax increase on the so-called middle class. The idea
is that middle-class families spend whatever money they have available.
That plays into this Keynesian economic notion that it advances
spending so we should let them keep more of their money but that
wealthier people--the people in the top two brackets--don't spend their
money and, therefore, they do not contribute to economic growth. But of
course it totally misses the point that money saved is money ultimately
invested. If it is invested, it is either put in a bank, which can then
lend more money to people who need to borrow or it is directly invested
in stocks or bonds or some other enterprise which generally results in
the acquisition of more equipment or the hiring of more people, both of
which are essential to reducing unemployment and getting the economy
back moving again.
Well, Treasury Secretary Geithner was testifying before the Congress
about the possibility of imposing penalties on China because of its
currency policies. According to an article in Friday's Washington
Times--on the front page:
While taking his toughest stance to date on China's need to
speed up the pace of currency reform, Treasury Secretary
Timothy F. Geithner echoed China's point that doing that by
itself will not eliminate the gigantic $230 billion trade
deficit with China or restore millions of manufacturing jobs
lost in the recession.
Continuing to quote from the article:
``Americans also must save more and invest more while
consuming less of the world's bounty,'' he said, ``to bring a
better balance to trade.''
He is right. America does need to save more and invest more. That is
the way you restore not just the manufacturing jobs lost in the
recession but a lot of the other jobs as well.
Reporting on the same story in another newspaper, Secretary Geithner
is quoted as saying:
We are concerned . . . that the pace of appreciation has
been too slow. The most important things we can do to make
manufacturing stronger in the United States are going to be
about the policies we pursue in the United States.
I think he is right and that the policies we have to pursue are the
policies of savings and investment--exactly what he said. It may be
fine for the U.S. economy to spend more money, but the reality is, each
of our families and our businesses are better off if we save and invest
at this important time in our history.
So let there be no mistake; the Secretary's promotion of savings and
investment is contrary to this Keynesian notion that all we have to do
is spend more money and the economy will get better. There is a need to
save and a need to invest. That is what enables businesses to create
more jobs.
I think it is very important to remind everyone that economic growth
stems from combining three separate inputs--labor, capital, and
technology. These three factors of production result in output that we
can then consume. Without labor, without capital--that is the savings
and investment part--and technology, which enhances our productivity,
there can be no consumption. Focusing on policies that stimulate
consumption targets the wrong side of the equation.
In order to get the economy going, we need to focus on the inputs,
and that is where the second philosophy of economic growth comes in.
Some people refer to it as supply-side economics. The fundamental
principle of supply-side economics is that people work harder and take
more risks when there are more opportunities for economic gain and less
government intrusion.
Translating this economic philosophy into policy means reducing
government consumption by cutting spending; thus, leaving resources in
the private sector. It also means not raising taxes on anyone,
especially in these difficult economic times--certainly not on the very
employers that we count on to hire more workers. Who employs 25 percent
of our workplace? Small businesses. Who would bear the brunt of tax
increases in the upper two brackets? Small businesses. So the last
thing we should be doing is raising taxes on anyone, most especially
our small businesses to which we are looking to produce more jobs.
There is plenty of evidence that the economic theory I am talking
about works in practice. We have abundant evidence of what works and
what does not. A recent study was conducted by Harvard economists
Alberto Alesina and Silvia Ardagna, who recently studied more than 100
fiscal adjustments in 21 separate countries over the past 40 years. The
countries are all in the OECD. These are the more economically advanced
countries of the world.
The fiscal adjustments that led to economic expansions were generally
based around spending cuts. By contrast, the adjustments that led to
economic recessions were based around tax increases. Thus, spending
cuts, not tax hikes, appear to be the more effective strategy for
deficit reduction.
Using data from more than 90 different OECD countries, Alesina and
Ardagna also compared the relative benefits of spending increases and
tax cuts. Their conclusion: Tax cuts are a much better way to spur
economic growth.
Unfortunately, the current administration and Congress have done the
exact opposite of what these two economists from Harvard have proposed.
They have dramatically increased Federal spending and are now
threatening to implement a massive tax hike, exactly the wrong
prescription. I believe it is long past time for Congress to consider
an alternative strategy, a strategy that rejects misguided income tax
increases and, instead, focuses on targeted spending reductions; a
strategy that lowers our corporate tax rate, which is the second
highest of all of the OECD countries; a strategy that blocks unelected
Federal bureaucrats from imposing new energy taxes on small businesses
and middle-class households; a strategy that restructures our three
biggest entitlement programs--Social Security, Medicare, and Medicaid--
to prevent a future fiscal crisis; a strategy that reins in overall
health care costs through market-oriented, consumer-driven reforms; a
strategy that promotes free trade across the globe and strengthens our
bilateral relationships in the process; a strategy that embraces clear,
transparent fiscal regulations to end taxpayer bailouts and discourage
excessive leveraging.
These are just some of the recommendations that come from the
Republican side of the aisle. I note that they track very closely a
piece that
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four economists and George Shultz, a former Cabinet member--in fact,
two different Secretaries in the Cabinet of the President of the United
States--George Shultz, Michael Boskin, John Cogan, Allan Meltzer, and
John Taylor. They wrote a piece in the September 16 Wall Street Journal
called ``Principles for Economic Revival.'' These principles track very
closely the principles I have just identified and provide what I think
is a very good blueprint for moving forward.
Just a final note. I would note parochially that starting in the
third paragraph of their piece: ``The Noble Prize-winning economist
Edward Prescott'' is from Arizona State University. I visited with Dr.
Prescott, and I can affirm the things he teaches in his classes as well
as what he teaches by his writings are the principles upon which we can
build economic growth. They are what I said in the very beginning of my
remarks. They are the principles of incentive for more economic output
and reward.
He talks, in this piece, about the way higher tax rates on labor are
associated with the reductions in the labor output, and therefore the
productivity of the country, the wages of the people, and the economic
condition of the country.
Also, the authors have a very interesting chart in this Wall Street
Journal piece called ``The Cost of Washington.'' It is astonishing to
see on paper the cost of World War I--in fact, the cost of the Civil
War before that, the cost of World War II--pretty high. Then it went
back down again. These are all costs as a percent of GDP.
Now when we have the biggest gross domestic product ever,
dramatically larger even than what we had in World War II, we have
costs of the Federal Government that exceed even the cost as a
percentage of GDP of World War II.
The President's folks, as well as those who advise Congress, have all
said this is unsustainable. It is one of the reasons it is time for us,
as I said, to get back to principles for economic revival and focus on
reducing unnecessary spending and making certain that, especially in
these times, we resist the notion of raising taxes on any Americans.
I ask unanimous consent this Wall Street Journal op-ed be printed in
the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
[From the Wall Street Journal, Sept. 16, 2010]
Principles for Economic Revival
(By George P. Shultz, Michael J. Boskin, John F. Cogan, Allan Meltzer
and John B. Taylor)
America's financial crisis, deep recession and anemic
recovery have largely been driven by economic policies that
have deviated from proven fact-based principles. To return to
prosperity we must get back to these principles.
The most fundamental starting point is that people respond
to incentives and disincentives. Tax rates are a great
example because the data are so clear and the results so
powerful. A wealth of evidence shows that high tax rates
reduce work effort, retard investment and lower productivity
growth. Raise taxes, and living standards stagnate.
Nobel Prize-winning economist Edward Prescott examined
international labor market data and showed that changes in
tax rates on labor are associated with changes in employment
and hours worked. From the 1970s to the 1990s, the effective
tax rate on work increased by an average of 28% in Germany,
France and Italy. Over that same period, work hours fell by
an average of 22% in those three countries. When higher taxes
reduce the reward for work, you get less of it.
Long-lasting economic policies based on a long-term
strategy work; temporary policies don't. The difference
between the effect of permanent tax rate cuts and one-time
temporary tax rebates is also well-documented. The former
creates a sustainable increase in economic output, the latter
at best only a transitory blip. Temporary policies create
uncertainty that dampen economic output as market
participants, unsure about whether and how policies might
change, delay their decisions.
Having ``skin in the game,'' unsurprisingly, leads to
superior outcomes. As Milton Friedman famously observed:
``Nobody spends somebody else's money as wisely as they spend
their own.'' When legislators put other people's money at
risk--as when Fannie Mae and Freddie Mac bought risky
mortgages--crisis and economic hardship inevitably result.
When minimal co-payments and low deductibles are mandated in
the insurance market, wasteful health-care spending balloons.
Rule-based policies provide the foundation of a high-growth
market economy. Abiding by such policies minimizes capricious
discretionary actions, such as the recent ad hoc bailouts,
which too often had deleterious consequences. For most of the
1980s and '90s monetary policy was conducted in a predictable
rule-like manner. As a result, the economy was far more
stable. We avoided lengthy economic contractions like the
Great Depression of the 1930s and the rapid inflation of the
1970s.
The history of recent economic policy is one of massive
deviations from these basic tenets. The result has been a
crippling recession and now a weak, nearly nonexistent
recovery. The deviations began with policies--like the
Federal Reserve holding interest rates too low for too long--
that fueled the unsustainable housing boom. Federal housing
policies allowed down payments on home loans as low as zero.
Banks were encouraged to make risky loans, and securitization
separated lenders from their loans. Neither borrower nor
lender had sufficient skin in the game. Lax enforcement of
existing regulations allowed both investment and commercial
banks to circumvent long-established banking rules to take on
far too much leverage. Regulators, not regulations, failed.
The departures from sound principles continued when the Fed
and the Treasury responded with arbitrary and unpredictable
bailouts of banks, auto companies and financial institutions.
They financed their actions with unprecedented money creation
and massive issuance of debt. These frantic moves spooked
already turbulent markets and led to the financial panic.
More deviations occurred when the government responded with
ineffective temporary stimulus packages. The 2008 tax rebate
and the 2009 spending stimulus bills failed to improve the
economy. Cash for clunkers and the first-time home buyers tax
credit merely moved purchases forward by a few months.
Then there's the recent health-care legislation, which
imposes taxes on savings and investment and gives the
government control over health-care decisions. Fannie Mae and
Freddie Mac now sit with an estimated $400 billion cost to
taxpayers and no path to resolution. Hundreds of new complex
regulations lurk in the 2010 financial reform bill with most
of the critical details left to regulators. So uncertainty
reigns and nearly $2 trillion in cash sits in corporate
coffers.
Since the onset of the financial crisis, annual federal
spending has increased by an extraordinary $800 billion--more
than $10,000 for every American family. This has driven the
budget deficit to 10% of GDP, far above the previous
peacetime record. The Obama administration has proposed to
lock a sizable portion of that additional spending into
government programs and to finance it with higher taxes and
debt. The Fed recently announced it would continue buying
long-term Treasury debt, adding to the risk of future
inflation.
There is perhaps no better indicator of the destructive
path that these policy deviations have put us on than the
federal budget. The nearby chart puts the fiscal problem in
perspective. It shows federal spending as a percent of GDP,
which is now at 24%, up sharply from 18.2% in 2000.
Future federal spending, driven mainly by retirement and
health-care promises, is likely to increase beyond 30% of GDP
in 20 years and then keep rising, according to the
Congressional Budget Office. The reckless expansions of both
entitlements and discretionary programs in recent years have
only added to our long-term fiscal problem.
As the chart shows, in all of U.S. history, there has been
only one period of sustained decline in federal spending
relative to GDP. From 1983 to 2001, federal spending relative
to GDP declined by five percentage points. Two factors
dominated this remarkable period. First was strong economic
growth. Second was modest spending restraint--on domestic
spending in the 1980s and on defense in the 1990s.
The good news is that we can change these destructive
policies by adopting a strategy based on proven economic
principles:
First, take tax increases off the table. Higher tax rates
are destructive to growth and would ratify the recent
spending excesses. Our complex tax code is badly in need of
overhaul to make America more competitive. For example, the
U.S. corporate tax is one of the highest in the world. That's
why many tax reform proposals integrate personal and
corporate income taxes with fewer special tax breaks and
lower tax rates.
But in the current climate, with the very credit-worthiness
of the United States at stake, our program keeps the present
tax regime in place while avoiding the severe economic drag
of higher tax rates.
Second, balance the federal budget by reducing spending.
The publicly held debt must be brought down to the pre-crisis
safety zone. To do this, the excessive spending of recent
years must be removed before it becomes a permanent budget
fixture. The government should begin by rescinding unspent
``stimulus'' and TARP funds, ratcheting down domestic
appropriations to their pre-binge levels, and repealing
entitlement expansions, most notably the subsidies in the
health-care bill.
The next step is restructuring public activities between
federal and state governments. The federal government has
taken on more responsibilities than it can properly manage
and efficiently finance. The 1996 welfare reform, which
transferred authority and financing for welfare from the
federal to the state level, should serve as the model. This
reform reduced welfare dependency and lowered costs,
benefiting taxpayers and welfare recipients.
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Third, modify Social Security and health-care entitlements
to reduce their explosive future growth. Social Security now
promises much higher benefits to future retirees than to
today's retirees. The typical 30-year-old today is scheduled
to get an inflation-adjusted retirement benefit that is
50% higher than the benefit for a typical current retiree.
Benefits paid to future retirees should remain at the same
level, in terms of purchasing power, that today's retirees
receive. A combination of indexing initial benefits to prices
rather than to wages and increasing the program's retirement
age would achieve this goal. They should be phased-in
gradually so that current retirees and those nearing
retirement are not affected.
Health care is far too important to the American economy to
be left in its current state. In markets other than health
care, the legendary American shopper, armed with money and
information, has kept quality high and costs low. In health
care, service providers, unaided by consumers with sufficient
skin in the game, make the purchasing decisions. Third-party
payers--employers, governments and insurance companies--have
resorted to regulatory schemes and price controls to stem the
resulting cost growth.
The key to making Medicare affordable while maintaining the
quality of health care is more patient involvement, more
choices among Medicare health plans, and more competition.
Co-payments should be raised to make patients and their
physicians more cost-conscious. Monthly premiums should be
lowered to provide seniors with more disposable income to
make these choices. A menu of additional Medicare plans, some
with lower premiums, higher co-payments and improved
catastrophic coverage, should be added to the current one-
size-fits-all program to encourage competition.
Similarly for Medicaid, modest co-payments should be
introduced except for preventive services. The program should
be turned over entirely to the states with federal financing
supplied by a ``no strings attached'' block grant. States
should then allow Medicaid recipients to purchase a health
plan of their choosing with a risk-adjusted Medicaid grant
that phases out as income rises.
The 2010 health-care law undermined positive reforms
underway since the late 1990s, including higher co-payments
and health savings accounts. The law should be repealed
before its regulations and price controls further damage
availability and quality of care. It should be replaced with
policies that target specific health market concerns:
quality, affordability and access. Making out-of-pocket
expenditures and individual purchases of health insurance tax
deductible, enhancing health savings accounts, and improving
access to medical information are keys to more consumer
involvement. Allowing consumers to buy insurance across state
lines will lower the cost of insurance.
Fourth, enact a moratorium on all new regulations for the
next three years, with an exception for national security and
public safety. Going forward, regulations should be
transparent and simple, pass rigorous cost-benefit tests, and
rely to a maximum extent on market-based incentives instead
of command and control. Direct and indirect cost estimates of
regulations and subsidies should be published before new
regulations are put into law.
Off-budget financing should end by closing Fannie Mae and
Freddie Mac. The Bureau of Consumer Finance Protection and
all other government agencies should be on the budget that
Congress annually approves. An enhanced bankruptcy process
for failing financial firms should be enacted in order to end
the need for bailouts. Higher bank capital requirements that
rise with the size of the bank should be phased in.
Fifth, monetary policy should be less discretionary and
more rule-like. The Federal Reserve should announce and
follow a monetary policy rule, such as the Taylor rule, in
which the short-term interest rate is determined by the
supply and demand for money and is adjusted through changes
in the money supply when inflation rises above or falls below
the target, or when the economy goes into a recession. When
monetary policy decisions follow such a rule, economic
stability and growth increase.
In order to reduce the size of the Fed's bloated balance
sheet without causing more market disruption, the Fed should
announce and follow a clear and predictable exit rule, which
describes a contingency path for bringing bank reserves back
to normal levels. It should also announce and follow a
lender-of-last-resort rule designed to protect the payment
system and the economy--not failing banks. Such a rule would
end the erratic bailout policy that leads to crises.
The United States should, along with other countries, agree
to a target for inflation in order to increase expected price
stability and exchange rate stability. A new accord between
the Federal Reserve and Treasury should reestablish the Fed's
independence and accountability so that it is not called on
to monetize the debt or engage in credit allocation. A
monetary rule is a requisite for restoring the Fed's
independence.
These pro-growth policies provide the surest path back to
prosperity.
Mr. KYL. I suggest the absence of a quorum.
The ACTING PRESIDENT pro tempore. The clerk will call the roll.
The bill clerk proceeded to call the roll.
Mr. KYL. Mr. President, I ask unanimous consent the order for the
quorum call be rescinded.
The ACTING PRESIDENT pro tempore. Without objection, it is so
ordered.
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