[Congressional Record (Bound Edition), Volume 156 (2010), Part 11]
[Senate]
[Pages 15992-15995]
[From the U.S. 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 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

[[Page 15993]]

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 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.

[[Page 15994]]

  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.
       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

[[Page 15995]]

     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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